Re: ekonomisti im i preferuar : Stephen Roach (New York)
Global: The Armageddon Foil
Stephen Roach (New York)
Spinning a tale of global imbalances does not exactly make me the most popular person in the investment community. In large part, that's because many take great umbrage at the implications global rebalancing have for the US economy. Current-account adjustments, dollar weakness, deficit reduction, and a rebuilding of national saving are widely perceived to be an unusually painful price for America to pay to put itself and the world back on a sounder footing. I have been on the receiving end of that push-back for some time, and that same response was very much in evidence at our just-completed annual investment conference at Lyford Cay.
I'll be the first to admit that we may have been guilty of overkill in making the case for global rebalancing at this year's conference. Not only was it the focus of my remarks but it was very much on the mind of two outside speakers — Pete Peterson, Chairman of Blackstone and author of the best-selling book, Running on Empty, and Jeffrey Sachs, Professor at Columbia University and one of globalization's most provocative advocates. Peterson focused on the worrisome juxtaposition of America's profound saving shortfall and some $45 to $74 trillion of unfunded liabilities — especially Medicare and Social Security. Sachs spoke of a deficit-constrained America that was likely to have an increasingly difficult time of maintaining its leadership role in the global economy.
This is not the message a group of inherently bullish investors wants to hear. In the discussion that followed, the focus was on what it would take for America to change its seemingly reckless ways. Peterson shrugged and admitted, "It will probably take a crisis."
That's when the light bulb went on for most of the assembled investors. Crises are, of course, very rare events — outcomes that may be worthy of concern but not worthy of guiding baseline investment decisions. Even if you buy into the Armageddon scenario — and former Fed Chairman Paul Volcker is on record attaching a 75% probability to a dollar crisis at some point in the next five years — timing is next to impossible to predict. Consequently, as soon as investors are able to associate global rebalancing with a low-probability crisis scenario, they inevitably breathe a collective sign of relief and get back to the basics of asset allocation. I've seen this response repeatedly in my travels around the world in the past year, and I saw it again this year at Lyford Cay.
There are, in fact, three possible endgames that can spin out of the global rebalancing framework: For starters, I could be dead wrong in worrying about global imbalances. After all, many believe that a "new symbiosis" has emerged between American consumers and Asian producers and financiers. All it takes is the vision of an expanded dollar bloc, and imbalances quickly vanish into thin air. The crisis is at the other end of the spectrum — probably triggered by a foreign buyer's strike of US Treasuries that would then spark a dollar crash and a spike in US interest rates. But there is a third alternative — the in-between outcome of a measured venting of global imbalances that need not be associated with a wrenching crisis. In my view, the measured venting outcome is the most likely of the three possibilities. That would entail a managed but sustained decline in the dollar, a gradual increase in real US interest rates, a moderation of growth in interest-rate sensitive components of US domestic demand, and a related rebuilding of private saving. It would also require a regeneration of domestic demand elsewhere in the world — gradually transforming Asia and Europe from savers to spenders.
In my view, the broad consensus of investors is guilty of a dangerous compartmentalization — call it the Armageddon foil. By presuming that global rebalancing boils down to nothing more than an end-of-the-world scenario, investors have implicitly adopted heroic assumptions that have all but defanged the very serious threat of unprecedented global imbalances. Several such presumptions come to mind: First would be the belief that a shortfall of US domestic saving doesn't matter; the corollary of this view is that US budget and current-account deficits don't matter. Second, non-US saving is being taken for granted — especially the inevitable emergence of consumers in Asia and Europe.
Third, there is the presumption that the economics of trade liberalization outweigh the politics of worker angst and trade frictions. Fourth, Asian financing of US imbalances is being taken for granted — as is the lack of currency diversification of foreign-exchange portfolios of Asian central banks, as well as the related perils of a major fiscal hit to Asian governments in the event of a sharp depreciation of the dollar. Fifth, there is the presumption that America remains on top and that the world can continue to enjoy solid support from saving-short, overly-indebted US consumers.
The Armageddon foil — focusing on but ultimately dismissing the low-probability crisis alternative — effectively sweeps all of the above concerns under the proverbial rug. Most investors argue that the benign condition of the US bond market validates this attitude. After all, goes the argument, with yields on 10-year Treasuries holding in the low 4% range, financial markets are effectively saying that imbalances don't matter. That's a very risky interpretation, in my view. The Treasury market is being supported by many factors — low inflation, measured monetary tightening by the Fed, equity-market risks associated with peaking profit margins, and, of course, buying by Asian central banks. Meanwhile the dollar is slipping again after a nine-month hiatus — a classic early warning sign that financial markets could well be starting to take global rebalancing imperatives far more seriously than the bond market seems to imply.
My own view is that the odds are now shifting in favor of the measured-venting strain of global rebalancing — a more optimistic stance than I have previously held. Three factors recently have come into play that have encouraged me — oil, China, and the dollar. With oil prices down about 15% over the past two-and-a-half weeks, the likelihood of a full-blown energy shock has receded a bit. I have long maintained that the $50 threshold is a very dangerous price point for a vulnerable global economy. So far, that threshold was breached for only about five weeks. I have no idea what lies ahead for oil prices, but if they hold at or below present levels, then any disruption to global demand will be limited. As for China, my latest visit left me much more encouraged than before I arrived (see my 8 November dispatch, "Rethinking the China Slowdown"). The possibility of a boom-bust endgame for an overheated Chinese economy was a worrisome wildcard for a world that is now being heavily influenced by the "China factor." To the extent that the Chinese downside now seems limited, I have tempered my concerns in that regard.
The dollar's recent decline is equally encouraging. Despite being characterized as "brutal" by ECB President Trichet, I believe the renewed depreciation of the US currency is a very welcome development for an unbalanced world. In real terms, the broadest measure of the dollar has basically only retraced the run-up that occurred in the first nine months of this year — leaving the index about 15% below its February 2002 peak. For a US economy with a current account deficit of 5.7% and rising, this adjustment is modest, at best. In my view, there is at least another 10–15% to go on the downside. The trick will be for the world to manage the coming currency realignment in a fashion that is fair and equitable to all countries and regions on the other side of that trade.
What this means, of course, is that Asia now has to give and accept its role in accommodating the dollar's adjustment. I have made two treks to Asia in the past six weeks, and my sense is that Asian officials are now increasingly resigned to this responsibility. Japan and China are, of course, the linchpins to pan-Asian currency adjustments. While the latest Japanese GDP statistics were surprisingly soft, officials in Japan are nearly unanimous in believing that the Japanese economy is now strong enough to withstand the pressures of yen appreciation. In China, the near-term verdict is more guarded, but I get the sense in Beijing that the move to a more flexible foreign-exchange mechanism — either widening the bands on the existing dollar peg and/or shifting to a peg against a basket of currencies — is now likely to come sooner rather than later. I also got the impression from my travels elsewhere in Asia that diversification of foreign-exchange reserves is becoming an increasingly important objective of regional policy makers. Add to that current-account and dollar-related concerns expresses by senior Federal Reserve officials from the United States, and there is good reason to believe that the world has basically come together in attempting to manage the dollar lower.
The weak-dollar bet was very much a part of the consensus verdict at Lyford Cay this year. Of course, for those who worry about the pitfalls of consensus forecasts, the fabled "curse of Lyford Cay" is good reason for caution in assessing currency risk. But, consistent with the Armageddon foil noted above, few expected big moves — for example, a euro that might go past 1.40
against the dollar or a yen that would strengthen through 95. Yet one of the savviest foreign exchange traders of the lot — also a dollar bear — didn't seem concerned. The dollar's renewed slide had only just begun, he noted, and there was little leverage to the trading positions that normally drive major moves in currencies.
In the end, a significant currency realignment is central to global rebalancing. It is the functional equivalent of a shift in the world's relative price structure. For a lopsided, US-centric global economy, a weaker dollar is the most important relative price shift that needs to occur. While I am encouraged that such a shift now appears to be under way, there is still a long way to go in defusing the tensions of a severely unbalanced global economy.
