Tuesday, August 30, 2011

Noriel Roubini (aka "Dr. Doom") on Exchange Rates, China, and U.S. Investment

Nouriel Roubini, sometimes nicknamed "Dr. Doom," is interviewed by Tom Keene of Bloomberg News at the Milken Institute Global Conference in May. An edited and shortened transcript of the interview is available (with free registration) in the Milken Institute Review (Third Quarter, pp. 65-74). Or you can watch the interview here. Some snippets:

On currency adjustment: 
"Exchange rate determination is really a beauty contest about which currency is the “least ugly,” and this changes depending on relative growth concerns, fiscal policy, financial stability, sovereign debt, interest rate policies, etc. At the moment, all the major currencies have reasons to be weaker. The trouble is, not all currencies can be weak. The currencies that should be depreciating are those of the U.S., U.K. and other countries that went bust in the financial bubble, and now need export growth to make up for anemic domestic demand during the period of balance sheet retrenchment. ... Countries running current account surpluses can keep on accumulating reserves, and thereby prevent the appreciation of their currencies. By contrast, countries with deficits eventually run out of foreign exchange reserves, or the bond vigilantes impose discipline. The one exception is the United States: because the dollar is the major reserve currency, we can run larger deficits for longer. If the
dollar didn’t have reserve status, it would have collapsed a long time ago."

On the need for rebalancing China's economy: 
"In China today, half of GDP is in the form of fixed investment, while consumption is only 35 percent – and falling. That is not sustainable because no country can productively invest half its GDP for very long. Historically, every case of over-investment – the Soviet Union, East Asia in the 90s – has ended in a hard landing."

On the more rapid economic recovery in Asia: 
The recovery in the Asian emerging markets has been a “V” [rather than a “U”] because their financial fundamentals were much sounder and they don’t have balance sheet problems comparable to the U.S. and Europe. In some countries, though, that recovery’s now leading to overheating.
Are they in control of their own destiny? Not if China shadows the dollar and everybody else shadows China; they are effectively adopting U.S. monetary and credit policies. As a result, there’s been excessive money growth, excessive foreign exchange intervention. You’re seeing overheating in credit that is spilling out as price pressure in the equity, commodity and real estate markets. And
therefore Asia is in danger of both goods and asset inflation."

Why the U.S. needs a weaker dollar: 
"Tim Geithner and others say they’re in favor of a strong dollar. But we actually need a weaker dollar, maybe 15 percent on a trade-weighted basis. Think about it rationally. Because of the asset bubble collapse, domestic demand is going to be anemic. So in order to maintain growth even close to potential, we need to reduce our trade deficit. How do you reduce this trade deficit? We have to have more private and public savings – but that’s going to slow down domestic demand even more. Therefore we need a weaker exchange rate to gradually improve the trade balance."

On U.S. firms sitting on their cash: 
"While the balance sheets of government and financial institutions are damaged, the corporate sector is in excellent shape. Corporations have used the crisis to cut costs, especially labor costs. They’re highly profitable and productive: earnings are going to be surprising. They are sitting on $2 trillion in cash in the U.S. alone. But they are not spending it. And even if they start to spend, it’s not clear why they’d choose to invest in slow-growing advanced economies rather than fast-growing emerging markets. One reason they’re not spending more is excess capacity: roughly a quarter of industrial
capacity is currently not used. Why would you want to do a lot of investment where there is excess capacity?"