Roubini in Forbes

Nuriel Roubini (Someone buy this man a pink or yellow suit! Too much gloom dampens the intellect, Professor) captured the worldwide state of the economy in Forbes. Not a bad article, and I found myself nodding while reading it. Typically, his articles make my face scrunch up. Plus, having doublechecked his math, I tend to treat his proclamations with great skepticism.

Of course, economics is a very complicated subject, and it's easy to get caught up in contradictions. Roubini is no exception.

His piece in the NYTimes described the coming collapse of the dollar. Yet, he forgets the simplest concept in foreign exchange: currencies are measured against each other. Consider all the debt issuance already done by the Fed/Treas. Why hasn't the dollar already collapsed? Two reasons: measured against other currencies, the dollar stays strong because of two factors: 1) The USA's GDP is shrinking less than its major competitors (and you have to consider that China's numbers are fanciful at best), and 2) other central banks are also printing money in their respective local currencies (increased supply on both sides of the value comparison). Roubini's Forbes piece captures these two phenomena quite succinctly.

As time goes by, the American financial sector will recover. When it does, the Fed will pull back the excess liquidity to take some of the steam out of inflation. At the same time, other countries will have to do the same thing (decoupling is a myth not unlike the Montauk Monster), and probably with steeper interest rate targets. Inflationary pressures will be much stronger in Europe and China than in the US. This fact alone will keep the dollar atop the list of favorite currencies. Yes, the US will see inflation, but it will be a result of competition with Brazilian, Indian, Korean, Japanese, and some other -- yet unknown (rubles, anyone?) -- currencies. Those countries will export stuff we like -- or perform services we think are useful. Their national balance sheets will be stabilizing. Plus, cost of production and transporation (OIL!) will drive up prices at the wholesale and consumer levels.

Net result: dollar still reigns, despite inflation. But, there will be greater parity.