Roubini: Obama Is Right; Gold Bugs Are Wrong

"It is not in the books, because six years after the crisis we have tried zero policy rates; we have done quantitative easing, credit easing, forward guidance; we have done negative deposit and interest rates in nominal terms; we have done … foreign-exchange intervention," he stated. "Now, last week in Switzerland, the 10-year Treasury yields were negative. Which kind of a world is this?"

The gold bugs were incorrect by saying that Fed policies would lead to the collapse of the U.S. dollar and hyperinflation. "They got it all wrong," Roubini said. "Gold is down, the dollar is up, and we have a problem with a lack of inflation — of deflation.

In spite of monetary stimulation, he adds, "There is not enough fiscal stimulation, and therefore output is still below trend."

What's needed — in addition to a focus on deflation — "is not just the right monetary policy," he says.

Quantitative easing worked in the U.S., Roubini explains, "because you had back-loaded fiscal consolidation, while [fiscal consolidation has] been frontloaded in the case of the eurozone. Structural reform has to occur in Japan, the eurozone and even the U.S. You have done a combination of policy [moves] and have not done the right thing."

The economist still sees the Fed raising rates this year. What would stop such a move?

"If the rest of the world surprises on the downside and if the dollar sharply appreciates further, at some point, the U.S. is not going to be able to decouple from what is happening in rest of the world," he said.

"Economic growth could slow down, we could go into deflation, and they could postpone the start of the hike — or they could start the hike and then reverse themselves, or in a very extreme scenario they could go back to quantitative easing."

In other words, the more things change, the more they stay the same — even at Davos. 

— Check out Roubini: World's Economy Flying on Single Engine on ThinkAdvisor.