8 Ways to Avoid a Recession

Posted by - Monday, September 19th, 2011

The words “recession” and “double dip” are code words for fear in today’s global economy. It seems everywhere you look, the danger of economic turmoil is looming.

And according to Nouriel Roubini, the economy’s stress level is hauntingly similar to the level seen on the brink of the last recession.

But Roubini provides a glimmer of hope in his Project Syndicate article, showing that there could be a solution. He urges nations and economies to comply with these eight ways to avoid a recession or worse in the article.

Number 1: Be careful with austerity measures.

[A]usterity measures, necessary to avoid a fiscal train wreck, have recessionary effects on output.

He recommends that other nations “provide short-term stimulus” to counteract the effects of these austerity measures, naming the U.S., United Kingdom, Germany, and Japan as the most capable of doing so.

Number 2: Try credit easing instead.

Quantitative easing should be combined with credit easing, especially in banks such as the Federal Reserve Bank, the Bank of Japan, and the Bank of England.  And the European Central Bank should avoid increased interest rates for now.

N. Gregory Mankiw, back in 2007, advised that the Federal Reserve’s monetary expansion could solve most of the problems.  We have already found out that alone, that is not the solution.

Number 3: Strengthen eurozone banks and banking systems through public financing.

Roubini advises that a European Union-wide program is necessary.  “[B]anks should be given some short-term forbearance on capital and liquidity requirements.”

Number 4: Solvent governments need liquidity provision.

Governments such as Spain and Italy need to restore their credibility.

Number 5: More action is needed for certain debt burdens, such as “debt restructuring, debt reduction, and conversion of debt into equity.”

Number 6: Nations need to restore their competitiveness to return to economic growth.

According to Roubini, one of the only solutions may be “exit from the eurozone by Greece and some other current members.”  He recommends the drastic change of these countries going back to their national currency.

Number 7: Restore competitiveness in advanced economies.

The growth of new markets and their rising competition is pushing behind already advanced economies.  These countries need to boost investments in areas that will lead to job and infrastructure growth.

Number 8: Emerging markets should do their part to aid the global market.

This would include a more rapid currency appreciation on behalf of China.  Australian Treasurer and Deputy Prime Minister Wayne Swan agrees that this could solve many things.

China is appreciating the yuan against the dollar, but the pace at which this is occurring is too slow to make the expected impact.

Some of these solutions that Roubini’s Project Syndicate article suggests are quite drastic. Others would call for cooperation and agreement on behalf of many economies.

Only time will tell if our global economy band can together enough to apply these solutions. We'll be finding out sooner than later...

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