Let’s play a game. The game is called “Agree or Disagree”.
To play this game we will look at a lengthy article by Steve Roach entitled On the Road to Global Rebalancing. In italics are paragraphs or statements by Stephen Roach. My responses are in normal print. Here goes:
It was exactly six years ago when I first coined the term, “Global Rebalancing.” The equity bubble had burst, America was heading into recession, and an unbalanced, US-centric global economy was in trouble. A rebalancing was in order, I argued at the time — and the sooner the better!
An unbalanced world was able to buy time. With the benefit of hindsight, it is not that difficult to figure out how. Fearful of a Japanese style deflation in the aftermath of a burst equity bubble, America’s Federal Reserve rushed to the rescue — spearheading a massive monetary easing that pushed short-term interest rates down to the unheard of 1% threshold. That prompted a seamless move from one asset bubble to another, as the property market took over where equities left off.
Courtesy of state-of-the-art financial technologies, US homeowners were quick to extract equity from an increasingly frothy housing market — and use the proceeds to fund both consumption and saving.
It is pure insanity for any economist to suggest that extracting equity (borrowing against one’s home) can in any way shape or form “fund savings”.
Time has finally run out for an unbalanced world. Just like the demise of the equity bubble over six years ago, America’s property bubble is now in the process of bursting. Moreover, a sharp resurgence of equity markets is unlikely as corporate profit margins now come under pressure. That means the days of asset-driven support to US consumption are coming to an end. For American households, that spells a return to basics — the need to draw support from income generation rather than wealth creation. That points to a likely increase in personal saving and, as a result, less of a need for foreign saving — setting the stage for a reduction in America’s gaping current account and trade deficits.
There are three key elements of a rebalancing policy agenda: First, US authorities must act to temper the consumption excesses of an asset-dependent economy. Tax policy should be used to alter the tradeoff between consumption and saving. Some form of a consumption tax — either a national sales tax or a VAT — would make good sense in the current climate; not only would it encourage saving but it would also broaden the tax base and lower the budget deficit — thereby boosting national saving and reducing the US current account deficit. The US must also run a tighter monetary policy aimed at curtailing the expansion the excess liquidity that has long fed its multi-bubble syndrome.
Generally agree but very fearful of what politicians might do if we march down the road of new tax resources.
Second, the non-US world must move actively to embrace policies that boost private consumption. This will wean the world from excess dependence on the American consumer — tempering the damage from a US-led export compression scenario.
The imbalances are not because of excessive savings abroad but because of lack of saving in the US. The pool of real funding is most likely negative and the supposedly massive savings in Asia are based on a mirage of overcapacity in the wake of what is sure to be falling US demand. It seems silly to promote consumption bubbles elsewhere just because the consumption bubble is bursting in the US.
Even IF demand picks up in China and Japan, the outsourcing of manufacturing many not benefit the US as much as anyone thinks. Just watch what happens when China comes out with its own brands to compete with the likes of “Crest” toothpaste, DELL computers and the like.
Third, the stewards of globalization — namely G-7 finance ministers, the IMF, and the world’s major central banks — must remain committed to rebalancing. So far, so good. The IMF recently moved to implement a new multi-lateral surveillance and consultation process that initially includes the US, Europe, Japan, China, and Saudi Arabia. Major central banks seem firm in their resolve to withdraw excess liquidity. And German Chancellor Angela Merkel, the new head of the G-8 for the next year, seems determined to focus the policy debate on global rebalancing.
So far so bad is more like it. The world trade talks blow up year in year out and we have proven time and time again that talk (and talk is really all we have) is useless. Japan has tightened money supply but has yet to do anything more than a token 25 basis point hike and some BOJ commentary seems concerned about that. Trichet is once again bitching about the strength of the Euro, and the US Congress is once again threatening 27.5% tariffs on China. It is a joke to suggest that anyone is serious about global rebalancing anymore than they are serious about solving trade issues. Actually that is slightly incorrect, people may be serious about it, but no one is serious enough to do anything more than talk while hiding under the mask of blatant protectionism.
There is no quick fix for an unbalanced world. Many harbor the false allusion that currency adjustments — namely, a significant depreciation of the US dollar — could provide a short-cut to global rebalancing.
Lulled into a false sense of complacency by America’s prolonged bubble-induced consumption binge, the rest of the world is unprepared for a very different post-bubble climate.
Yet the rebalancing of an unbalanced world is far too important and far too delicate an operation to be left to the whims of over-extended markets. Policy makers around the world must rise to the occasion.
Violently disagree. The reason we are in the fix we are in is because policy makers thought they knew better than the markets. Greenspan blew bubble after bubble. The market was not concerned about Y2K but Greenspan was. He fueled a massive bubble in dotcoms and fiber as a result. Even though consumers or housing were not yet tapped out, the Greenspan Fed in a deflation panic fueled the biggest housing bubble the world has ever seen by slashing rates to 1%. Oddly enough the Fed’s actions have brought about the very condition (consumer credit and housing bubbles) that are all but guaranteed to create the problem the Fed was attempting to prevent.
No! Steve Roach you are dead wrong on this. The problem is that the Fed has no idea where interest rates should be any more than it knows what the price of cotton, corn or oil should be. The Fed does not know “neutral” to save their soul, overshoots and undershoots every step of the way, yet for some unknown reason you keep putting your very faith on the idiots that exacerbated the problem. It is not time for the Fed to be deciding things, it is indeed time, and long over due at that, to abolish the Fed and let the markets decide things. Proof of that statement should be easy enough.
Is there any way we could possibly be more imbalanced if market forces rather than the Fed was attempting to control interest rate policy?
Roach clearly understands the problem. His unfounded optimism as of late is based on thinking that what caused the problem is going to cure it. Sorry, Roach your optimism and faith in central bankers everywhere is simply unfounded.
Perhaps some of you noticed I have not posted for nearly four days. There was an unexpected death in the family. My wife’s brother died at the early age of 55 of a massive heart attack. It was quite a shock as he was not a smoker, was not overweight, and seemed to be in good health.
It is hard to know whether or not I am supposed to interject extremely personal situations like this into what is supposed to be an economic blog. But if I could be more like anyone I ever knew, I would choose to be more like John Philip “Phil” Reid of Kalamazoo Michigan than anyone else I have ever met. He was always in fine spirits, always had a kind word for everyone, and always brought out the best in everyone he met.
One never knows when one’s time is up, so in honor of Phil I ask everyone to try and spread some extra kindness around this week.
Mike Shedlock / Mish/