The "It's a new Paradigm" band plays on
Snips from Roach's last conference
my view ran very much against the grain of the hopes and dreams of this year’s crowd at Davos. In the opening economics session, I had the audacity to make the argument that imbalances matter. A one-engine world, in my view, is utterly incapable of providing a sustainable growth dynamic for a $36 trillion global economy. That’s the case even if that engine is America — the unquestioned global hegemon that rescued the world economy from the brink of last year’s feared abyss.
The response was right out of the script of the late 1990s. One new paradigm after another was offered as explanations as to why this global recovery is for real.
As he did at the end of the equity bubble, Greenspan seems to be making a special effort to portray old concerns in a new light. Last time, it was a productivity breakthrough; this time, it’s the nimble financing of a new globalization.
After all, Asia is funding the bulk of the new increments to that debt, and most were utterly convinced that nothing could break the “daisy chain.” As long as America continued to buy Asian-made products, Asian investors would continue to buy American-made bonds — thereby avoiding the lethal back-up in real interest rates that such imbalances would normally spawn.
Either way, no one could conceive of any circumstances that would cause Asian investors — private or official — to change their mind on the funding of America’s massive external imbalance. And so the Davos crowd believes the music will continue to play on.
Quite honestly, none of this really surprised me — these are precisely the assumptions that ever-frothy financial markets must be making in order to sustain asset values at current levels. If imbalances were perceived to be the problem I suspect they are, markets would be in a very different place. As predictable as this response was, I was totally unprepared for what hit me immediately after the conclusion of this opening session. Two of America’s leading academics rushed the stage — one a renowned economics professor and the other the president of a top university — and loudly proclaimed that the traditional macro of saving shortages and current-account deficits is a scam. America was not in any danger whatsoever, they argued vociferously. The imbalances that I worried about are simply the logical and entirely rational manifestations of a New Economy.
The New Paradigm in this case is that America has now become an asset-based, wealth driven economy. As such, it need not worry about scaling its imbalances by national income — instead they need to be judged against economy-wide net worth.
When I pressed this point with my adversary, he bristled in response, claiming that permanently rapid rates of financial asset appreciation were entirely justified by the productivity breakthroughs of recent years. He went on to add that property cycles had all but been abolished — that the American home was a lasting store of ever-rising value. Needless to say, if that’s the case, then I’m the one who’s dead wrong. Ever-rising asset values would then qualify as permanent sources of saving — obviating the need for consumers to rely on traditional income-based saving strategies. Quite frankly, I couldn’t believe what I was hearing. Here we are, just a few years after America’s most devastating post-bubble carnage, and the apostles of the New Economy were back with a vengeance.
But have we truly learned nothing from the Great Bubble? As was the case in the late 1990s, the sustainability of a wealth-driven US economy is critically dependent on the permanence of asset appreciation. Yet bubbles are, by definition, the antithesis of such permanence. The Fed, through its extraordinary monetary accommodation, is doing its best to keep the magic alive. Unfortunately, that only underscores the dangerous moral hazard implications of a post-bubble containment strategy — massive liquidity injections and rock-bottom interest rates that ultimately lead from one bubble to the next.
morganstanley.com |
