Friday, September 24, 2004

Highlights from today's edition of Stephen Roach's musings. In short: US slowdown + Chinese overheating + oil shock = bad economic news.
. . . I believe it�s appropriate to reinstate my warning of a 40% chance of US and global recession in 2005. . . .

I have long argued that the macro impact of any [oil] shock depends critically on context. A rapidly growing economy has a built-in cushion of resilience that enables it to ward off such blows. A slowly growing economy does not. That�s certainly been the experience in the US. . . . Today�s growth climate is strikingly reminiscent of pre-shock stall speeds of the past. . . .

With the Fed now back in a tightening mode and with the personal saving rate having recently plunged back through the 1% threshold, the case for sustained exogenous support of an overly-indebted, income- and saving-short American consumer is weakening. . . .

In an unbalanced global economy, America�s soft patch is the world�s soft patch. . . .

What I find interesting and somewhat disconcerting about China�s tightening campaign is the reluctance to rely on the traditional policy instruments of a market-based economy, such as the currency and now interest rates. Instead, Chinese authorities have relied far more on the administrative edicts that have long been at the heart of a centrally planned economy � namely, industry-specific constraints on the quantity of credit and project finance. . . .

Lacking in alternative growth engines and now facing the risks of a shock, financial markets have good reason to sound the alarm for another growth alert.

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