Stephen Roach on the current crisis

Stephen Roach, a senior executive at Morgan Stanley and Chief economist for Morgan Stanley for over 16 years has been a vocal critic of the state of the global economy for over a generation.  Roach’s bearish forecasts have drawn attention in the popular press, in particular after the 2001 world recession. In November 2004 Roach predicted an ‘economic Armageddon‘, in part due to the record U.S. current account, trade and government deficits. According to some reports Roach in private predicted the chances of the US escaping a financial Armageddon were less than 10%. Roach has warned repeatedly that a dollar exchange rate could eventually force U.S. policy makers to raise interest rates. Last week Roach wrote this:

Stephen S Roach

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.

In large part, that is because this is a profoundly different crisis. It stands in sharp contrast to earlier disruptions, such as the Latin debt crisis of the 1980s, the Asian financial crisis of 1997–98, or the bursting of the dot-com bubble nearly nine years ago. In those instances, the pressures were confined largely to a region or asset class, while the rest of the world benefited from insulation and resilience. This time, there is no place to hide. An unbalanced world is now in the midst of a painful but necessary rebalancing.

Steeped in denial during the days of froth, policy makers, financial markets, the business community, and Main Street all reached the same erroneous conclusion—that an increasingly sophisticated and globalized world had learned to live with its imbalances. Some called this the Bretton Woods II era, cemented by a new symbiotic relationship between China (the saver and producer) and America (the borrower and consumer). Under this arrangement, most observers came to believe, unprecedented saving and current-account 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 in some far-off, distant future. That was the fatal mistake made by a world in denial. The day of rebalancing is now at hand.

Do go and read the rest at McKinsey.  It makes a lot of sense

Tagged as: Economy