Roach: The west went on a “drunken binge of excess consumption”
by ilene - September 16th, 2009 12:18 pm
Roach: The west went on a “drunken binge of excess consumption”
Courtesy of Edward Harrison at Credit Writedowns
Stephen Roach doesn’t mince words. He calls monetary policy during the bubble years “reckless and irresponsible” and he thinks politics is thwarting any meaningful regulatory reform, a view I also hold. I think the point of Roach’s attack is that a lot of finger-pointing has been directed at Wall Street and even Main Street. But, policy makers share much of the blame. This is a point I tried to make in a post “Forget about Goldman” from this past summer.
Moreover, as Roach indicates, the concept that a central planner (which a central bank most certainly is) can allow bubbles to form and then clean up after the mess- is on it’s face absurd. But, clearly the Federal Reserve and other central banks are doing their level best to re-create the conditions which led to a near-financial collapse.
The money quote comes just about 4:45 through the eleven minute clip below:
Central bankers say trust us. We know what we’re doing. I don’t trust them one bit. They got us into this mess in the first place.
As for Asia, Roach sees a bright future. However, he warns that it has risen on the back of an unsustainable export-led macro-policy by selling things to people in the West who can’t afford them. With continued private-sector deleveraging in the west likely, this dynamic has ended.
(video embedded below)
As an aside, Roach also correctly adds that the recent protectionist tariff administered by President Obama was not the result of tire manufacturers’ lobbying. Four of five of the Chinese importers are subsidiaries of U.S. firms. Obama did this to gain credibility and support from unions, a key Democratic constituency in the health care debate and in the run-up to the mid-term elections.
I should also point out that much of the U.S. trade deficit comes from such arrangements, where a U.S. company imports goods from its own foreign subsidiary.
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IT IS LIQUIDITY DRIVING THE MARKET
by ilene - September 15th, 2009 3:17 pm
IT IS LIQUIDITY DRIVING THE MARKET
Courtesy of The Pragmatic Capitalist
Guest contribution from Pazzo Mundo:
The economist David Rosenberg makes the headline statement in today’s missive that “It’s not liquidity driving the market”. Rather than guess at his motivations – let’s have a look at how liquidity is driving the market.
First up, define liquidity as referring to the relative ease with which an asset can be sold. Typically, selling an asset for cash is the most expedient way to realise an asset’s value. In a sense, cash is the most liquid of assets (as a store of value its pretty darn good most of the time and everyone is happy to use it as a medium of exchange). For this reason, cash is at the very heart of the liquidity concept.
When there is an abundance of liquidity for a given asset, selling it can be achieved quickly and with minimum price disturbance to that asset. When there is an abundance of liquidity in an economy as a whole, there is lots of cash available to buy assets – it is relatively easy to sell assets across the risk spectrum.
From this definition, the impact of liquidity on markets seems straightforward. To get a sense of how it can be measured, a former roomie of Mr Rosenbeg, Stephen Roach, points to a useful indicator:
My favorite gauge of the quantity dimension of liquidity is the so-called “Marshallian K” — the difference between growth in the money supply and nominal GDP. In essence, this measures the surplus of money that is not absorbed by the real economy.
When the money supply is growing faster than nominal GDP, then excess liquidity tends to flow to financial assets. On the flip side, if money supply is growing more slowly than nominal GDP, then the real economy absorbs more available liquidity.
Under this model, asset price inflation will be the result of excess liquidity. For example have a look at some research from BCA on the correlation of the US$ gold price with the Marshallian K and then as compared to CPI:
Now while David makes the point that the Fed’s most recent pumping of the monetary base has had little impact on broader money aggregates (as bank lending continues to contract at record rates), by taking a step back from the four week data we can see that the Fed has provided the system with a mountain of cash (charts from…
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Stephen Roach: 1-In-3 Chance We’re Screwed
by ilene - September 11th, 2009 10:26 am
Stephen Roach: 1-In-3 Chance We’re Screwed
Courtesy of Vincent Fernando at Clusterstock
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Stephen Roach: The case against Bernanke
by ilene - August 26th, 2009 10:38 am
Stephen Roach: The case against Bernanke
Courtesy of Edward Harrison at Credit Writedowns
While most economists have come out in favor of Barack Obama’s decision to re-appoint Ben Bernanke as Chairman of the Federal Reserve Board, Stephen Roach has penned an Op-Ed in today’s Financial Times which highlights the case against Bernanke. It is must reading.
Roach has three main points.
- Before the Lehman bankruptcy, Bernanke was an adherent of the Greenspan-professed doctrine to “clean up after bubbles.” This is what others have called “The Greenspan Put,” otherwise known as an asymmetric monetary policy response – what I would term “lax during the bubble, and loose after it.” Clearly, this doctrine was responsible for much of the carnage.
- Bernanke was also a proponent of the “Asian Savings Glut” theory which puts much of the blame for global imbalances at Asia’s doorstep and exonerates over-consumption by American citizens for a credit crisis which began in America. I have called this the Blame Asia meme. While there may be excess savings, it is disingenuous to blame Asia for problems created in the United States.
- Bernanke, like Greenspan, is an ultra-free market Libertarian who believes markets always are better informed than regulators. This takes libertarian views to an extreme which I have dubbed “Deregulation as Crony Capitalism.” I see a more nuanced belief in free markets as more appropriate.
But Roach goes on to opine that Obama, with his early decision to re-appoint Bernanke, is signalling he believes the credit crisis has ended, a calculation that Roach believes may be hasty.
Notwithstanding these mistakes, Mr Obama may be premature in giving Mr Bernanke credit for the great cure. No one knows for certain as to whether the Fed’s strategy will ultimately be successful. The worst of the US recession appears to have been arrested for now – a fairly typical, but temporary, outgrowth of the time-honored inventory cycle. But the sustainability of any post-bubble recovery is always dubious. Just ask Japan 20 years after the bursting of its bubbles.
While financial markets are giddy with hopes of economic revival – in part inspired by Mr Bernanke’s cheerleading at the Fed’s annual Jackson Hole gathering – there is still good reason to believe that the US recovery will be anaemic and fragile. US consumers are in the early stages of a multi-year retrenchment as they cut debt and rebuild retirement saving. The unusual breadth and synchronicity of the global recession will restrain US export demand from becoming…
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Stephen Roach sees a W-shaped recovery for China
by ilene - August 4th, 2009 11:47 pm
Stephen Roach sees a W-shaped recovery for China
Courtesy of Edward Harrison at Credit Writedowns
The US is not the only place where a double dip downturn is to be feared. China has its own economic imbalances to deal with. Too much money is being thrown at the problem creating malinvestment and a bubble economy, shares having doubled this year alone.
Stephen Roach thinks much of the stimulus money in China has been wasted, potentially requiring a second stimulus package.
‘The impact of the investment-led stimulus will fade and the Chinese growth rate will start to slip again some time towards the middle of 2010,’ Roach said, suggesting that slowing growth could lead to increased layoffs and thus social instability.
‘That means, the Chinese authorities will be forced to contemplate another proactive fiscal stimulus.’
In May, Roach had said China may face a ‘W’-shaped economic recovery and had previously said that China’s current stimulus is directed too much at the pace of growth rather than the quality of the growth.
The former global chief economist for the U.S. investment bank also reiterated his concerns about excessive investments in infrastructure, rather than on stimulating private consumption or bolstering health care or social safety nets for Chinese.
‘Bottom line is they are creating a very unbalanced macroeconomic structure,’ Roach said in the interview, estimating that investment spending in the first half of the year as a share of gross domestic product had exceeded 45 percent of the economy.
‘This is a ratio unheard of in the annals of a modern, large developing economy,’ he said.
These are much the same complaints that can be levelled against US policy makers. However, the scale of the endeavour in China is truly breathtaking. And while the growth potential in China is still very strong, the economy has a number of significant problems with which to deal, unemployment being one. Another mentioned by Roach is the need for the Chinese to save huge sums in order to meet health care costs and to insure against economic misfortune because of the porous social safety net.
Were the government to put more emphasis on increasing economic security, many Chinese would feel more comfortable spending and the economy would be able to wean itself from its reliance on exports. However, to date, infrastructure has been the name of the game in China’s fiscal stimulus. Come this time next year, we will have a much better handle on whether this growth dynamic…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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