Roubini Says U.S. Risks ‘Train Wreck’ From Bond Vigilante Wrath

The U.S. will suffer a “train wreck” at the hands of bond investors if it fails to solve its budget problems, said Nouriel Roubini, the economist who predicted the financial crisis.

“The fiscal problem is very serious,” he said in a Bloomberg Television interview today with Tom Keene at the World Economic Forum in Davos, Switzerland. “The bond vigilantes have not yet woken up in the U.S. in the way they have in the euro zone. Unless the U.S. addresses this fiscal problem, we’re going to see a train wreck.”

President Barack Obama yesterday pledged a freeze on non-defense discretionary government spending to rein in a deficit he described as “not sustainable.” U.S. Treasuries fell today before an auction of $35 billion of five-year bonds. Roubini suggested that the U.S.’s commitment on the deficit may still not be enough to placate investors.

“We’re not doing much about the budget deficit,” said Roubini, who is chairman and co-founder of Roubini Global Economics LLC. “The public debt in the U.S. next year may go from 60 percent to 90 percent” of gross domestic product.

Roubini’s repeated warnings of the dangers posed by “bond vigilantes” follow the intensification of the European sovereign debt crisis. Greece and Ireland had to accept bailouts from the International Monetary Fund after bond investors sent government debt yields soaring, undermining their ability to address record borrowing.

Sovereign Crisis

European policy makers face added pressure to bolster their response to the region’s debt crisis as global investors bet Greece and Ireland will default, according to a Bloomberg Global Poll released today.

U.S. Treasuries have held their value this month compared with a 0.2 percent decline for the 17-nation euro area, according to Bank of America Merrill Lynch indexes. The extra yield investors demand to hold Irish 10-year bonds rather than German securities of similar maturity widened 10 basis points today to 580 points amid questions on the government’s ability to pass a finance bill to tackle the nation’s budget problems.

Roubini also said today that rising commodity prices are a “huge deal” in developing economies that can lead to political instability. A United Nations gauge of food prices soared to a record last month.

Rising food and commodity prices are “leading to riots, demonstrations, and political instability,” Roubini said. “It’s something that can topple regimes.”

“In many of these emerging markets two-thirds of their consumer-price indexes are food, energy and transportation,” he said. “When these things rise it becomes a really significant social cost.”