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To: High-Tech East who wrote (46326)	11/10/2001 1:53:37 PM
From: High-Tech East	Respond to of 64865

... and lastly, as I poor the first Dewar's of the day before the Penn State-Illinois game on ABC ... ... JDN's friend from Morgan Stanley ... he's been totally correct so far ... Global: Monetary Policy Pitfalls in an Era of Globalization Stephen Roach (New York) The world’ s major central banks are at it again -- first, America’s Federal Reserve and then the European Central Bank and the Bank of England -- all moving together in early November to reflate an increasingly beleaguered global economy. The key question on everyone’s mind: Will the medicine work? The financial markets are certainly betting it will. But I continue to have my doubts. It’s not that I question the inevitability of economic recovery. It’s just that I continue to fear it will be a disappointing one -- later than expected and ultimately lacking in its typical vigor. The vicious circle of a rare, synchronous global recession is exceedingly difficult to break. It does not lend itself neatly to a standard policy fix. Contractionary forces are now reverberating with mounting intensity around the world. First, America exported its IT recession. Now, the US is exporting the shock to consumer demand brought about by the terrorist attacks of 11 September. Feedback effects are also lapping up on American shores, as US exports lose their external-demand underpinnings. Such are the self-reinforcing tendencies of the first recession in the modern era of globalization. But the authorities are on the case, goes the argument in favor of the V-shaped recovery. As the world economy has broken decisively to the downside, the Fed has now eased ten times this year, by a whopping 450 bp, and the ECB has cut its benchmark rate four times by a total of 150 bp. The Bank of Japan, by contrast, has largely been on the sidelines during this global easing cycle -- hardly surprising in that it has effectively run out of basis points. For a global recession made in America, it makes good sense for the Fed to have led the way in the monetary easing cycle. But with the cumulative easing in America now three times that in Europe, these disparate policy moves are sending an important message: A highly disproportionate share of the global stimulus has been concentrated in America. That means a US-dependent global economy is leaning heavily on a re-starting of the American growth engine to break the vicious circle of synchronous recession. Just as America led to the world to the downside, the world is now counting on the United States to lead the global economy back to the upside. Yet it won’t be easy for the world to extricate itself from this synchronous recession. That’s largely because cross border linkages have increased dramatically in recent years. Over the 1994 to 2000 interval, world trade expanded by more than twice the growth rate of world GDP. By contrast, over the 1970-93 period, trade growth was only about 45% faster than world output growth. As a result, world trade has risen to a level where it is now approximately 24% of world GDP, well above the 19% share prevailing during the last recession in 1990-91. That suggests cyclical swings in global trade should have a much greater impact on world output growth in this recession than was the case in the last one. For that reason, alone, the current sharp reversal in the global trade cycle -- with world trade growth going from a 12.4% spike in 2000 to only about a 1% estimated increase in 2001 -- is a much bigger deal today than it was in the past. The violent boom-bust cycle now under way in global trade is a key force behind this synchronous worldwide recession. This conclusion is very much consistent with recent research of the IMF, which found evidence of increased correlation in the international business cycle in the late 1990s following a reduction of such correlation in the asynchronous downturns of the early 1990s (see Chapter 2 in the IMF’s World Economic Outlook of October 2001). With cross-border reverberations now exacerbating this global recession, recovery is critically dependent on the potential for any policy actions to break this chain of events. With America’s Federal Reserve leading the way in attempting to reflate the world, the outcome hinges critically on the responsiveness of US domestic demand to lower interest rates. As I indicated recently, there are several reasons to be quite dubious of the efficacy of monetary stimulus in the current climate (see my 7 November dispatch, "Running Out of Basis Points"): First, an economy dealing with the aftershocks of an asset bubble is typically less responsive to lower interest rates. Second, for a country with a strong currency, export weakness is a given in a synchronous global recession -- irrespective of the level of short-term interest rates. Third, the quick response of the "refi-cycle" may have shortened the lags of the monetary policy transmission mechanism, suggesting that there may be less demand stimulus in the pipeline than widely perceived. Fourth, any whiff of deflation -- now a distinct possibility, in my view -- could deaden the economy’s sensitivity to lower nominal interest rates. Fifth, a possible downshift in trend productivity would impair the economy’s flexibility, probably making it less responsive to cuts in interest rates. All in all, there are no guarantees that the Fed’s latest efforts to save the world by jump-starting the US economy will work to the extent that most believe. Monetary easing is usually a powerful antidote for recession. But in this first recession of globalization, it’s hardly a sure thing that the cure will work as neatly as it has in the past. Today, trade linkages -- to say nothing of financial market linkages -- play a much greater role in shaping global activity. That means heightened cross-border connectivity of this synchronous downturn is a far more potent force in driving the world economy than has been the case in earlier global recessions. For that reason, alone, the current downturn in the world economy is shaping up to be the most lethal of all the post-World War II synchronous global recessions. Once again, the world is essentially leaving it up to the Fed to find a way out. But given the possibility that the US central bank may not be able to deliver, an engineless global economy could remain mired in recession for considerably longer than most might think.