Roubini Bets Against the Melt

A few posts ago, Tuna Melt predicted inflation was coming, and it would lead to a rapid "recovery" of the stock market.

Nouriel Roubini of NYU, who's become the go-to guy for GFM 2008, predicts just the opposite.

Game on, Roubini.

Here's where Tuna Melt disagrees with you:

You say:
"First, the massive injection of liquidity in the financial system--literally trillions of dollars in the last few months--is not inflationary, as it accommodates the demand for liquidity that the current financial crisis and investors' panic have triggered."
TM says: And the dollar has benefited from everyone's desire to get into cash. But there's a buttload of cash out there now. More than at any time in the dollar's history. At the first hint of an upward trend in any asset market, the cash will start to move in, and the snowball will roll. You say central banks can and will mop up the excess before inflation starts. I say they tried that in 06, 07 and caused GFM oughteight.


You say:
"As long as deficits are financed with debt--rather than by the printing presses--fiscal costs will not be inflationary, as taxes will have to be increased over the next few decades and/or government spending reduced to service this large increase in the stock of public debt."
TM says: have you met the United States government? Don't forget that a Social Security/Medicare disaster is looming a decade out. The only way Big G can finance all the schemes in store for us is with the printing press.

You say:
"Wouldn't central banks be tempted to monetize these fiscal costs--rather than allow a mushrooming of public debt--and thus wipe out with inflation these fiscal costs of bailing out lenders/investors and borrowers? Not likely in my view. Even a relatively dovish Bernanke Fed cannot afford to let the inflation-expectations genie out of the bottle via a monetization of the fiscal bailout costs."
TM says: On this you are correct, but I think it's already too late for poor Ben. The Fed has pumped out an unprecedented amount of cash into the world and we're nearing the point where foreign investors don't want to touch American debt.