Roubini sucks, blows at same time

This isn't a bad place to start. The other day Roubini writes in the op/ed pages of the FT that we're all going to hell in a handbasket, which is fair enough. Certainly, the employment numbers this morning say as much, and certainly, he has been as prescient as anyone viz. the great unwind. No argument here. It is his endgame that doesn't seem to follow. "Stag-deflation", he calls for, a theme that seems to be resonating. I suppose that's why I thought I'd start writing here; perhaps it will be more gratifying than banging my head against a wall.

I am at a loss as to why the guy can hold these views re deflation (even "stag-deflation") even as he appears to be able to think it through. Let's walk with him:

As traditional monetary policy becomes ineffective, other unorthodox policies have been used: massive provision of liquidity to financial institutions to unclog the liquidity crunch and reduce the spread between short-term market rates and policy rates; quasi-fiscal policies to bail out investors, lenders and borrowers. And even more unorthodox “crazy” policy actions become necessary...

This is not new. Mainstream commentators are now talking like this and "Quantitative easing" has become a watercooler expression. The next logical step:

With consumption by households and capital spending by corporations collapsing, governments will soon become the spenders of first and only resort as fiscal deficits surge.

No one blinks at this either. Then we have this:

But with governments and central banks bringing private sector losses on to their balance sheets, fiscal deficits will top $1,000bn for the US in the next two years. The Fed and the Treasury are taking a massive amount of credit risk, endangering the long-term solvency of the US government. [Emph added]

Agreed. It is difficult to see how the "long-term solvency of the US government" will not be endangered. But how does this get us to stag-deflation? It would appear to lead us in precisely the opposite direction.

The bailout process is simply a matter of progressively passing bad debt upstairs. From the mortage holder and consumers to the banks, and then from the banks to the government. That's where, literally, the buck will stop. And when it parks itself upstairs, when the Fed's balance sheet starts racing into the trillions, ditto at the Treasury, then what? As Roubini correctly points out,then the solvency of the government itself is called into question.

When a government's solvency gets called into question -- when a government goes broke, as it were -- it is resolved in one of two ways: a) if the debt is foriegn-denominated, the government defaults; b) if the debt is locally-denominated, it devalues. The US falls into the latter camp. It will devalue. Massively. There is no other way out.