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Thread: The Worry is Deflation NOT Inflation.

  1. #1
    Havakasha is offline
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    The Worry is Deflation NOT Inflation.

    Roubini: The Fed Needs to Fight Deflation and a Double Dip Recession
    Published: Thursday, 11 Nov 2010 | 1:21 PM ET Text Size
    By: Ash Bennington

    With all the second guessing of QE2 — and even chatter about a return to a gold standard—Nouriel Roubini is very clear about the primary challenge to the U.S. economy: "The risk is deflation—not inflation."
    Roubini, of course, has been on record supporting quantitative easing for some time. But, in my interview with him, he made clear that he's still not sanguine about growth prospects—even after the injection of a fresh $600 billion.
    What value does he see in QE2 (Federal Reserve easing quantitative easing)? Principally, he believes it's a necessary evil for allowing the U.S. economy to steer clear of catastrophe.

    "It certainly reduces the tail risk of a double dip [recession]," he said."And it reduces the risk of outright deflation or the expectation of deflation."

    In our discussion, Roubini made his case against the critics of quantitative easing very clear—and explained the dire consequences of inaction.

    "The biggest problem we're facing today is growth that is too low. And inflation that is too low. And if we don't do anything to prevent growth that is too low…then we're going to end up in deflation," Roubini said And how bad might that get? According to Roubini, if the deflation scenario is allowed to unfold due to an absence of central bank intervention, "we end up like Japan: In a trap of near depression that can last a decade—if not longer."

    But what of inflation? Aren't there risks inherent in expanding the money supply? Haven't we witnessed the disastrous consequences around the world when governments recklessly run the monetary printing presses?

    Roubini is very clear about why the nightmarish inflation scenario isn't likely to occur now in The United States.

    To begin with, there is slack in the labor market. And that 'slack' is broader than the unemployment statistics alone would suggest. To more fully understand the employment situation, you need to account for not just the unemployed, but the underemployed, discouraged workers, and 'overstaffing' which, in part, is driving corporate profits without top line growth.

    Roubini points out: "As long as there is slack, you can actually grow many years above trend before you see tightness in the labor markets and goods markets,"—which is what he says drives inflation in the first place.

    When I asked Roubini if politicians who advocate anti-Fed policies—such as the abolition of the Federal Reserve Board—should be addressed, he said: "Some of the stuff they say is so weird that I don't even know if it's worth engaging them or not."

    But Roubini acknowledged that those who say that QE2 is going to cause massive debasement of the currency must be engaged. And Roubini understands the linkage among the ideologies of that political movement: "That's also the argument for the gold standard," he said in reference to the connection drawn in some sectors.

    Essentially, opposition to fiat money generally—and QE2 specifically—always sees an inflationary bias and the government creation of money as problematic. Hence, the desire for the gold standard and other fixed rate regimes. But according to Roubini, "Those kinds of arguments are totally senseless today."

    Some among the camp who oppose QE2—and many of the Fed abolitionists—have a desire to "tie the hands of policymakers," as Roubini says.

    But, in these economic times, that's not just undesirable—it's downright dangerous.


  2. #2
    SiriuslyLong is offline
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    Joined: Jan 2009 Location: Ann Arbor, MI Posts: 3,560
    This guy may have a point. Our economy is based on fiat money. It's not a stretch to say we then have a fiat economy. "Common sense and logic" needn't apply. Value is arbitrary. We can make up rules as we go.

    I don't see any lunacy stopping.

  3. #3
    Havakasha is offline
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    Joined: Sep 2009 Posts: 5,358
    Roubini also believes that Germany has it wrong when it comes to monetary easing.

    Monetary Easing a ‘Necessary Evil’: Roubini
    Published: Thursday, 11 Nov 2010 | 11:26 AM ET Text Size

    The European Central Bank’s reluctance to consider further monetary easing exacerbates the problems the euro zone is currently facing, and Germany’s criticism of the Federal Reserve second round of bond buying is “misplaced,” economist Nouriel Roubini told CNBC Thursday.
    “In a situation where there is massive fiscal consolidation … the ECB should be providing more liquidity to the financial system and do more bond buying," Roubini said in an interview, adding the ECB did not do enough to limit the widening of bond-yield spreads.

    German finance minister Wolfgang Schäuble recently irked US authorities when he criticized the Federal Reserve’s decision to launch another round of bond buying and called the policy "clueless."

    “There is a huge divide between the position of the United States and that of Germany, “ Roubini said.

    “The Fed believes we need to do (a second round of asset buying) while the ECB and the Germans are dead against it. On that particular issue I think the Germans have it wrong,” he said.

    Given that growth is low and falling and with inflation low and falling, the buying, also known as quantitative easing or QE2, was necessary, Roubini, whose analysis firm Roubini Global Economics recently opened an office in London, said.

    “To me QE2 was a necessary evil because with growth so below potential and with inflation following a risk of deflation, if we had not done QE2, the risk of a double-dip recession and of deflation would become more significant.“

    But the real economic effects of QE2 will be modest in Roubini’s view, as the market has already priced in its effect to a large extent.

    “A lot of that critique of QE2 is somehow misplaced … If anything, you could criticize the ECB for not doing QE2,” he said.

    The Federal Reserve's most recent move wouldn't be its last one, Roubini said.

    "In my view it is not just going to be QE2. The Fed eventually is going to do QE3, QE4 and even QE5 because growth is going to fundamentally stay below trend and inflation low," he said.

    Roubini was critical of the austerity programs outlined by the British government among others in Europe, saying that frontloading fiscal consolidation would only reduce growth.

    Instead, governments, including the US, should commit today to a schedule of reducing spending and raising taxes that would be gradually phased in over the next few years, “so people see there is light at the end of the tunnel of the fiscal trainwreck.”

    What the euro zone needs is easier monetary policy to stimulate growth and to weaken the euro, the strength of which is damaging the chance of a recovery in the region’s periphery, Roubini said.

    While Germany can live with a strong euro because it is very competitive, the periphery of the euro zone needs a euro closer to parity, he said.

    “Eventually, even Germany is going to be hurt. So far Germany is doing well (but) if the periphery is sinking, eventually Germany will too. No country in the euro zone is an island.”

    If Spain were to fall off the cliff in the next twelve months, that would pose a serious problem for the euro zone, he said.

    "The size of Spain in terms of its GDP and debt – private and public – is so large that official resources like the IMF may not be sufficient if they lose market access to roll over their debt and finance their current fiscal deficit."

    "It’s also systemically so much more important. And even (a country as small as) Greece had contagious effects," Roubini added.

    Roubini expects the Bank of England to launch another round of monetary easing as soon as the austerity measures the government has set out kick in.

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