Roubini versus Rogers is right debate for 2010

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: William Pesek

It’s a, well, golden opportunity. Investor Jim Rogers thinks gold will double to at least $2,000 an ounce. Economist Nouriel Roubini says that’s utter nonsense. As these well-known personalities duke it out, they’re doing us a favour by highlighting a critical debate: Which is the bigger threat— inflation or deflation? Inflation, though not to the extent many fear.

Saying this opens me up to a rebuke from the National Inflation Association. It chided Roubini last week for arguing there’s no inflation to drive gold that high. The group said he doesn’t understand inflation and deflation. Then again, who really does these days? If you’re looking at economics and markets through traditional lenses, very little makes sense. Many concepts that seemed like rock-hard truths two years ago are looking shaky.

Just ask John Reed, who helped engineer the merger that created Citigroup Inc. Reed last week apologised for his role in building a company that has taken $45 billion in direct US aid, and said banks that big should be split up. Turns out, the 1999 repeal of the Depression-era Glass-Steagall Act separating consumer banking from those involved in capital markets was a terrible idea after all.

Up has become down, and down has become up. Amid such disorientation, the risk is that policymakers will apply old ideas and relationships to new and diverse challenges. One such error would be prematurely taking away the stimulus that’s only now stabilising growth.

Only a fool would dismiss inflation risks at a time when the Federal Reserve, Bank of Japan and Bank of England are holding short-term rates near zero and the European Central Bank isn’t far behind. Central banks are starting to unwind emergency measures introduced to stave off disaster, and that’s appropriate.

The risk is that policymakers go overboard looking for exit strategies. That, in a nutshell, is Roubini’s shtick and it’s hard to refute. Yes, inflation must be contained, but so must the forces of deflation in the short run.

To me, Roubini’s worries are more persuasive than Rogers’s bet on gold. That also goes for Roubini’s view that bubbles pervade rallies in emerging-market stocks. They do.

As 2010 approaches, there are widespread expectations that gold will continue rising. India’s recent purchase of $6.7 billion worth of the precious metal focused attention on the trend.