From The Financial Times:
An unbalanced world is again compounding its imbalances
By Stephen Roach
Published: October 7 2009 03:00 Last updated: October 7 2009 03:00
Hope always seems to spring eternal in liquidity-driven financial markets. That is very much the case today in the aftermath of the biggest liquidity injection in modern history.
Unfortunately, along with that hope comes an acute sense of short-term memory loss - notably, a failure on the part of the broad consensus of investors to grasp the toughest lessons of the Great Crisis and Recession of 2008-09. This is a dangerous combination for increasingly frothy financial markets.
This crisis was, first and foremost, about the unsustainability of macro imbalances - imbalances within and between nations - as well as about the egregious flaws in policies, regulatory structures, and risk-management practices that allowed these imbalances to take the world to the brink.
Repeatedly, we were told by the apostles of yet another New Era that imbalances were to be ignored - whether they took the form of an unprecedented build-up of current account deficits and surpluses around the world or an increasingly virulent strain of asset- and debt-dependent growth in the US.
A year after the world's near-death experience, there is broad acceptance that there must be a safer and saner way to grow.
As someone who warned of the imperatives of global rebalancing as long ago as 2002, I draw comfort that the authorities are now looking back on the era of excess with a more jaundiced view.
The shift from a G7 to a G20 architecture is an important breakthrough - at least on paper. It updates the power structure of an increasingly globalised world and urges a greater appreciation of cross-border spillovers between the rich developed nations and the large and rapidly growing economies of the developing world.
But the risk of the new G20 framework is that it is long on rhetoric and short on execution. It underscores a key question that has always been at the heart of the debate over a new global architecture: are sovereign states truly willing to abdicate control of their economies to a supra-national authority?
Recent policy initiatives offer little reassurance. Cash-for-clunkers in America and cash for roads in China are emblematic of a penchant for quick-fix stimulus actions that risk compounding existing imbalances.
US authorities cannot resist opting for another dose of excess consumption - despite the fact that the consumption share of real gross domestic product remains at a record high of 71 per cent.
Nor can the Chinese wean themselves off investment-led growth - even though the fixed investment share of their GDP appears to have surged beyond the already unprecedented reading of 45 per cent in mid-2009. Far from rebalancing, an unbalanced world once again appears to be compounding existing imbalances.
Notwithstanding the new mantra of "sustained and balanced growth" adopted at the recent Pittsburgh Summit, the world continues to have local biases for solving global problems. As such, it continues to operate under the presumption that the best global policies are the arithmetic sum of the best national policies.
This underscores the most glaring inconsistency of the new G20 framework: It lacks an enforcement mechanism to make rebalancing actually occur. Until - or unless - the world is willing to empower a new architecture with effective and robust policy tools, it is hard to believe that the days of global rebalancing are finally at hand.
Liquidity-driven financial markets have all but dismissed this debate. The onset of recovery is all that seems to matter for most investors. Global equity markets have surged in the past six months, banking increasingly on the hopes and dreams of a classic V-shaped recovery.
In the US, consensus expectations are centred on a 40 per cent rebound in the earnings of the cyclically-sensitive non-financial component of the S&P 500 during 2010-11 - a stretch relative to what I suspect will be an anaemic recovery for a battered post-crisis US economy.
Ever-frothy emerging markets equities, which are up some 85 per cent from early March, are building in an even more powerful rebound - much at odds with export-led growth models that seem exceedingly vulnerable to a protracted period of weak global consumption growth.
With massive liquidity injections well in excess of the anaemic state of end-market demand in this post-crisis world, financial markets are again ignoring tough fundamentals.
Yet this is the same dubious script the world followed in the aftermath of the bursting of the equity bubble in the early part of this decade. And look how that ended. With far more excess liquidity currently sloshing over into asset markets, there is great temptation to erase the memories of the Great Crisis. Therein lies a pitfall for the markets - as well as for a still unbalanced post-crisis world.
The writer is Chairman of Morgan Stanley Asia and author of The Next Asia just published by Wiley.
Comments:
Stephen Roach is likely one of the most bearish Keynesian economists in the popular press. He also has a knack of predicting with remarkable accuracy future market direction.
I share Dr. Roach's concern that huge trade and fiscal imbalances have not been corrected and governments seem intent on pursuing the status quo. The idea that the US in particular can print and borrow its way to prosperity and recovery is lunacy.
While we may still see a frothy market continue for stocks and crude oil in the short term (provided the US dollar index drops below the important support level of 76 and above the support level of 72), the sustainability of this move is simply absent. At some point ugly fundamentals will raise their heads and let the air out of the balloon in stock, crude, and commodities prices.
An unbalanced world is again compounding its imbalances
By Stephen Roach
Published: October 7 2009 03:00 Last updated: October 7 2009 03:00
Hope always seems to spring eternal in liquidity-driven financial markets. That is very much the case today in the aftermath of the biggest liquidity injection in modern history.
Unfortunately, along with that hope comes an acute sense of short-term memory loss - notably, a failure on the part of the broad consensus of investors to grasp the toughest lessons of the Great Crisis and Recession of 2008-09. This is a dangerous combination for increasingly frothy financial markets.
This crisis was, first and foremost, about the unsustainability of macro imbalances - imbalances within and between nations - as well as about the egregious flaws in policies, regulatory structures, and risk-management practices that allowed these imbalances to take the world to the brink.
Repeatedly, we were told by the apostles of yet another New Era that imbalances were to be ignored - whether they took the form of an unprecedented build-up of current account deficits and surpluses around the world or an increasingly virulent strain of asset- and debt-dependent growth in the US.
A year after the world's near-death experience, there is broad acceptance that there must be a safer and saner way to grow.
As someone who warned of the imperatives of global rebalancing as long ago as 2002, I draw comfort that the authorities are now looking back on the era of excess with a more jaundiced view.
The shift from a G7 to a G20 architecture is an important breakthrough - at least on paper. It updates the power structure of an increasingly globalised world and urges a greater appreciation of cross-border spillovers between the rich developed nations and the large and rapidly growing economies of the developing world.
But the risk of the new G20 framework is that it is long on rhetoric and short on execution. It underscores a key question that has always been at the heart of the debate over a new global architecture: are sovereign states truly willing to abdicate control of their economies to a supra-national authority?
Recent policy initiatives offer little reassurance. Cash-for-clunkers in America and cash for roads in China are emblematic of a penchant for quick-fix stimulus actions that risk compounding existing imbalances.
US authorities cannot resist opting for another dose of excess consumption - despite the fact that the consumption share of real gross domestic product remains at a record high of 71 per cent.
Nor can the Chinese wean themselves off investment-led growth - even though the fixed investment share of their GDP appears to have surged beyond the already unprecedented reading of 45 per cent in mid-2009. Far from rebalancing, an unbalanced world once again appears to be compounding existing imbalances.
Notwithstanding the new mantra of "sustained and balanced growth" adopted at the recent Pittsburgh Summit, the world continues to have local biases for solving global problems. As such, it continues to operate under the presumption that the best global policies are the arithmetic sum of the best national policies.
This underscores the most glaring inconsistency of the new G20 framework: It lacks an enforcement mechanism to make rebalancing actually occur. Until - or unless - the world is willing to empower a new architecture with effective and robust policy tools, it is hard to believe that the days of global rebalancing are finally at hand.
Liquidity-driven financial markets have all but dismissed this debate. The onset of recovery is all that seems to matter for most investors. Global equity markets have surged in the past six months, banking increasingly on the hopes and dreams of a classic V-shaped recovery.
In the US, consensus expectations are centred on a 40 per cent rebound in the earnings of the cyclically-sensitive non-financial component of the S&P 500 during 2010-11 - a stretch relative to what I suspect will be an anaemic recovery for a battered post-crisis US economy.
Ever-frothy emerging markets equities, which are up some 85 per cent from early March, are building in an even more powerful rebound - much at odds with export-led growth models that seem exceedingly vulnerable to a protracted period of weak global consumption growth.
With massive liquidity injections well in excess of the anaemic state of end-market demand in this post-crisis world, financial markets are again ignoring tough fundamentals.
Yet this is the same dubious script the world followed in the aftermath of the bursting of the equity bubble in the early part of this decade. And look how that ended. With far more excess liquidity currently sloshing over into asset markets, there is great temptation to erase the memories of the Great Crisis. Therein lies a pitfall for the markets - as well as for a still unbalanced post-crisis world.
The writer is Chairman of Morgan Stanley Asia and author of The Next Asia just published by Wiley.
Comments:
Stephen Roach is likely one of the most bearish Keynesian economists in the popular press. He also has a knack of predicting with remarkable accuracy future market direction.
I share Dr. Roach's concern that huge trade and fiscal imbalances have not been corrected and governments seem intent on pursuing the status quo. The idea that the US in particular can print and borrow its way to prosperity and recovery is lunacy.
While we may still see a frothy market continue for stocks and crude oil in the short term (provided the US dollar index drops below the important support level of 76 and above the support level of 72), the sustainability of this move is simply absent. At some point ugly fundamentals will raise their heads and let the air out of the balloon in stock, crude, and commodities prices.
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