Roubini Says Carry Trades Fueling ‘Huge’ Asset Bubble

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Again, maybe right but for the wrong reason.

My take is the gold and commodity bubble is due to people (Roubini included) believing Fed policy is inherently inflationary – printing money and all that – when it’s not.

When those funds are done being committed, it can all end very badly in a deflationary tumble.

Roubini Says Carry Trades Fueling ‘Huge’ Asset Bubble

By Michael Patterson

Oct. 27 (Bloomberg) — Investors worldwide are borrowing dollars to buy assets including equities and commodities, fueling “huge” bubbles that may spark another financial crisis, said New York University professor Nouriel Roubini.

“We have the mother of all carry trades,” Roubini, who predicted the banking crisis that spurred more than $1.6 trillion of asset writedowns and credit losses at financial companies worldwide since 2007, said via satellite to a conference in Cape Town, South Africa. “Everybody’s playing the same game and this game is becoming dangerous.”


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4 Responses to Roubini Says Carry Trades Fueling ‘Huge’ Asset Bubble

  1. Bill says:

    Why will we not have mass inflation or even hyperinflation? I have read a lot of the material on your site but you don’t seem to go into detail, just dismiss inflation as unlikely.

    But it seems to be the #1 bogeyman out there right now in econo-blog land. A lot of people think the massive deficits will inevitably lead to more QE which will lead us to look like Zimbabwe sometime soon. Is there any piece you’ve written on your site which can explain this and your take on it, which I assume from the above is that you don’t think it will go that route. Thanks.


    Ralph Musgrave Reply:

    Hope you don’t mind me asking Bill, but why SHOULD a deficit be inflationary UNLESS AND UNTIL it results in excess demand? I don’t see any good theoretical backing for the “deficits cause inflation” idea – unless a large section of the population ASSUMES inflation will be the result of a deficit, and bumps up wages and prices accordingly. But this is a “self fulfilling” prophesy, not a genuine economic cause-effect phenomenon.

    This is not to say that deficits are NEVER inflationary. A classic example of a totally irresponsible deficit, which resulted in inflation was “Barber’s boom” in the UK around 1972.

    As to the empirical evidence, Edward Lazear, chairman of the President’s Council of Economic Advisers from 2006-2009, said in a Wall Street Journal (yesterday or thereabouts) that “Historically, recoveries have a consistent pattern: productivity grows first, then jobs are created, and finally wages rise.” Exactly what I would expect: wages won’t rise (i.e. inflation won’t kick in) till unemployment has dropped significantly. Hopefully governments can rein in demand after unemployment has dropped significantly, but before inflation kicks in: not an easy task.


    winterspeak Reply:

    RALPH: Good response.

    BILL: Deficits may be inflationary, deflationary, or neutral. It depends on how they match the private sector demand to increase its net savings.

    If the deficit is too large and overwhelms that demand, then yes, you will see inflation.

    If the deficit is too small, then you will see deflation.

    The deficit needs to be “just right” where “just right is” big enough to keep unemployment low, but not so big that it causes inflation.

    There are lots of more involved ideas on this site about how else to deal with unemployment, but this is the core concept.

    Inflation is caused by too many dollars chasing too few goods. If the dollars aren’t chasing, there’s no inflation.


  2. jimi says:

    The September Core YOY PCE came in at 1.3…additionally the Core YOY PCE for August was revised down to 1.3 from 1.4 … so, certainly more deflationary than inflationary


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