“Dr. Doom's” Firm, in Counterintuitive Claim, Says US Better Off Than Europe

(April 20, 2011) – The firm run by “Dr. Gloom” himself is making a counterintuitive claim: the United States, thought by many to be on the verge of bankruptcy, is in fact better off than Europe.

With the United States receiving a “negative outlook” from Standard & Poor’s and the Eurozone crisis continuing to escalate, it is apparent that the world’s advanced economies are battling an increasingly worrisome fiscal situation. Yet, David Nowakowski, director of credit strategy at Roubini Global Economics (RGE), is asserting that the problems in Europe are much more severe – and harder to work out from an investor perspective – compared to the debt issues facing the US. “We’re much better off than many Eurozone countries like Portugal and Ireland,” he tells aiCIO, adding that he believes widespread assertions that municipalities are on the brink of disaster and heading for bankruptcy are blown out of proportion.

According to Nowakowski, the main problem regarding the US’s debt problems is an exit strategy to the fiscal and monetary stimulus that has kept the economy on course. “Without a more robust recovery and additional action, municipalities’ revenues will never recover to its pre-crisis levels. We need to have political agreement for a longer-term deficit reduction,” he says, indicating that the problems in the US – similar to other advanced economies – will only be aggravated by demographic change and an aging population. However, a political solution is in the cards, he believes.

The S&P debt warning highlights the comparison between the US and Japan, Nowakowski says. Japan lost its AAA status in 2001, but the resulting reform and the reduction in deficits from 2006 to 2008 allowed it to win back its AAA status from Moody’s. However, Nowakowski warns about drawing too strong a parallel between this example and that of America and Europe in 2011. “The US has much better demographics and growth outlook than Europe and Japan,” he says.

Buttressing Nowakowski’s claims, RGE issued a report yesterday in response to the S&P’s rating action, asserting that while the US is on an unsustainable fiscal path from which it cannot exit without political consensus, it will “do the right thing.”

“The United States has the most manageable fiscal issues of any major advanced economy because federal, state and local revenues as a share of GDP are very low, for cyclical and other reasons,” the report claimed. “Therefore, fiscal balance can be restored by fiscal adjustment without major economic difficulty in the near term.”