Tuesday, January 11, 2011

Roubini Versus Goldman Sachs, Who is Right?

Nouriel Roubini says Brazil's comments, and also Goldman Sachs comments, that the country should cut spending and reduce its budget deficit as a measure to contain the appreciation fothe Real may well backfire.

So Goldan Sachs says one thing, Roubini says quite another.

According to Bloomberg, Roubini calls Mantega’s proposal (to stem currency gains by cutting spending) is flawed.

Brazil mentioned a strong fiscal move to reduce demand and slow inflation down. With lower inflation, as opposed to the high current rate, the country will be able to lower interest rates, thus making it less attractive to foreigners.

Roubini says that may actually have the oppostite effect.because spending cuts will reduce the budget deficit and increase the country’s creditworthiness.
Roubini: “I am not convinced by the argument,” “If you are fiscally sound, then you are even more appealing as a country and more money can come.”

Per the sasme Bloomberg report, Goldman Sachs’s chief Latin America economist (Paulo Leme) says that Brazil "may struggle to slow real gains if international prices for its commodity exports keep rising. Still, he said, reining in government spending and credit growth would help the country “find a more neutral interest rate which is less attractive” to overseas investors".

Roubini said he has doubts about the proposal.

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