Looking to 2005: How to Fix the World
Dec 17, 2004
Special Year-End Issue
Here is a collection of 31 lengthy articles by various MS economists on how to fix the world's problems. I can probably summarize the concensus with this ridiculous assertion:
The US hikes to 5%, US employment goes up in the process (no mention of housing of course), and US GDP growth rises to 4% during this hike (a sudden jolt by the way, not a series of baby steps), meanwhile the US saves more which solves the balance of trade problem since the whole rest of the world stops saving and consumes more. Germany solves its structural problems which leads to higher employment as well as more productivity and more consumer spending. No one has a recession and everything is beautiful.
Quite literally, in conglomerate it is one of the most preposterous things I have read, given that it represents the views of a dozen or more economists all from the same company. There was some attempt at genuine discussion, particularly about the UK in this anchor but most of this stuff is not fit for reading:
morganstanley.com
It's one thing to think that US rates should rise dramatically (I think this view wil be proven decisively wrong quite soon), it is yet another thing to think we can hike to 5% and have an immediate everything is rosy scenarion.
Nonetheless, I posed some snips from this set, some of them primarily because they they were so preposterous. Here are snips from some of them.
===========================================================
Global: How to Fix the World
Stephen Roach (New York)
morganstanley.com
[Here are some highlights from a very long article that for the most part says nothing that he has not said 5 times before, only this time he uses far far more words and for an unRoach-like change, he does not discuss the downside risks either. mish]
America's role in global rebalancing is thus relatively straightforward: finally facing up to the daunting challenge of fixing its saving problem. There are two main lines of attack: boosting personal saving from its present rock-bottom level and fixing the Federal budget deficit. Amazingly enough, there are many who believe that US consumers don't have a saving problem. Never mind the personal saving rate of 0.2% in October 2004, they argue; after all, rational consumers have figured out new and creative ways to save through their wise and prudent investments in asset markets. This mindset first took on a life of its own during the equity bubble of the Roaring 1990s; and now the baton has been passed to the biggest bubble of all: housing.
.......
What a reckless way to run the world! The problem comes, of course, when asset appreciation goes to excess. Then, bursting bubbles leave saving-short US consumers no choice other than to rebuild income-based saving rates, an outcome that would restrain US consumption and impede externally-led economies elsewhere in the world. In a rebalancing framework, a major challenge for US authorities is to pre-empt this painful endgame by seeking policies that boost personal saving. Unfortunately, the orthodox approach to saving policy: creating new accounts such as IRAs and 401Ks has had a terrible track record in boosting aggregate saving.
These instruments have mainly succeeded in shifting the mix of saving from one type of account to another rather than by generating net new saving. I would, therefore, be in favor of a more radical approach: namely, a consumption tax. For the sake of simplicity, my preference would be a national sales tax over a more cumbersome value-added tax; and for the sake of equity, any such scheme should be designed to buffer any regressive impacts on the lower portion of the income distribution. A saving-short nation needs to tilt the incentive structure away from the excesses of open-ended personal consumption. A national sales tax could well be a very important step in that direction.
Washington should not take false comfort in running "average" deficits. Second, tax reform is a luxury that only fiscally prudent nations can afford. America is not in that position. It is fiscally irresponsible to push a supply-side agenda i.e., making the temporary tax cuts of 2003 permanent under the dubious premise they will be self-financing.
Deficit reduction will not happen by osmosis. With Washington having lost the discipline on budgetary control that was so important in the late 1980s and early 1990s, a new approach is needed. That is especially important, given rising military and homeland security commitments. Consequently, I would be in favor of reinstituting the enforcement framework of the now-discarded Gramm-Rudman fiscal restraints of the late 1980s. An acceptable alternative would be to establish a new set of pay-as-you-go requirements that would put the government's discretionary budgetary commitments on a very tight leash.
America today has a current-account problem that is almost twice as bad as it was in the 1980s but a dollar that has fallen only about half as much. For that simple reason, alone, I would argue that the dollar has at least another 15% to go on the downside.
A saving-short, asset-dependent US economy needs higher real interest rates to temper excess consumption. To the extent a further decline in the dollar sparks such an adjustment, the US will have taken an important step on the road to global rebalancing.
[verly long.......blah blah blah blah blah....... europe needs reform blah blah,..... followed by a new idea: Kick Canada out of the G7 and replace it with China. blah blah blah blah blah....... No mention of possible problems associated with all these "fixes", nor any discussion of the liklihood of Bush passing a consumption tax and reducing spending. mish ]
============================================================
Global: Breaking the Cycle
Rebecca McCaughrin (London)
[The following snip probably states one of today's problems quite well: Lack of good places to park money. Unfortunately no "fix" was offered - mish]
morganstanley.com
...........................
The lack of liquid capital markets limits the options for high-savings nations. If foreigners were to diversify, where would they go? Which markets are liquid and large enough to support the $9.1 trillion of foreign capital that comprises the US liabilities position? The US equity market capitalization accounts for roughly 44% of the global market cap; the comparable weight of Euroland?s equity markets is 14.7%, 11.5% in Japan and 7.7% in the UK. The weight of the US in the global debt market is about as large as in equities, accounting for 45% of the global long-term debt market, while Euroland?s debt markets account for 21% of the pie, Japan 15%, and the UK 4%. With the US accounting for the lion?s share of global capital market cap, diversification is limited.
Bottom line: Realistically, financial institutions are slow to develop, and diversification is a long-term solution. This leaves limited alternative destinations for excess savings in the immediate term. In terms of what is likely to happen, if foreigners were to begin to sell off US bonds, once they began to convert the dollars received from bond sales back into local currency, FX markets would be swamped with dollars, resulting in a sharp unraveling in the dollar and large asset losses. Everyone loses in this scenario, which is what makes it highly unlikely. By contrast, an orderly dollar decline can occur without a corresponding decline in appetite for US assets, as long as foreign investors believe a credible policy is in place. The Plaza Accord was a case in point: Despite a 40% decline in the dollar, the rest of the world did not sell off USD-denominated assets.
============================================================
Currencies: Softer Commodities Ahead
Karin Kimbrough (New York)
morganstanley.com
Commodities no help to the global imbalances
Over the past three years, non-oil commodity prices have risen by 38% in US dollar terms, of which 7% occurred in 2004. This has sparked a massive transfer of wealth from commodity consumers to commodity producers. In terms of oil alone the transfer has been estimated at a cumulative $125 bn since 2000. In our view, higher commodity prices have so far probably made the global imbalances worse, not better.
Commodity Outlook for 2005
However, before addressing these issues, we will give a quick summary of the firm's expectations for commodities prices in 2005. Our expectation of slower global growth in 2005 is accompanied by a softening of commodity prices. Our basic materials group still expects that prices will continue rising for most commodities during 2005, albeit at a slower pace than in 2004.
Most of the base metals are forecast to rise between 6% and 10%, with the exception of copper which is projected to fall. Gold is expected to rise slightly, but other precious metals are more likely to fall. Finally, our analysts expect a major increase in coking coal prices based on tight supply, but are projecting a decline in the spot price of oil.
Andy Xie forecasts that Chinese GDP growth in 2005 will probably be 7.8%, which represent an appreciable drop from the estimated 9.3% in 2004. However, we don't anticipate that this slower pace of growth will significantly dampen China's appetite for commodities. In our view, the Chinese demand for many commodities is more closely related to the expanding domestic market demand rather than to exports.
....
Summary
Commodities prices have probably amplified global imbalances in 2004 -- through the transfer problem, higher global growth, and a weaker dollar. Going forward, slightly softer commodities prices in 2005 as well as a firmer USD and a slower global growth environment may well alleviate pressure on these imbalances.
[This seems somewhat contradictory with the above, and I fail to see how it "fixes" anything mish]
==============================================================
Currencies: British Sterling and Imbalances
Melanie Baker (London)
[Mish note - this is one of the better articles in the set.
I do not want to snip the whole thing so anyone interested in a discussion of the british pound and the structural problems of the UK might want to read this whole article.]
morganstanley.com;
============================================================
United States: Normalize Interest Rates Now
Ted Wieseman (New York)
morganstanley.com
[here is a call for the FED to hike to 4.5% and have a 3.9% GDP as a result. Where they find these rosy guys is quite simply beyond me. Posting snips for balance only as this is well beyond absurd.]
If the current year-ahead eurodollar futures rate were 5% instead of 3.5% (assuming a more nearly neutral but certainly not overly restrictive fed funds rate by year-end 2005), then the current fair value 10-year rate according to A.J. Lindeman?s model would be roughly 5 1/4%.
A year from now, if we assume the fed funds rate were at 4.5%, the one-year-ahead eurodollar future at 5.5%, and that current inflation, inflation expectations, and employment growth were maintained near current levels, then the fair value 10-year yield would be roughly 5 3/4% at the end of 2005.
==============================================================
United Kingdom: Imbalances Are Things To Worry About
David Miles and Melanie Baker (London)
morganstanley.com
Main risks to the outlook next year are likely the unwind of global imbalances and a significant slowdown in the housing market. An unwinding of global imbalances could, potentially, be very disruptive for the UK economy, particularly if it generates sharp movements in sterling. The UK is a very open economy (a high ratio of exports plus imports to GDP) with a completely floating exchange rate. The Euro area has a floating currency but is very much less open than the UK; Asian economies are very open but most do not have freely floating exchange rates. There is not much the UK can do about this - except take no small comfort from the fact that the Bank of England has the slack to cut interest rates if needs be and the independence to raise them if necessary.
What the government can do something about is to help boost the savings rate. A long-term strategy of removing all taxes on capital income and clawing back the lost revenue by raising consumption taxes has much to recommend it. Engineering that in a way that is not regressive is the hard bit.
[Wouldn't this "fix" destroy spending and with it housing? mish]
===============================================================
Asia Pacific: Sharing the Burden of Fixing the World
Andy Xie (Hong Kong)
morganstanley.com
The US weak dollar policy is an attempt to secure high growth for the US. Asia could suffer low growth if the US policy is unchallenged. Asian governments must take safeguarding measures against the world slipping into an equilibrium that is bad for Asia. Through cooperation it is possible that both Asia and the US could move towards a stable equilibrium that offers high growth rates for both. The world needs the US to increase its savings rate and Asia to decrease its savings rate. Both need to be done in such a way to promote growth. I want to outline some measures that Asia could take to do its part.
In the short term, however, slowing down both Asia and the US is the only way to stop or reverse the trend of a rising US trade deficit, as the current model for global economic growth depends on an ever rising US deficit. Two actions are necessary to reverse the tide. First, both China and the US should eliminate negative real interest rates that exaggerate growth rates as soon as possible by raising interest rates by 100-150 bp.
[yeah like an immediate hike of 150 bps would not cause an immediate housing depression in the US. mish] |
