De-bunking Nouriel Roubini

Someone asked an excellent question in the comment section of my previous post regarding Nouriel Roubini's shoot-from-the-hip comment getting headlines today that the unwinding of the dollar carry-trade will cause the dollar to spike.  The short answer is that any spikes in the U.S. dollar index will be short-lived and shallow, as the dollar has a long way to go before it finds a spot to land which reflects the reality behind the U.S. financial system and the ever-increasing supply of dollars being produced by Bernanke.

Having said that, here are my thoughts:  The dollar carry-trade is a relatively new development fueled by zero percent Fed Funds and a rapidly expanding supply of dollars. Before we speculate on the effects of the dollar carry trade unwinding, let's figure out what events would precipitate the unwinding of the dollar carry trade. The yen carry trade lasted for several years. In fact, to a degree, its still going on relative to other currencies, just not dollars, since both the U.S. and Japan have zero interest policies implemented by their respective central banks.

When do you think the Fed will raise rates to a level which exceeds the rates in other countries? My bet is that it will be a lot longer than anyone realizes. Based on this, I think the more interesting question is "how insane will the dollar carry-trade get?" The yen carry trade financed a multi-trillion dollar bubbles in hedge funds, derivatives, the real estate/mortgage market, and the Treasury bond market. Using that as your measuring tape relative to the dollar, the starting pitchers for the dollar carry trade have yet to finish warming up and take the mound.

When do you think the Fed will stop expanding the money supply (the real money supply, not MZM or M2)? I would suggest that if the Fed starts to withdraw liquidity and raise rates, the U.S. financial system will fold up faster than a circus tent in a hurricane and Bernanke will lose his job - as will Obama and the current stable of bank-financed Congressmen.

I think Roubini says a lot of outrageous things either to grab attention or because he doesn't fully understand finance. Probably a bit of both.  I don't really pay attention to his commentary because I believe it's nothing more than superficial analysis cloaked in headline-grabbing hype and an accent that makes him sound well-educated.