RGE President Nouriel Roubini told FOX Business Network’s (FBN) Neil Cavuto that the US deficit is unsustainable, that there’s a need for the VAT tax, and that the implicit bill is huge.
Excerpts are below:
**MANDATORY CREDIT: FOX BUSINESS NETWORK**
On Greece being the tip of the iceberg:
“In my view what is happening in Greece is just the tip of an iceberg. With private debt in many parts of the world, we socialize these private losses. Now with large budget deficits in Europe, in Japan, in the United States. The bond market vigilantes have woken up in Greece, in Portugal, in Spain.
At some point they're going to wake up in the U.K., in Japan, in the United States. We're running a 3.5 budget deficit. It is obviously over time not sustainable.”
On why there has not been any market discipline:
“The Fed has near zero rates. There is low growth. There is still deflation. So for a number of reasons, interest rates are still low. That is why there is no market discipline. This is unsustainable. There is going to be market pressure and we will be forced to do the tough adjustments.”
On how the US fiscal problems will cause high inflation:
“In a country like the U.S. where you can monetize the budget deficit, run the printing presses, monetizing the fiscal deficit eventually leads to inflation. So we're not going to have a default in the United States, that is not the option on the table. But we could have high inflation if we don't fix our fiscal problems.”
On possible riots in the US:
“Well, we have a social safety net that means that unemployed people and poor people get some income, so you're not having so far riots in the streets.”
On the implicit debt being huge:
“You have a federal deficit problem. A state and local problem. You have unfunded liabilities of Medicare, Social Security. And you have also unfunded liabilities of state and local government pension funds. You add it all together between the official debt, the implicit one, the bill is huge.”
On the need to raise non-distortional revenues:
“The official numbers suggest about $9 trillion budget deficits for the next decade. Even with reasonable assumption about economic growth, at some point we have to reduce spending, we have also raise some kind of non-distortional revenues.”
On Governor Christie’s plan to cut spending:
“If I had to make a choice at the margin, it is better to cut the budget deficit on the spending side…the size of the deficit is such that realistically the two parties will have to accept -- the Democrats, spending cuts, and also the Republicans will have to realize that some increase in revenues, want to limit as much as possible, is going to be needed to shrink over time, this deficit.”
On the need for a VAT tax:
That is why we have to cut the fat of the government first. We have to reduce the inefficiencies.”
“Realistically down the line we'll have to raise revenues. In my view, there are less distortional ways of raising revenue. We don't want to increase income taxes, capital gains, dividends, and other things of this sort. Probably introducing down the line a value-added tax, it's less distortionary, an indirect (ph) tax will be the right way of doing it over time…we have to fill this gap.”
# # #
NEIL CAVUTO, HOST: Well, think it is a stretch to say this is all the makings of a spreading global contagion? Nouriel Roubini says, think again. The enormously influential Stern School of Business economics guru, very quoted, New York University business professor, and author of a new book that's racing up the charts, "Crisis Economics," sees a disturbing trend here.
(BEGIN VIDEOTAPE)
CAVUTO: And, Nouriel, you're saying it's a trend that gets worse, right?
NOURIEL ROUBINI, NYU STERN SCHOOL OF BUSINESS: Yes. In my view what is happening in Greece is just the tip of an iceberg. With private debt in many parts of the world, we socialize these private losses. Now with large budget deficits in Europe, in Japan, in the United States. The bond market vigilantes have woken up in Greece, in Portugal, in Spain.
At some point they're going to wake up in the U.K., in Japan, in the United States. We're running a 3.5 budget deficit. It is obviously over time not sustainable.
CAVUTO: You know, I've always heard that, Nouriel, you have been ahead of this curve very early on, but we have not seen it yet. We haven't seen interest rates soar here. We saw gold hit a record here, that is for sure. But we haven't seen the panic yet that you would see in interest rates soaring.
ROUBINI: No, not yet for a number of reasons. The Fed has near zero rates. There is low growth. There is still deflation. There are still the (INAUDIBLE) financing us, private savings are rising. So for a number of reasons, interest rates are still low. That is why there is no market discipline.
The government can borrow at zero rate on the short end, at 3.5 on the long end. While in Europe at least the markets will compensate, sorry, you cannot buy at these rates. And the rates are going up. And that's forcing governments to raise taxes or cut spending.
I worry that with a trillion deficit this year and next year, 2012, and for as far as the eye can see, eventually, not this year, but the next year, the markets are going to wake up and say, this is unsustainable. There is going to be market pressure and we will be forced to do the tough adjustments.
CAVUTO: All right. Then what happens to the markets?
ROUBINI: Well, you know, if we don't do the adjustment early on and we need to raise taxes and/or cut spending, I would spend -- cut more on the spending side than on the revenue side, then there are two options.
(INAUDIBLE) cannot borrow on their own currency, you can only default a la Greece.
In a country like the U.S. where you can monetize the budget deficit, run the printing presses, monetizing the fiscal deficit eventually leads to inflation. So we're not going to have a default in the United States, that is not the option on the table. But we could have high inflation if we don't fix our fiscal problems.
CAVUTO: How do you think workers of all stripes, tax-payers of all stripes, will respond here to a Greece-like situation here? In other words, we saw how the public workers just went nuts in Greece for what were actually nominal adjustments. So we weren't -- it was not nearly as much pain as was first trumpeted.
But let's say now we have Governor Schwarzenegger say that these sweeping cuts are coming. Would people react the same way?
ROUBINI: Well, we have a social safety net that means that unemployed people and poor people get some income, so you're not having so far
riots in the streets. But think of it where the...
(CROSSTALK)
CAVUTO: So you take all the welfare benefits away by -- the state provided ones, that is a pretty big deal.
ROUBINI: Yes, we will see if that is politically feasible or not.
You have riots and demonstrations, strikes in the streets of Athens, eventually we could have the same kind of social pressure in the U.S.
But you have a federal deficit problem. A state and local problem.
You have unfunded liabilities of Medicare, Medicare (ph), Social Security. And you have also unfunded liabilities of state and local government pension funds. You add it all together between the official debt, the implicit one, the bill is huge.
At some point we cannot leave behind payments, not the households, not the government, not the country.
CAVUTO: I see things pretty much as you do, which should worry you, you might want to re-do the book and rethink that strategy. But here is one of the arguments for this not happening that you're envisioning.
That it's -- and it is akin to the way people would tap their home equity in the belief the home price would keep going up and they could keep this folly going.
And we know what happened there. But they're carrying it over to what is going on now. All of this borrowing and spending is going to be justified with a reignited economy, GDP is going to go up, sales are going to go up, revenues are going to come in, and the things that, you know, guys like you are fearing don't materialize.
In other words, we dodge the bullet.
ROUBINI: I doubt there will, because even if you take the official administration optimistic assumption about the high economic growth, 3.5 percent for the next decade, the budget deficit is going to fall to 5 percent of GDP. That means over the next few years, something $800 billion, as opposed to over a trillion dollars.
Even $800 billion is unsustainable. The official numbers suggest about
$9 trillion budget deficits for the next decade. Even with reasonable
assumption about economic growth, at some point we have to reduce spending, we have also raise some kind of non-distortional (ph) revenues, maybe introduce...
(CROSSTALK)
CAVUTO: What if you don't do both?
ROUBINI: ... tax.
CAVUTO: In New Jersey the governor there, Governor Christie, is trying to do it just by cutting spending. He is not entertaining any tax hikes. And he has been closely watched obviously by a lot of conservatives and Reaganites who say, you know, go baby go. But he -- that is how he plans to do it. He thinks if you break the union leaders' back and their built-in pension benefits and increases, you'll be ahead of the game, longer term you make a very sharp Spartan commitment.
What do you make of that?
ROUBINI: If I had to make a choice at the margin, it is better to cut the budget deficit on the spending side...
(CROSSTALK)
CAVUTO: They can never do it.
ROUBINI: ... raising revenue. But realistically...
CAVUTO: They can never do it.
ROUBINI: ... the size of the deficit is such that realistically the two parties will have to accept -- the Democrats, spending cuts, and also the Republicans will have to realize that some increase in revenues, want to limit as much as possible, is going to be needed to shrink over time, this deficit.
CAVUTO: Now does it worry you -- my argument with a lot of this stuff is when you have tax increases, I don't care what people's views are on tax increases, you are more or less saying, look, we know the product stinks, but you're going to have to pay more for it.
And there is something intrinsically wrong about that. In no other field, in no other endeavor, no other product, if there's a lousy car, no one is buying it, would you raise the price of the car? Yet with a lousy unresponsive, sloppy, slovenly government, we raise the price of it effectively by increasing the cost of it.
ROUBINI: That is why we have to cut the fat of the government first.
We have to reduce the inefficiencies...
CAVUTO: But they don't. They never ever do. They never do. Does it worry you? If they never do, then we have to raise...
ROUBINI: Conditional. Conditional on doing the spending cuts which should be first, come in first, I would say the gap is so large, 10 percent of GDP, that I don't think we have enough to spend to cut on the spending side. Realistically down the line we'll have to raise revenues.
In my view, there are less distortional ways of raising revenue. We don't want to increase income taxes, capital gains, dividends, and other things of this sort. Probably introducing down the line a value-added tax, it's less distortionary, an indirect (ph) tax will be the right way of doing it over time.
CAVUTO: Yes, but that would be an add-on tax, it wouldn't be a substitute tax, it would be an add-on tax.
ROUBINI: Yes, because we have to fill this gap.
CAVUTO: OK. Nouriel Roubini, "Crisis Economics," a very -- a toe-tapper kind of a view of where we are going here. But that's a good read, good read. Thank you very much.
ROUBINI: A pleasure being with you today.
(END VIDEOTAPE)
Watch the video below:
Watch the latest business video atvideo.foxbusiness.com
Excerpts are below:
**MANDATORY CREDIT: FOX BUSINESS NETWORK**
On Greece being the tip of the iceberg:
“In my view what is happening in Greece is just the tip of an iceberg. With private debt in many parts of the world, we socialize these private losses. Now with large budget deficits in Europe, in Japan, in the United States. The bond market vigilantes have woken up in Greece, in Portugal, in Spain.
At some point they're going to wake up in the U.K., in Japan, in the United States. We're running a 3.5 budget deficit. It is obviously over time not sustainable.”
On why there has not been any market discipline:
“The Fed has near zero rates. There is low growth. There is still deflation. So for a number of reasons, interest rates are still low. That is why there is no market discipline. This is unsustainable. There is going to be market pressure and we will be forced to do the tough adjustments.”
On how the US fiscal problems will cause high inflation:
“In a country like the U.S. where you can monetize the budget deficit, run the printing presses, monetizing the fiscal deficit eventually leads to inflation. So we're not going to have a default in the United States, that is not the option on the table. But we could have high inflation if we don't fix our fiscal problems.”
On possible riots in the US:
“Well, we have a social safety net that means that unemployed people and poor people get some income, so you're not having so far riots in the streets.”
On the implicit debt being huge:
“You have a federal deficit problem. A state and local problem. You have unfunded liabilities of Medicare, Social Security. And you have also unfunded liabilities of state and local government pension funds. You add it all together between the official debt, the implicit one, the bill is huge.”
On the need to raise non-distortional revenues:
“The official numbers suggest about $9 trillion budget deficits for the next decade. Even with reasonable assumption about economic growth, at some point we have to reduce spending, we have also raise some kind of non-distortional revenues.”
On Governor Christie’s plan to cut spending:
“If I had to make a choice at the margin, it is better to cut the budget deficit on the spending side…the size of the deficit is such that realistically the two parties will have to accept -- the Democrats, spending cuts, and also the Republicans will have to realize that some increase in revenues, want to limit as much as possible, is going to be needed to shrink over time, this deficit.”
On the need for a VAT tax:
That is why we have to cut the fat of the government first. We have to reduce the inefficiencies.”
“Realistically down the line we'll have to raise revenues. In my view, there are less distortional ways of raising revenue. We don't want to increase income taxes, capital gains, dividends, and other things of this sort. Probably introducing down the line a value-added tax, it's less distortionary, an indirect (ph) tax will be the right way of doing it over time…we have to fill this gap.”
# # #
NEIL CAVUTO, HOST: Well, think it is a stretch to say this is all the makings of a spreading global contagion? Nouriel Roubini says, think again. The enormously influential Stern School of Business economics guru, very quoted, New York University business professor, and author of a new book that's racing up the charts, "Crisis Economics," sees a disturbing trend here.
(BEGIN VIDEOTAPE)
CAVUTO: And, Nouriel, you're saying it's a trend that gets worse, right?
NOURIEL ROUBINI, NYU STERN SCHOOL OF BUSINESS: Yes. In my view what is happening in Greece is just the tip of an iceberg. With private debt in many parts of the world, we socialize these private losses. Now with large budget deficits in Europe, in Japan, in the United States. The bond market vigilantes have woken up in Greece, in Portugal, in Spain.
At some point they're going to wake up in the U.K., in Japan, in the United States. We're running a 3.5 budget deficit. It is obviously over time not sustainable.
CAVUTO: You know, I've always heard that, Nouriel, you have been ahead of this curve very early on, but we have not seen it yet. We haven't seen interest rates soar here. We saw gold hit a record here, that is for sure. But we haven't seen the panic yet that you would see in interest rates soaring.
ROUBINI: No, not yet for a number of reasons. The Fed has near zero rates. There is low growth. There is still deflation. There are still the (INAUDIBLE) financing us, private savings are rising. So for a number of reasons, interest rates are still low. That is why there is no market discipline.
The government can borrow at zero rate on the short end, at 3.5 on the long end. While in Europe at least the markets will compensate, sorry, you cannot buy at these rates. And the rates are going up. And that's forcing governments to raise taxes or cut spending.
I worry that with a trillion deficit this year and next year, 2012, and for as far as the eye can see, eventually, not this year, but the next year, the markets are going to wake up and say, this is unsustainable. There is going to be market pressure and we will be forced to do the tough adjustments.
CAVUTO: All right. Then what happens to the markets?
ROUBINI: Well, you know, if we don't do the adjustment early on and we need to raise taxes and/or cut spending, I would spend -- cut more on the spending side than on the revenue side, then there are two options.
(INAUDIBLE) cannot borrow on their own currency, you can only default a la Greece.
In a country like the U.S. where you can monetize the budget deficit, run the printing presses, monetizing the fiscal deficit eventually leads to inflation. So we're not going to have a default in the United States, that is not the option on the table. But we could have high inflation if we don't fix our fiscal problems.
CAVUTO: How do you think workers of all stripes, tax-payers of all stripes, will respond here to a Greece-like situation here? In other words, we saw how the public workers just went nuts in Greece for what were actually nominal adjustments. So we weren't -- it was not nearly as much pain as was first trumpeted.
But let's say now we have Governor Schwarzenegger say that these sweeping cuts are coming. Would people react the same way?
ROUBINI: Well, we have a social safety net that means that unemployed people and poor people get some income, so you're not having so far
riots in the streets. But think of it where the...
(CROSSTALK)
CAVUTO: So you take all the welfare benefits away by -- the state provided ones, that is a pretty big deal.
ROUBINI: Yes, we will see if that is politically feasible or not.
You have riots and demonstrations, strikes in the streets of Athens, eventually we could have the same kind of social pressure in the U.S.
But you have a federal deficit problem. A state and local problem.
You have unfunded liabilities of Medicare, Medicare (ph), Social Security. And you have also unfunded liabilities of state and local government pension funds. You add it all together between the official debt, the implicit one, the bill is huge.
At some point we cannot leave behind payments, not the households, not the government, not the country.
CAVUTO: I see things pretty much as you do, which should worry you, you might want to re-do the book and rethink that strategy. But here is one of the arguments for this not happening that you're envisioning.
That it's -- and it is akin to the way people would tap their home equity in the belief the home price would keep going up and they could keep this folly going.
And we know what happened there. But they're carrying it over to what is going on now. All of this borrowing and spending is going to be justified with a reignited economy, GDP is going to go up, sales are going to go up, revenues are going to come in, and the things that, you know, guys like you are fearing don't materialize.
In other words, we dodge the bullet.
ROUBINI: I doubt there will, because even if you take the official administration optimistic assumption about the high economic growth, 3.5 percent for the next decade, the budget deficit is going to fall to 5 percent of GDP. That means over the next few years, something $800 billion, as opposed to over a trillion dollars.
Even $800 billion is unsustainable. The official numbers suggest about
$9 trillion budget deficits for the next decade. Even with reasonable
assumption about economic growth, at some point we have to reduce spending, we have also raise some kind of non-distortional (ph) revenues, maybe introduce...
(CROSSTALK)
CAVUTO: What if you don't do both?
ROUBINI: ... tax.
CAVUTO: In New Jersey the governor there, Governor Christie, is trying to do it just by cutting spending. He is not entertaining any tax hikes. And he has been closely watched obviously by a lot of conservatives and Reaganites who say, you know, go baby go. But he -- that is how he plans to do it. He thinks if you break the union leaders' back and their built-in pension benefits and increases, you'll be ahead of the game, longer term you make a very sharp Spartan commitment.
What do you make of that?
ROUBINI: If I had to make a choice at the margin, it is better to cut the budget deficit on the spending side...
(CROSSTALK)
CAVUTO: They can never do it.
ROUBINI: ... raising revenue. But realistically...
CAVUTO: They can never do it.
ROUBINI: ... the size of the deficit is such that realistically the two parties will have to accept -- the Democrats, spending cuts, and also the Republicans will have to realize that some increase in revenues, want to limit as much as possible, is going to be needed to shrink over time, this deficit.
CAVUTO: Now does it worry you -- my argument with a lot of this stuff is when you have tax increases, I don't care what people's views are on tax increases, you are more or less saying, look, we know the product stinks, but you're going to have to pay more for it.
And there is something intrinsically wrong about that. In no other field, in no other endeavor, no other product, if there's a lousy car, no one is buying it, would you raise the price of the car? Yet with a lousy unresponsive, sloppy, slovenly government, we raise the price of it effectively by increasing the cost of it.
ROUBINI: That is why we have to cut the fat of the government first.
We have to reduce the inefficiencies...
CAVUTO: But they don't. They never ever do. They never do. Does it worry you? If they never do, then we have to raise...
ROUBINI: Conditional. Conditional on doing the spending cuts which should be first, come in first, I would say the gap is so large, 10 percent of GDP, that I don't think we have enough to spend to cut on the spending side. Realistically down the line we'll have to raise revenues.
In my view, there are less distortional ways of raising revenue. We don't want to increase income taxes, capital gains, dividends, and other things of this sort. Probably introducing down the line a value-added tax, it's less distortionary, an indirect (ph) tax will be the right way of doing it over time.
CAVUTO: Yes, but that would be an add-on tax, it wouldn't be a substitute tax, it would be an add-on tax.
ROUBINI: Yes, because we have to fill this gap.
CAVUTO: OK. Nouriel Roubini, "Crisis Economics," a very -- a toe-tapper kind of a view of where we are going here. But that's a good read, good read. Thank you very much.
ROUBINI: A pleasure being with you today.
(END VIDEOTAPE)
Watch the video below:
