Tags: Roubini | Fed | credit | bubble

Roubini: Fed's Credit Bubble May Be Bigger Than 2003-06

Sunday, 24 Feb 2013 12:48 PM

By Dan Weil

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Nouriel Roubini, the respected New York University economist, says the Federal Reserve’s quantitative easing (QE) is brewing a credit bubble that means trouble down the road.

Through QE, the Fed has injected more than $2 trillion into the financial system over the last five years,

“The risk from QE isn’t goods inflation; it’s not going to be a rout in the bond market, because the Fed will exit slowly,” Roubini tells Yahoo. “The risk is like during the 2003-06 cycle. We exited very slowly, and we got an asset bubble.”

But he thinks this bubble could be “bigger than 2003-06.”

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

Meanwhile, many commentators have trumpeted the arrival of a currency war, and Roubini says the conflict is inextricably intertwined with QE.

Growth is below trend in advanced economies, thanks to slow domestic demand. “So how can you achieve strong economic growth?” Roubini asks.

“In every economy the only way to do it is more external demand,” he answers. “How do you achieve that? Through a weaker currency.

“And how do you achieve that? Through more QE. There’s a QE war that’s a proxy for a currency war,” Roubini says.

Retired hedge fund manager Andy Kessler says that when the Fed finally withdraws its easing, stocks will be in big trouble.

Perhaps the Fed has realized that “the experiment to kick-start the economy with near-zero interest rates has failed,” he writes in The Wall Street Journal.

“The prospect of higher interest rates is like the Sword of Damocles hanging over the stock market. Be advised that in selloffs, stocks fall into the valley of despair.”

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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