Monday, July 7, 2008


Nouriel Roubini has been pessimistic for years now, and right for almost as long. Apparently he's got a new post on the endgame for the current monetary regime (which he calls Bretton-Woods 2). Unfortunately, it's subscription only, so we will have to rely on Naked Capitalism for a summary. The thing that caught my eye was how remarkably close this was to what I have been thinking, and this quote can almost be found (less eloquently of course) scattered across the last several posts on my blog.
However, Roubini, who has been prescient on this topic, sees another outcome: with world growth and demand looking wobbly, these countries (which are not the most politically stable, an important fact to keep in mind) are reluctant to risk a big slowdown or huge damage to exporters by letting their currencies appreciate.

Roubini believes they will let inflation run, and even allow it to become embedded. In the long run, this will achieve similar results to a revaluation (as local goods prices rise in nominal terms, it winds up increasing the price of exports, much as currency appreciation would. However, it would happen more gradually and (implicit in Roubini's argument) it would be hard to point fingers (while a change in the currency regime would clearly be tied to specific authorities).

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