Stephen Roach pens an incredibly sobering commentary today. You just can't read today's missive and not get a creepy 1930s feeling about you.
I take this debate over non-traditional policies very seriously. It is emblematic of how desperate matters have now become. It reflects a mindset in policy circles that hasn�t been seen since the 1930s. And it reflects perils in the global economy that haven�t been seen in the modern era.Not only does the global economy have to fight off the US current account deficit (flip-side, the rest of the world's current account surplus now at 2% of global GDP), deflation and massive budget deficits. It has to fight them all off simultaneously.
As Roach observes, the surplus-deficit gap between the US and the rest of the world (primarily East Asia) "has never been larger"; the US, the engine of the dysfunctional global economy, "is currently closer to deflation than at any point in over 40 years and will probably get even closer in the months ahead" (amazingly enough, there is even CPI deflation in parts of Latin America!); and the "traditional options of monetary and fiscal stimulus have all but been exhausted." The intersection of these problems is such that fixing one will only aggravate another. For example, a boost in US demand pushing the US economy up into mild inflation would only exacerbate the current account deficit.
If for no other reason than monetary authorities' public willingness to try "unorthodox" policies to fight deflation, the current era has more than a whiff of the 1930s about it. The post-WWII social contract in both Japan and Western Europe is under the sword of Damocles, according to Roach, for the only solution to this impasse is "painful . . . structural reform". This is the only solution from the point of view of capital. Remember, Roach is a pessimist on capitalism, but only in the short term. The guy works for Morgan Stanley after all! He is more like the technocrats heading up the New Deal rather than the populist farmers in the Midwest and the socialist labor unions in the East and California working to create a wholly new economic order.
Roach at least has one thing right: "we�re in uncharted waters, both in diagnosing the world�s problems as well as in prescribing the remedies." If the Left has any spark of life left in it, it will seize this moment.