FYI | May 02 2006
By Rudi Filapek-Vandyck
Morgan Stanley’s chief economist and global strategist Stephen Roach has turned into a semi-optimist, an event that hasn’t happened for a long time. It must have surprised the legend himself, with Roach likely to have gone through his market analyses to find out about the last time he was positive on the world economy. It was back in 1999. Things went awfully wrong soon after. Maybe it’s time to really get worried.
Roach: "It was back in 1999 when I argued that "Global Healing" would allow the world to make a stunning comeback from the ravages of the worst financial crisis in 60 years. My enthusiasm was short-lived, however, as the cure led to the mother of all liquidity cycles, multiple asset bubbles, and an unprecedented build-up of global imbalances. While an unbalanced world has yet to shake its hangover from global healing, I must confess that I am now feeling better about the prognosis for the world economy for the first time in ages."
The reason is because the world has finally commenced treating the cancers in the economic system while still enjoying the support of some key beneficial developments. Roach knows better than anyone else there’s no such thing as a guarantee in life, especially not when it comes to finance and economics on a macro scale, but he believes there are now sufficient reasons to believe it could all work out just fine.
Central banks are finally addressing what Roach calls "the liquidity spigot". OK, they are still enjoying the luxury of low inflation, but at least they are addressing the matter, Roach argues. And they are helped by the G-7 and the International Monetary Fund (IMF) who have now turned to solve the severe imbalances in the world economy.
Add a weaker US dollar, needed to allow for the easing of the US’s problem of its ever growing current account deficit, and what you get is a cocktail that turned Roach from a long time bear into a hopeful optimist.
Of course, there are still quite some dangers lurking around the corner. But aren’t there always? Oil priced above US$70 a barrel, Iran’s nuclear ambitions in face of the world’s opposition (well, the West’s at least) and for all we know the US dollar’s gradual fall could well become a huge plunge at any stage. But let’s focus on the positives instead.
Inflation is still low (thanks China) and central banks worldwide are scaling back the excess liquidity that has flooded the world over the past few years. Even Japan is believed to be back on the path of ‘neutralising’ interest rates again – and China has joined in. Roach believes this process of global ‘normalisation’ has "reduced the possibility that the world will be disrupted by the boom-bust cycles that frequently plagued the economy of yesteryear".
So is the mother of all liquidity cycles finally coming to an end? Roach thinks that as long as inflation stays contained the process of global normalisation has every chance of success. The possibility of a disruptive US current account adjustment at any given stage remains, however. A gradually weakening US dollar is seen as key in the whole process.
Equally important, Roach believes, is the fact that Asia has come to realise its focus on exports is not a sustainable long term viable strategy. His second trip to the region recently has added to his positivism as Asian policymakers, especially in China, are putting strategies in place to stimulate internal consumption. This can only be a good thing, or as Roach puts it: "A rebalancing of the Asian growth model is a big plus for an unbalanced world".
Roach is not prepared to give the presently unbalanced world economy the green light just yet. But he is hopeful the cure might work.