'Dr. Doom' Roubini: China's currency to challenge the dollar
May 18th 2009 2:30PM
Updated Dec 4th 2009 11:35AM
Others may claim to hold the title, but there is only one "Dr. Doom" for me -- NYU Economics Professor Nouriel Roubini.
Roubini, who rose to prominence in 2008 after he accurately predicted -- two year ago -- the global financial crisis, now senses a challenge up ahead for the U.S. dollar. China's currency, the yuan (also called the renminbi), will likely challenge the buck's status as a global reserve currency, Roubini writes in an op-ed column in The New York Times.
Roubini, who also heads a macroeconomics research firm, RGE Monitor, says the U.S.'s large budget deficit and trade deficit over the past decade parallels the policies of United Kingdom after World War II, when the British pound lost its status as the world's reserve currency.
Problems: Budget, trade deficits
Roubini said biggest factor weighing on the dollar is the U.S.'s status as a net-debtor nation, not a net creditor nation. Typically, empires whose currency has global reserve currency status are also net creditors to foreigners. The U.S.'s net-debtor status means the nation is vulnerable to withdrawals or the failure of foreign investors to buy U.S. debt – a tactic that would cause the dollar to decline and increase inflation in the U.S., as well force interest rates up. Roubini said the U.S.'s vulnerability is serious and the decline of the dollar could happen sooner than we think "if we do not get our financial house in order." His recommendations? Rein-in spending and borrowing, and pursue growth not based on asset and credit bubbles.
Further, in order achieve sustainable economic growth, Roubini said the U.S. should invest in its crumbling infrastructure, in alternative and renewable resources, and in productive human capital, rather than in unnecessary housing and toxic financial innovation.
The dollar weakened about one-tenth of a cent to $1.3488 versus the euro and weakened about 1.2 cents to $1.5291 versus the British pound Monday at mid-day. The dollar was virtually unchanged against China's yuan, at 6.82 yuan to the dollar: China restricts the yuan's movement to a trading band, and does not permit the yuan's price to be determined by market forces.
Economic Analysis: NYU's Roubini is on-the-mark concerning the U.S.'s budget and trade deficits, and the nation's need to encourage sustainable economic growth, not pseudo-growth propelled by bubbles. Tax increases and entitlement reform will lower the budget deficit, and conservation/increased vehicle efficiency will help lower the trade deficit by reducing the nation's imported oil bill.
That leaves infrastructure and investing in the nation's productive capacity (including human capital) to achieve this sustainable growth. The Obama administration's 2009 fiscal stimulus package represents a good first step, but much more investment will be needed, from both private and public sources. It remains an unresolved question concerning which sectors will help the nation return to a sustainable growth track, but several contributors could include: wind/solar energy, biotechnology, health care services, and high-end manufacturing.