Roubini: Huge Asset Bust Ahead
Thursday, November 5, 2009 8:16 AM
By: Julie Crawshaw Article Font Size
The stock market rally was helped by a wave of liquidity from near-zero interest rates and quantitative easing, says economist Nouriel Roubini — but what’s really fueling this asset bubble is the weakness of the U.S. dollar, driven by “the mother of all carry trades.”
"Traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade," Roubini writes in the Financial Times.
"Every investor who plays this risky game looks like a genius — even if they are just riding a huge bubble financed by a large negative cost of borrowing — as the total returns have been in the 50-70 percent range since March."
Reckless U.S. policy that feeds these carry trades is forcing other countries to follow suit, Roubini observes.
“Near-zero policy rates and quantitative easing were already in place in the UK, Eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse,” he says.
If the U.S. dollar’s steady fall against other major currencies continues the repercussions for the U.S. economy would be significant and could include inflation, higher interest rates, and a lower standard of living, says economist J.D. Foster.
“Perhaps most worrisome, the slide in the dollar risks becoming a rout that could trigger another global financial crisis,” Foster writes at the Heritage Foundation Web site, heritage.org.
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