Mr. Roach, is an 'Economic Armageddon' still on the Horizon?
Is what we are experiencing with the economy the beginning of the 'Economic Armageddon' that Stephen Roach forecast for the U.S. in November 2004? This is what he said (and I paraphrase):
America's record trade deficit means the dollar will keep falling, interest rates will rise further and U.S. consumers, in debt up to their eyeballs, will get pounded with no better than a 10% chance of avoiding economic Armageddon.
A lot has happened since then. The U.S. Dollar index did keep falling but then rose considerably in 2008 with the financial crisis; interest rates did rise further before dropping precipitously in 2008; but, thankfully, we appear to have avoided economic Armageddon thanks to aggressive moves by the Fed back in September/October 2008. That was 2004 and this is 2009. Back then Mr. Roach was Managing Director, Chief Economist, and Director of Global Economic Analysis of Morgan Stanley; today he is Chairman of Hong Kong-based Morgan Stanley Asia. So what is Roach saying these days? In an early February '09 article for the New York Times he forecast that (and I paraphrase):
Unemployment will rise to near 10% over the next year and a half .... and this recession won't end until late 2010 or early 2011.
These comments are hardly earth-shattering as negative as they may be. There is not even a hint of major economic distress.
Roach warms up in an article he wrote in late February, 2009 entitled "After the era of excess" in which he says (and I paraphrase on occasion):
The world stopped in 2008 - and it was a full stop for the era of excess. Belatedly, the authorities have been extraordinarily aggressive in coming to the rescue of a system in crisis. But as in the case of Humpty Dumpty, they will not be able to put all the pieces back together again. The next era will be very different from the one we have just left behind.
Up until recently there had been a symbiotic relationship between China (the saver and producer) and America (the borrower and consumer) with a belief that these disparities could be finessed indefinitely, as could record debt burdens and currency misalignments. Some day, went the argument, the world would have to face up to its imbalances, but the day of reckoning was always assumed to be some far-off, distant future. That was the fatal mistake made by the world in denial. But that game is now over. Our unbalanced world is now in the midst of a painful but necessary rebalancing what with the U.S. consumer most likely in the early stages of a multi-year contraction and the fact that there is no other consumer group to fill the void. As such, a post crisis global economy is likely to struggle for years to come.
Unfortunately, however, the policy response to the crisis has been disturbing in that the near-term tactics have been all about containing the crisis, with little appreciation of the strategic implications of these actions. In the U.S., for example, there is growing support for mortgage foreclosure relief - in effect perpetuating uneconomic levels of home "ownership" by many people who simply can not afford their still overvalued dwellings. In China, on the other hand, policy priorities remained focused on providing support for investment through a massive $585 billion infrastructure program, and on exports, rather than on doing anything to stimulate the Chinese economy. Such actions suggest that the world has learned little from its recent experience. Sadly, such reactive approach reflects a global politic that always seems to be focused on the quick fix.
Tactics of crisis containment cannot be the sole focus of the policy response to this wrenching global economic recession. The world also needs a strategy. What we need, in fact, is leadership that has the courage to look beyond the valley.
In early March, 2009, in an article entitled "'Grow now, ask questions later' formula will end in tears," Roach carried on the above theme stating in much more foreboding words that (and I paraphrase on occasion):
A crisis-torn world is in no mood for the heavy lifting of global rebalancing. Policies are being framed with an aim towards re-creating the boom. Washington wants to get credit flowing again to indebted US consumers and exporters - especially in Asia - would like nothing better than a renewal of demand led by the world's biggest consumer. Unbalanced Asian economies are desperate for unbalanced US consumers to start spending again and spark another post-crisis recovery. Grow now, ask questions later. That has again become the mantra for an unbalanced world in crisis and, regretfully, it is a recipe for disaster. What a reckless way to run the world!
If the policies currently being put into place end up perpetuating the imbalances that got the global economy into this mess - and that appears to be the case - the next crisis will be worse than this one. Indeed, until an unbalanced world faces up to its chronic imbalances, successive crises are likely to be increasingly destabilizing. While it is hard to believe that anything could be worse that what is happening today, I can assure you that it could get worse - much worse.
In a mid-March '09 interview with the Xinhau News Agency Roach continued by saying that (and I paraphrase):
The major risks challenging the world economy are that all the aggressive stimulus measures that have been put in place by central banks and fiscal authorities around the world are not enough or sufficient to stop the downturn of the global economy and, therefore, we need to continue to be cautious on the economic climate for some time to come.
While one of the consequences of lowering interest rates is high inflation my utmost concern is what the exit strategy will be for this aggressive easing and how you wind down without tipping into deflation.
That's more like the Roach of old - deflation and an unknown degree of high (hyper?) inflation on the horizon. Now, that is not something to look forward to with anything but dread.
There you have it. Not very encouraging insights but at least Roach has abandoned the "economic Armageddon" scenario he once predicted for America. Thank goodness for small mercies!
To learn what other prominent economists, financial analysts, economic research firms and well-informed financial commentators have had to say about what has happened over the past year check out the 6-part series of articles I wrote back in 2006 entitled "Ominous Warnings and Dire Predictions of World's Financial Experts." You'll be surprised how accurate they were, albeit somewhat sensational in language on occasion, as to what they expected to unfold in the years to come. And in most instances those 'years to come' have turned out to be 2008, 2009, 2010(?) and perhaps beyond.