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Sun 22 Nov 2009 04:00 AM

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The Roubini Vs Rogers debate

Which is the bigger threat - inflation or deflation? William Pesek attempts to find answers to the critical debate.

It's a, well, golden opportunity. Investor Jim Rogers thinks gold will double to at least $2,000 an ounce. Economist Nouriel Roubini says that's "utter nonsense."

As these well-known market personalities duke it out, they're doing us a favour by highlighting a critical debate: Which is the bigger threat - inflation or deflation?

Inflation, though not to the extent many fear. Saying this opens me up to a rebuke from the National Inflation Association. It chided Roubini last week for arguing there's no inflation to drive gold that high. The group said he "doesn't understand inflation and deflation."

Then again, who really does these days? If you're looking at economics and markets through traditional lenses, very little makes sense. Many concepts that seemed like rock-hard truths two years ago are looking shaky.

Just ask John Reed, who helped engineer the merger that created Citigroup Inc. Reed last week apologised for his role in building a company that has taken $45bn in direct US aid, and said banks that big should be split up. Turns out, the 1999 repeal of the Depression-era Glass-Steagall Act separating consumer banking from those involved in capital markets was certainly a terrible idea after all.

Up has become down, and down has become up. Amid such disorientation, the risk is that policymakers will apply old ideas and relationships to new and diverse challenges. One such error would be prematurely taking away the stimulus that's only now stabilising growth.

Only a fool would dismiss inflation risks at a time when the Federal Reserve, Bank of Japan and Bank of England are holding short-term rates near zero and the European Central Bank isn't far behind. Central banks are starting to unwind emergency measures introduced to stave off disaster, and that's appropriate.

The risk is that policymakers go overboard looking for exit strategies. That, in a nutshell, is Roubini's shtick and it's hard to refute the views of the New York University professor. Yes, inflation must be contained, but so must the forces of deflation in the short run.

To me, Roubini's worries are more persuasive than Rogers's bet on gold. That also goes for Roubini's view that bubbles pervade rallies in emerging-market stocks. They do.

As 2010 approaches, there are widespread expectations that gold will continue rising. India's recent purchase of $6.7bn worth of the precious metal focused attention on the trend.

Yet the global economy is turning Japanese more than those fixated on inflation may realise. In a world awash in liquidity traps, price pressures aren't the usual threat.

That's not to say inflation won't perk up, particularly in emerging markets. The Fed's ultra-low rates are likely to result in inflation in China, Indonesia and Thailand before they do in the US. Bank lending is locked in neutral, at best, even though monetary-base growth in the US has increased exponentially over the past year. Oddly, the main beneficiary of the Fed's liquidity is emerging-market stocks.

At the same time, highly indebted US households will be spending even less now that unemployment is above ten percent. Weekend news reports about the jobless rate climbing to a 26-year high were a huge consumption killer.

Couple that with Washington's enthusiastic embrace of the too-big-to-fail doctrine. That encourages reckless decisions and will slow the process of clearing imbalances in the commercial real-estate market and other sectors. All this suggests that Japan's experience these past twenty years is more relevant to the US than many admit.

The key difference between Japan and the US is the concentration of financial distress. In Japan, bad debt was concentrated in the corporate sector; in the US it's in households.

The US may be sowing the seeds of yet another bad-loan crisis by expanding homeownership anew. How encouraging those who may be better off renting to buy homes in a weak economy is good policy is beyond me. It's all a bit too Japan-like for comfort.

Another lesson Wall Street hasn't learned from Japan is the power of "I'm sorry." Reed's utterance of those very words in an interview with Bloomberg News reporter Bob Ivry was extraordinary because bankers have avoided taking blame.

When rationalising the crisis, bankers point to everything from too little regulation to too much regulation to low-income Americans fudging mortgage applications. What they haven't done is look in the mirror and acknowledge the role of their own greed. Nothing dramatises that more than the fat bonuses bankers are again paying themselves.

They will regret that strategy if markets falter anew. The trick for policymakers is to take some of the froth out of asset prices without going too far, too quickly, and ushering in global deflation.

William Pesek is a Bloomberg News columnist. The opinions expressed are his own.

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BR 10 years ago

Gold is not only a hedge against inflation, it holds steady worth in times of uncertainty. Current money creation in the form of 'stimulus' is supposed to be short term, in other words that money is due to be withdrawn (with interest) in a relatively short space of time, it is not structural bank operating credit or economic gain. Destruction of credit is however ongoing , public spending is no substitute for that, bank reserves have increased dramatically (presumably to cover future losses, or if we are positive, maintain adequate capital reserves on bad debt). Nowhere is this money issuance making its way into the ground level economy to a degree capable of fuelling expansion. The reasons are fairly obvious - borrowing is maxed out already to an economic reality which has finally proved unstable. There are limits of many kinds to the current system and they have been reached. Where will we see price inflation is in essential commodities and then down line from there, starting with energy prices again. So while currently the stock markets in the west inflate beyond economic reality also, allowing corporate issuance to temporarily tie over or cover present dificulties at that level, until the west creates an economy that isn't credit driven and that is sustainable within the wider framework, there will be a very long journey of de/revaluation, and reality checks across the spectrum, along with more than a few serious reajustments. That also being as long as we all remain reasonably behaved...

John Ryskamp 10 years ago

What's not to understand. It's 1930s Hoover-Roosevelt liquidation. Are you really naive enough to believe that Andrew Mellon's "liquidate liquidate liquidate" was EVER repealed? Then you are naive indeed. Will there be inflation? Yeah, if the supply chain collapses. And it probably will, since no one is paying any attention to it. Of course there will be inflation if there is an interruption of supply. If there has been any obfuscation, it has been a concerted effort to disguise the collapse in economic activity in the U.S. A decline in economic activity outruns inflation, outruns deflation, outruns everything--EXCEPT liquidation. Why does everyone fear a double-dip? Because of what the double-dip is: a withdrawal of government spending at all levels. In a society in which, in 50% of transactions, one of the parties is a government entity, this matters. Why is there still a Babel on the economy? Obvious: underemployment among those with a Bachelors degree or higher, is only 15%. So keep chattering, because liquidationist policy will not change until underemployment in that class reaches 40%. Not 39.99999999%. 40%.

Simon 10 years ago

I actually like both economic commentators but for straight talking and straight forward common sense thinking, I have to say, I fall into the Rogers camp with regards to the Gold price issue. Jim Rogers is an excellnt and 'proven' commentator when it comes to Gold prices and the state of the $US. When you factor in his thinking and add to that the 'real' state of the Gold market...forget prce...I'm talking about the actual physical stuff and how China is buying up as much as they can and the fact that Hong Kong pulled all of their gold out of the UK last month...only to find that what they received was not all that it was supposed to be. The fact that the UK COMEX are soon to be drained of its reserves and will be lucky to have any reserves past June 2010. The fact that China submitted to the World/Internatonal Courts a submission suggesting that the USA has not repaid them 10,000tonnes of gold leant to the USA at $145/oz...at todays prce $1,100/oz. Then factor in a wild accusation which has yet to be shot down in the Media that the Clinton administration looted the Fort Knox gold reserve and replaced it with something else that was/is gold plated...sounds like a wild, wild conspiracy story to me but the Media are sweeping it under the carpet. Such an accussation should be rebuked and the accussor sued...if the accussation is false. It hasn't been rebuked... To be honest...these days i wouldn't be surprised to find some truth in the conspiracy side of the above. Anyways, I digress. Jim has a good handle on the $US and Gold prices. The economists who I follow: Gerald Celente, Peter Schiff, Mike Small (Dubai), Max Keiser, Marc Bach and Bob Chapman...also agree with Jim Rogers. All the above predicted the Credit Crisis way before it happened so I take on board what they say. The only thing they don't really agree on is whether there will be runaway inflation, hyper inflation or deflation. Eitherway...Gold as a physical form of money has been around for over 6,000yrs. No other currency has ever lasted so long. Its trusted worldwide...so in times of uncertainty its a natural hedge/defence against poverty.

Bertie Bentley 10 years ago

Simon, I agree with everything you say. The paper gold games of Comex and the gold fractional reserve banking system of the LBMA are effectively drawing to a close as demand for physical metal overwhelms the market. The Germans have also asked the US for the return of their gold supposedly held in custody-no response as yet, probably because it has been leased out. I had not seen any comment on the Hongkong unhappiness of whatever was returned to them, do you have any further details?

His Excellency Dr Paul 10 years ago

Simon, actually Mike Small who you mentioned does not agree with Jim Rogers - he is much more in the Roubini camp on this - that gold and emerging markets are in a huge bubble. I personally think gold is in somewhat of a bubble, the main issue would be if you sold, what to hold instead? Dollars? Pounds? All the major nations will be flooding the world with currency in a downward spiral of competitive devaluation. There may not be hyper inflation, but there will be fear of it even if deflation sets in, as nations print ever more currency.

Simon 10 years ago

Ref-Mike Small...I could have sworn Mike Small thought the $US was in for a bashing and that Gold had further to go. There I stand corrected, if in fact he doesn't have that opinion. I am definitely in the opposite camp to Mike on this one then. But what I would say, if you have ever spoken with Mike, is that he invites the opposing view...he welcomes a debate. He is deeply knowledgeable but still has the grace to take into account the opposing view. He also has a great knack of delicately letting you know why your own point of view maybe incorrect :) In that respect Mike is a great sounding board and to actually have the ability to talk to someone with such deep knowledge is a relief in many ways. I am still surprised that he thinks the $US remains a currency to hold (?)... In Gold, I totally agree with you...Except for the Gold Bubble. I still hold firm on the points I raised below in my other comments. I believe Gold is being bought heavily as a flight to safety against the collapse of the $US..and there are very credible reports of such being undertaken. Somehow, in someway, I believe that the Gold price is being suppressed. Mike would say not, conspiracy, but there is too much talk of unnatural trading going on in all sectors, not just Gold. These are interesting tmes indeed. My point, like yours...and to some extent Mike Smalls is that if you sell Gold or even Silver, what do you invest in? I bought some physical gold months back and I intend to buy some more...I'm not rockafella but I just feel happier with physical Gold than 'paper'. Paper can become worthless...physical Gold will always, I trust, have value.

Simon 10 years ago

Hi Bertie...I tried posting references to the HongKong issue but none have been posted by AB. I can only suggest you start by googling to hopefully end on an editorial by Jim Willie of financial Sense. His article is not the be all and end all but its a good source that leads to other sources...which hopefully leads you to one of Margerate Thatchers previous advisers... His name escapes me but he has a fascinating insight on the Gold issue and has not been challenged to date by the 'Authorities'. The tone of his writings are not exactly Financial Times stuff but the content, once you extract out the sarcasm etc, is fascinating. Read his biography for the credibility of being a person with 'sources'. I hope this helps...