Tuesday, July 7, 2009

Dr. Doom

James Fallows talks with Nouriel Roubini about Geithner, bubbles, inflation and China, among other things. Quote:

“The Fed is now embarked on a policy in which they are in effect directly monetizing about half of the budget deficit,” he said. The public debt is going up, and the federal government is covering about half of that total by printing new money and sending it to banks. “In the short run,” he said, “that monetization is not inflationary.” Banks are holding much of the money themselves; “they’re not relending it, so that money is not going anywhere and becoming inflationary.”

But at some point—Roubini’s guess is 2011—the recession will end. Banks will want to lend the money; people and businesses will want to borrow and spend it. Then it will be time for what Roubini calls “the exit strategy, of mopping up that liquidity”—pulling some of the money back out of circulation, so it doesn’t just bid up house prices and stock values in a new bubble. And that will be “very, very tricky indeed.”

(photo credit: Bruce Gilden/Magnum Photos, via theatlantic.com)