Roubini Expects A Deflationary Recession

Nouriel Roubini in today's Forbes details his argument for why the United States is heading towards a deflationary recession.

He writes:

Deflation and stag-deflation will, in six months, become the main concern of policy authorities.

My view is that it is pretty much impossible for anyone to forecast six months out in the current environment. There are simply too many variables, from what other "crisis" type situations may be lurking around the corner to what Ben Bernanke will do with money growth over the next six months.

Roubini correctly points out that the economy has been in a deflationary spiral over recent weeks, but then makes the jump that Bernanke fears inflation too much to start the printing presses. He writes:

The costs of raising expected inflation will be much higher than the benefits of using the inflation tax to pay for the fiscal costs of cleaning up the mess that this most severe financial crisis has created.

This is a very dangerous assumption to make as to what is going on in Ben Bernanke's brain, and on which to then make a forecast on the future trend in the economy.

I agree that an inflation tax is a high cost to pay. But governments for centuries have given little notice to this cost until inflation is generally much higher. Further, to claim that a central banker is going to be concerned about inflation when there is deflation around him is also a bit of a stretch.

Then there is the tiny little fact that Bernanke appears to have actually been flying his money dispersing helicopter in recent weeks.

In summary, Roubini's forecast of a deflationary recession is very bold, and likely very wrong.