Nouriel Roubini, one of the few economists who accurately predicted the magnitude of the financial crisis, said on Thursday that a double-dip recession can be avoided if stimulus measures are unwound properly.
Hopefully, if policymakers avoid further mistakes by exiting too soon or too late we can avoid another recession, Roubini said at a conference in Tel Aviv.
Roubini, known as Dr. Doom, said he expects an anemic global economic recovery where the United States and other advanced economies should grow below potential a few more years.
In terms of unraveling the large amounts of monetary and fiscal stimulus, doing so too soon could create another recession and deflation.
If policymakers wait too long, it would further strain budget deficits that would likely lead to higher bond yields -- and higher mortgage and other borrowing costs, he said.
You would get a recession with inflation -- stagflation, said Roubini, a professor at New York University's Stern School of Business, adding that stimulus measures should contribute to economic growth through the middle of 2010.
He said his pessimism the United States economy recovery will be U-shaped stems from a high unemployment rate that will curtail consumer spending and that part of the recovery so far has been due to temporary factors such as stimulus money, inventory restocking and the cash for clunkers program.
At the same time, capital spending in both the U.S. and Europe will remain low since capacity utilization rates are only around 70 percent. So why increase capital spending with one-third is not being utilized, he said.
He predicted that the euro zone's and Japan's recovery would be slower since they could not take such aggressive counter-cyclical policies due to high deficits and public debts.
He predicted that global inflation will become a problem next year due to the effects of high budget deficits, while the weak dollar will continue to lead to higher oil and other commodities prices.
Roubini expressed caution that the rally in asset prices will continue since, he said, the bubble was funded by dollar carry trades in which investors borrowed at zero U.S. rates, shorted the dollar and bought stocks and commodities.
At some point, the dollar will stabilize, then people will have to close their short dollar positions and then sell long positions in risky assets, Roubini said. Everyone will rush to the door at the same time.