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Nouriel Roubini (Reuters)
Nouriel Roubini (Reuters)

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Nouriel Roubini's 8 steps on 'how to prevent a depression' Add to ...

These are stories Report on Business is following Thursday, Sept. 22. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

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Roubini's prescription Nouriel Roubini believes the United States and the euro zone are "effectively in a recession now" and the world's leaders are running out of ammunition.

In a recent article, the New York University professor, chairman and co-founder of Roubini Global Economics, who forecast the financial crisis, lays out eight ways to "prevent a depression."

1. Countries in a position to still take new stimulus measures - the United States, Britain, Japan, and Germany and others in the euro zone core - should do it and delay austerity plans.

2. The European Central Bank should reverse its "mistaken decision" to boost interest rates, while others such as the Federal Reserve, Bank of Japan, Bank of England and Swiss National Bank do more. (This was written before the Fed's latest action.)

3. The European Union should strengthen its banks with public money, and spread money to small and mid-size businesses.

4. A fatter bailout fund, eurobonds or "massive ECB action," meaning a huge liquidity provision for solvent governments, is needed "to avoid a disastrous run on these sovereigns," notably Italy and Spain.

5. Impossible debt burdens among governments, households and banks that can't solve their problems should be "rendered sustainable" via orderly restructurings, reductions and debt-for-equity swaps.

6. Greece and "some other current members" should leave the euro zone. "Only a return to a national currency – and a sharp depreciation of that currency – can restore competitiveness and growth."

7. Advanced economies must plan "to restore competitiveness and jobs" with high-quality education, training, infrastructure and investment in alternative energy.

8. Emerging economies have more ammunition available and should ease their monetary and fiscal policies.

An ugly day Global financial markets are in turmoil today as weak numbers from China and Europe add to the Federal Reserve's gloomy outlook yesterday afternoon, the first spark in a collapse in global confidence.

Stocks tumbled, the Canadian dollar fell sharply from yesterday's peak, oil sank, and gold followed suit.

"Nothing's working in our favour today," senior currency strategist Camilla Sutton said of the loonie, one of the worst performing currencies as the U.S. dollar climbs.

Sal Guatieri of BMO Nesbitt Burns said "safe haven demand" set the U.S. dollar on fire, in turn knocking commodity prices.

Stocks sank first in Asia, with Hong Kong's Hang Seng down 4.9 per cent. The troubled deepened when European markets opened, with major bourses ending down in the 5-per-cent range. In North America, the Dow Jones industrial average , the S&P 500 , and Toronto's S&P/TSX composite crumbled.

Driving the markets overall was a deep sense of gloom, first from the U.S. central bank's warnings yesterday on the economic outlook, and, now, from numbers showing the private sector in retreat in China and Europe. China is key to the equation as it has been the driver of global growth, while Europe seems to go from bad to worse amid a mounting debt crisis.

The Canadian dollar, noted Ms. Sutton, is more vulnerable than other currencies to developments in China, whose numbers tend to drive commodity prices.

The Fed cited high unemployment, slowing household spending and a depressed housing market yesterday as it launched "Operation Twist," a $400-billion program aimed at bringing down longer-term borrowing costs by selling short-term notes and buying those on the longer end, a measure last used in the early 1960s.

(In retrospect, maybe the Twist wasn't the best dance craze to use. Maybe Locomotion? Jitterbug? Even the Limbo would have been better.)

Economies show signs of weakness It began yesterday afternoon with a worrisome outlook from the Federal Reserve as it launched "Operation Twist," a $400-billion (U.S.) scheme to bring down long-term interest rates in a bid to juice borrowing and spending as the recovery falters.

Then, today, fresh readings from China and Europe pointed to further slowing, with purchasing managers' indexes showing the corporate sector pulling back.

In China, the manufacturing sector contracted for the third month in a row. That troubles investors because China's economy has done the heavy lifting as western nations struggle in the post-recession climate. The key index slipped to 49.4 for September from 49.9 in August. A reading below 50 indicates a pullback.

"On the bright side, conditions in manufacturing have at least stopped deteriorating over recent months," said economists Mark Williams and Qinwei Wang at Capital Economics. "But chances of a significant rebound seem low."

In Europe, purchasing managers' index for both the manufacturing and services sectors raised fears of another recession. On the services side, the index fell to 49.1 from 51.5, and on the manufacturing side to 48.4 for its worst showing in about two years.

"Overall, nothing good here," said Benjamin Reitzes of BMO Nesbitt Burns. "This should increase pressure on the [European Central Bank]to cut rates at the October meeting. If the recent negative market tone persists, expect the ECB to act. That would provide at least some relief for sentiment, even if it’s temporary."

Jobless claims still high Just to drive home the point: Initial claims for jobless benefits in the United States, where millions lost their jobs in the recession, dipped last week to 423,000. The decline is a good sign, for sure, but weekly claims in the U.S. remain above 400,000, underscoring the jobs crisis that has sparked President Barack Obama's jobs plan and yesterday's warning from the Federal Reserve.

"Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated," the Fed said in its statement. "The committee continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually toward levels that the committee judges to be consistent with its dual mandate."

"At least continuing claims fell 28,000 in the week of Sept. 10 to a five-week low of 3.7 million, but that's not really a huge consolation because it reflects, one, Americans getting jobs and two, Americans running out of UI," said senior economist Jennifer Lee of BMO Nesbitt Burns.

"On the plus side, initial claims aren't deteriorating at a faster clip," she added. "On the downside, claims aren't improving much, if at all, either."

Consumers pull back Canadian consumers are showing signs of fatigue, which was to be expected.

Retail sales in Canada fell in July for the first time in three months, declining by 0.6 per cent, Statistics Canada said today. Autos and parts led the decline. Factor that out, and sales were flat, still not the best sign as seven of the 11 groups measured by the federal agency reported a drop.

The overall decline was worse than expected, and the poorest showing since April of 2010.

"Lower sales at new car dealers accounted for the decline at motor vehicle and parts dealers," Statistics Canada said.

"The 3.5-per-cent drop in sales at new car dealers offset gains made in June. Declines at used car dealers (-2 per cent) and automotive parts, accessories and tire stores (-0.4 per cent) were offset by a fourth consecutive monthly gain in the 'other motor vehicle dealers' (+2.3 per cen5) category," it said in its monthly report.

"Furniture and home furnishings stores registered a third consecutive decrease, falling 2.2 per cent. Lower sales at furniture stores (-2.9 per cent) were the main contributor to this decline. Sales at sporting goods, hobby, book and music stores decreased 2.3 per cent in July, more than offsetting gains made in the previous two months."

What's the outlook?

"Looking ahead, the uncertainties surrounding the economic outlook are expected to limit the demand for new vehicles and for durable goods more generally," said Toronto-Dominion Bank economist Shahrzad Mobasher Fard. "While a low interest rate environment should provide an offsetting impetus for consumer spending, the high level of household indebtedness will likely serve to constrain the pace at which debt is further accumulated."

Europe: From bad to worse Europe's turmoil is never ending, having raged for months now and spread from country to country.

In a paper published today by the European Central Bank, one of its executive board members, Juergen Stark, warns the very future of the euro zone is at stake. Europe's banks, particularly those in France with heavy exposure to Greece, have been severely pressured.

“Greatly increased fiscal imbalances in the euro area as a whole and the dire situation in individual member countries risk undermining stability, growth and employment, as well as the sustainability of EMU itself,” the paper said, referring to the European Monetary Union that takes in 17 countries.

"If that's not enough, there are ongoing concerns over the health of European banks," said Derek Holt and Karen Cordes Woods of Scotia Capital, referring to the weak numbers out of Europe today.

"Three-month European interbank funding spreads have more than quadrupled since mid-summer, with concerns over French banks remaining at the fore front of market considerations."

Change in works at HP Hewlett Packard Co. is poised to name Meg Whitman, the former chief of eBay, as its new CEO, The Wall Street Journal and Reuters report.

Ms. Whitman would replace Leo Apotheker, and the move could come as early as today.

HP hasn't announced Ms. Whitman yet. For that matter, it hasn't even said Mr. Apotheker is leaving.

FedEx a bellwether To get a different take on global developments, take a look at today's first-quarter results and comments from FedEx Corp. , oft seen as a bellwether for the economy.

FedEx today posted a quarterly profit of $464-million (U.S.), or $1.46 a share, diluted, up from $380-million or $1.20 a year earlier. Revenue climbed 11 per cent to $10.5-billion. But the company also trimmed its outlook, cutting its forecast for earnings per share for the fiscal year to $6.25 to $6.75, down from an earlier projection of $6.35 to $6.85.

"The U.S. and global economy grew at a slower rate than we anticipated during the quarter," said chief financial officer Alan Graf, Jr. "... We have slightly reduced our earnings forecast to reflect current business conditions and are aggressively working to adjust our cost structure to match demand levels."

Pope meets Merkel Even the pope is getting in on the act.

Pope Benedict XVI met in Berlin today with Chancellor Angela Merkel, and, according to the German leader, they agreed that policy makers, and not the markets, should be driving the agenda.

“We spoke about the financial markets and the fact that politicians should have the power to make policy for the people and not be driven by the markets, and that this is a very, very big task,” Ms. Merkel told reporters, according to reports.

In International Business Industrial conglomerate United Technologies Corp. is buying aerospace manufacturer Goodrich Corp. in a deal valued at $18.4-billion (U.S.), including the assumption of $1.9-billion in debt, Alex Veiga of The Associated Press reports from Los Angeles.

In Economy Lab There are some things that Americans can’t abide eliminating, even if it means billions in savings, namely, the dollar bill, David Milstead writes.

In Globe Careers There are certain words and phrases that are so overused they become red-flags in the job interview process, writes Meghan Casserly of Forbes.com.

In Personal Finance Picking stocks is exciting. But over the long haul, index investing is a more reliable path to wealth.

From today's Report on Business

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