Roubini: No Poom

[Verrocchio]

Re: Roubini: No Poom

Roubini gave four reasons in support of his thesis that inflation is not in our future.

1. [T]he recent trillions injected into the financial system have not been inflationary because the central banks will mop up excess liquidity after panic has receded.

This claim hinges on the efficacy of the mopping up mechanism. How is this to function, and how quickly? If the mechanism is unreliable, or the process is too lengthy, we may seen high inflation despite these efforts.

2. Inflation will not result from the big bailouts because the bailouts will have been financed with public debt, rather than by printing new currency. The public debt will be funded by increased taxes, reduced government spending, or both.

The question of financing the bailouts is not wholly economic. Politicians will make the ultimate decision, and they will be loath to increase taxes or reduce government spending. US public debt is now over 5 trillion dollars, but this is by no means a limit.

3. Bernanke and other central bankers won't monetize the bailouts because it would cause high inflation; this would result in a tight money policy; this would cause a severe recession; and this would corrode the banksters' "low inflation credibility" (evidently something that must be avoided at all costs).

Given the current debacle, the credibility of central bankers is falling to the floor ((recall Sir Greenspan's humiliating testimony last week). It is silly to propose that concern about their low inflation credibility is an important factor.

4. If inflation was to occur, lenders would quickly adapt by only agreeing to loans with built-in inflation hedges.

I doubt that this is simple as Roubini makes it seem.

Furthermore, all arguments for low or no inflation lead to conditions for deflation, possibly a deflationary depression. This would be a very dangerous, self-reinforcing downward spiral. The high real interest rates seen during deflationary periods hamper investment and reduce demand. The rate of employment drops. Wealth is transferred from those in debt to lenders. The lack of available credit reduces investment and demand. Unemployment increases.

Caught between the Scylla of runaway inflation and the Charybdis of a deflationary spiral, central banks will, like Odysseus, choose the lesser of the two evils -- and opt for inflation.
___________________________

See Fear of a Quagmire, by Krugman in the May 24, 2003, edition of the New York Times.

[The Outback Oracle]

Re: Roubini: No Poom

I agree: there's a persistent misunderstanding on this forum on how central banks work, and it's costing a lot of subscribers money.

In hind-sight, going long the Yen, aside from option trading I've been doing, has been the best trade I've made so far.

The worst trade? ALL inflation hedges: total abortion.

I feel like an idiot, frankly: it was obvious the carry trade would totally unwind. I am disappointed that EJ did not address this nor advise people to get long yen.

Phirang...it is easy in retrospect. I went on the Yen last year, expecting whaT is now occurring to happen....it did but irrationality took over and the yen was crucified by someone????? I got out with a small profit but it ruined my tendency to back my own thouhts this time! I think asking EJto suggest the Yen would one day be king would be one thing, but to time the currency fall, entirely another

[pksubs]

Re: Roubini: No Poom

Greetings, my first post, so officially a newbie :rolleyes:

There's been arguments made for the continued financing of the US debt by the Chinese/others because they have nowhere else to park their money. I don't get that. The Chinese investment in the US has been classic vendor financing, and it keeps their factories ticking over. With the bursting of the credit bubble, it's quite clear that US demand has dropped. The Chinese response cannot be to maintain their levels of investment in the US, they will have to reallocate their cash to boost domestic consumption, fund even larger public spending programs, etc. And I don't understand why they or anyone else would want to park their cash in treasuries at zero interest rate for any length of time. Moving out of treasuries can't be good for the dollar longer term. Is it possible that the behaviour we see today - everybody in treasuries - is just a short term deer in the headlights response to the crisis? One thing I'm sure we'll agree on is that the deer in the headlights situation is necessarily a temporary one, one way or another it resolves itself !

[Supercilious]

Re: Roubini: No Poom

4. If inflation was to occur, lenders would quickly adapt by only agreeing to loans with built-in inflation hedges.

I doubt that this is simple as Roubini makes it seem.

If a controlled inflationary shock occurs, what will happen with housing prices ... and here goes poof the negative equity and the subprime default era ends miraculously (there will be some form of mortgage conversion effort too) .

They are brilliant.

[phirang]

Re: Roubini: No Poom

If a controlled inflationary shock occurs, what will happen with housing prices ... and here goes poof the negative equity and the subprime default era ends miraculously (there will be some form of mortgage conversion effort too) .

They are brilliant.

I'm tellin' ya, agency MBS' will be the contrarian trade of 2009!!!

[Guest]

Re: Roubini: No Poom

Huh? I thought we were just getting warmed up to celebrate Roubini's "No Poom" with the black funeral clothes? Gold was supposed to plummet in a deflationary vortex, and an hour ago America here was supposed to get sucked down into a deflationary vortex along with the bling, which illustrated why Roubini was right about everything and iTulip was wrong about everything but now we've got a controlled inflationary shock coming and MBS wll be the contrarian trade??

Ow. My head hurts. Now I'm really confused. I want my blanky. Where's my global depression?

I'm tellin' ya, agency MBS' will be the contrarian trade of 2009!!!

If a controlled inflationary shock occurs, what will happen with housing prices ... and here goes poof the negative equity and the subprime default era ends miraculously (there will be some form of mortgage conversion effort too) . They are brilliant.

[phirang]

Re: Roubini: No Poom

Huh? I thought we were in the midst of celebrting Roubini's "No Poom"? Gold was supposed to plummet in a deflationary vortex, and an hour ago America here was supposed to get sucked down into a deflationary vortex which illustrated why Roubini was right about everything and iTulip was wrong about everything but now we've got a controlled inflationary shock coming and MBS wll be the contrarian trade??

Ow. My head hurts. Now I'm really confused. I want my blanky. Where's my global depression?

The elucidating EJ will address this all tomorrow, I am sure!

[Supercilious]

Re: Roubini: No Poom

I'm tellin' ya, agency MBS' will be the contrarian trade of 2009!!!

Possible, but right know it seems to be too risky for my taste. There is at this moment such a good game in zero-risk/sure-kills in these market conditions, definitely I'm not going to enter this game soon (if I'll enter at all).

[ASH]

Re: Roubini: No Poom

Politically there is no way to renege on SS and Medicare so the real debt is now around $50T - figure long term interest at 5% and that is $2.50T of more debt each year. Much of the debt we no longer "owe to ourselves" and the US will continue to try and borrow to meet the cost of social programs.

I agree with the general thrust of your statement, but the mechanics of the federal debt doesn't work quite like this. We're not paying interest on the $50T figure -- more like $10.5T.

You can read in great detail about the calculations and assumptions involved in projections for Social Security and Medicare in the Fiscal Year 2007 Financial Report of the United States Government. Discussion of the long-term impact of Social Security and Medicare on the budget begins on page 111.

The $50T figure is an estimate of the 75-year fiscal gap between projected expenditures and revenue (debt we are predicted to incur), calculated as a present value, plus the debt we've already incurred (presently about $10.5T). As of the 2007 Financial Report, the predicted gap between payroll tax revenue, taxes on benefits, and premium payments -- and promised expenditures for Social Security and Medicare -- total $40.8T (page 131). So, basically, the $50T estimate consists of $10T we owe today, and $40T we are projected to borrow over a 75-year span, under current law. We don't yet pay interest on the $40T (in present value) we are going to borrow, because we haven't borrowed it yet.

The portion of the $10T we "owe to ourselves" can normally be found in Table S-13 of OMB's latest budget. As of the FY2009 budget, we owed about 44% of this debt "to ourselves". This means that portion of the debt is in the form of government account series (GAS) bonds, which are not tradeable, and which are held by government agencies such as the Social Security and Medicare Trust Funds. Up until recently, these programs have run surpluses on their tax revenue, so the "interest" paid each year on these bonds has been rolled over into the issue of additional GAS bonds, increasing the federal debt. (This is why the change in debt each year does not match the official budget deficit -- and why the federal debt continued to grow during Clinton's supposed "surplus"; the interest we pay on debt "to ourselves" doesn't show up in the budget.) The net interest payments not to ourselves totaled about $237 billion in FY2007, according to Table S-7 of OMB's latest budget. You can find the off-budget interest paid to Social Security and Medicare in the Summary of the Annual Reports of the Social Security and Medicare Boards of Trustees. Interest earnings on the $2.6T of GAS bonds held by the Trust Funds totalled about $129 billion. That leaves another $2T or so of GAS bonds held by other government agencies, the exact disposition of which I haven't sniffed out.

The borrowing necessary for the recent bailouts occured after most of the documents I reference were published, so I'm sure the sums and proportions have shifted. I am citing the documents not to give accurate realtime debt figures, but rather to give an illustration of the mechanics and rough proportions.

[bpr]

Re: Roubini: No Poom

The borrowing necessary for the recent bailouts occured after most of the documents I reference were published, so I'm sure the sums and proportions have shifted. I am citing the documents not to give accurate realtime debt figures, but rather to give an illustration of the mechanics and rough proportions.

Thanks, Ash. Good stuff for Sunday reading.

[zmas28]

Re: Roubini: No Poom

Agreed. I don't think this crisis will end that cleanly. As pointed out in another thread, dollar hegemony is coming under attack.
(http://www.nakedcapitalism.com/2008/...st-dollar.html). Its doubtful if the Chinese and others will continue to support the dollar forever.
As EJ has pointed out several times, the political element (government policies) are going to play a critical role in determining how this is going to play out.

[ASH]

Re: Roubini: No Poom

I blame the neo-cons for spending on endless wars, deficits, drug war, prisons, tax-cuts for the rich, military toys, and bail-outs for Wall Street.

So let's be very clear about who is to blame before the new tax scheme is even introduced.

Just this past week, the U.S. military launched a new atomic-powered, attack submarine. With all this economic turmoil going on, the U.S. military got another expensive toy to play with...... Does Al Qaide have a navy?

I think we should separate the moral question of spending priorities from the purely financial question of balancing the budget, because people will disagree about which categories of federal spending are odious, whereas the problem of overspending is uncontroversial. For instance, I note that social spending did not make your list of culprits, despite its importance in the federal budget, and despite the fact that social spending is precisely what GAO and other nonpartisan budget agencies predict will break the federal budget in the long run. Hell, Bush gave us Medicare part D, which will be around a lot longer than his wars. The fact of the matter is that it all comes out of one pot, and we are overspending in aggregate.

No disagreement whatsoever about the lack of Republican fiscal discipline. What wankers. They even talk openly about trying to "starve the beast" by breaking the budget.

I just think what we overspend on is less important right now than that we are overspending in the first place (and, of course, who presided over this profligacy).

[c1ue]

Re: Roubini: No Poom

The problem with phirang and $#* are that they expect a moment by moment forecast of what is going to occur so that they can play the day trader game.

EJ and iTulip rightly never attempt to do this - because it is ultimately impossible.

Why impossible? Because the exact sequence of events is due to a myriad of decisions made on multiple conflicting fronts. Only the truly omniscient or the amazingly lucky can make such predictions - and only the former for any length of time.

For all those who say oil is/was a bubble - sorry, but even at today's $66 level, oil is still higher in price than it has EVER been prior to 2007.

As for Roubini - I have not seen many specific details from him either.

He just says that there will be a crash and outlined the mechanisms, but did not provide specific timelines nor triggering events. Nor did Roubini predict the government response.

This is no criticism of his message, merely that he is human much as all of us are.

As I've also mentioned in other posts - he never ever talks about extra-US happenings. I've never seen him talk about how US debt owed to foreigners will make a difference or not. Nor does he speak in any detail about the US consumption habits, nor even about the FIRE economy.

What Roubini has done is go into extreme detail on the bad loans.

He's done a fine job there but that is all.

Those who wish for the impossible daily detailed forecasts; those who don't have the patience to persevere with their well thought out investments through 'economic time' unfolding; those who attack others whom give their experience and opinions because of disappointment over personal decisions, will find the fate they're looking for.

[bpr]

Re: Roubini: No Poom

I think we should separate the moral question of spending priorities from the purely financial question of balancing the budget, because people will disagree about which categories of federal spending are odious, whereas the problem of overspending is uncontroversial. For instance, I note that social spending did not make your list of culprits, despite its importance in the federal budget, and despite the fact that social spending is precisely what GAO and other nonpartisan budget agencies predict will break the federal budget in the long run. Hell, Bush gave us Medicare part D, which will be around a lot longer than his wars. The fact of the matter is that it all comes out of one pot, and we are overspending in aggregate.

No disagreement whatsoever about the lack of Republican fiscal discipline. What wankers. They even talk openly about trying to "starve the beast" by breaking the budget.

I just think what we overspend on is less important right now than that we are overspending in the first place (and, of course, who presided over this profligacy).

I disagree wholesale, and this may belong in a different place, but it needs to be said.

The moral question of where we are spending comes before the financial obligation to balance the budget.

What we are spending on is going to determine what we can cut. If you think Medicare Part D is going to cost us more in the long run than Iraq and Afghanistan ("will be around a lot longer than his wars," is your way of terming it), then you truly believe we have no obligation to our veterans. These wars, which are off-budget, currently, are going to be major on-budget drags as the VA starts sending bills to Congress. Unless we just opt out of social programs. Then we can just leave the limbless to their families or the streets, and start new wars.

Carry on, and manage your investments well. Just don't look down as you trot to the bank.

I wish you well, and hope you aren't deployed. You're too smart to lose to violence.

[marvenger]

Re: Roubini: No Poom

I don't think Roubini has read Hudson when he says that more financing with public debt has less pain than monetisation. Hudson says the growing level of debt is becoming harder to service all the time creating a deflationary spiral, then Hudson points to the fall of the Roman Empire being caused by efforts to protect creditors in the face of deflationary spiral that further exacerbates the spiral. So I'm thinking that Roubini isn't following the mounting public debts process all the way through when reaching his conclusion. Unless he thinks the banksters would prefer mutual assured destruction rather than lose status like the Romans did. And Roubini doesn't seem to take the net capital flows into consideration, but this is pretty hard to predict I think, I'll go with Itulips confidence in the direction but this is due to trusting their track record and confidence rather than confirming it with any solid understanding of my own; it all depends on the alte and infrastructure spend happening I guess.