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"The root cause of the current crisis and recession
the lethal unwinding of unsustainable global imbalances."
Western economies have woken up with a hangover from a drunken binge of
excess consumption and leverage that was reckless and irresponsible
Central banks “were empowered as the ultimate whistle-blowers in a financial system and they failed,
utterly failed to do their job in this period of excess”.
Stephen Roach, chairman of Morgan Stanley Asia,CNBC, 16 Sep 2009
“The West, especially the Anglo-Saxon economies, went on a drunken binge of excess consumption,
leveraged up the eyeballs with totally inadequate savings,” Roach said.
“It was reckless, irresponsible and it’s over,” he added.
Roach said that the consumption binge was not just the fault of consumers, but also of central bankers for leaving monetary policy too loose during times of strong economic growth.
Central banks “were empowered as the ultimate whistle-blowers in a financial system and they failed,
utterly failed to do their job in this period of excess”.
By fixating on the anti-depression drill, authorities are failing to address
the root cause of the current crisis and recession
-- the lethal unwinding of unsustainable global imbalances.
"the willingness of consumers to live well beyond their means by extracting equity from over-valued homes"
Stephen Roach, April 13 (Bloomberg)2009
I well remember the debate over America’s current account deficit -- one of the most glaring manifestations of an economy built on quicksand.
Some argued that there was nothing to worry about in a world that was now joined in a new “Bretton Woods II” paradigm
The problem with the apologists is that they failed to appreciate the deeper meaning of these imbalances.
The U.S. current account deficit didn’t emerge out of thin air. It was the outgrowth of an unprecedented shortfall of domestic saving.
Saving itself was depressed by the illusions of an asset- dependent U.S. economy and especially by
the willingness of consumers to live well beyond their means by extracting equity from over-valued homes.
Export-led economies were delighted to draw support from bubble-dependent American consumers.
And now, that house of cards has collapsed.
A dangerous sense of déjà vu:
promoting a false recovery by kick-starting overextended, saving-short American consumers to borrow once again by leveraging their major asset.
Fortunately, the American consumer is smarter than the quick-fix Washington mindset.
Shell-shocked families -- especially some 77 million baby boomers for whom retirement planning is an urgent imperative -- know they have no choice other than to save.
The personal saving rate has risen from 0.8 percent to 4.2 percent in the past six months alone,
and is on its way to a new post-bubble equilibrium that I would place in the 7.5 percent to 10 percent zone.
A persistently weak American consumer is viewed as a worrisome threat to another sickening down leg for a world in recession.
No economy can live beyond its means in perpetuity. Yet....the US thought it was different.
America’s current account deficit surged from 1.5% of GDP in 1995 to 6% in 2006.
Stephen Roach August 2008
Stephen Roach, former chief economist of Morgan Stanley, is now chairman of its Asian operations
The US consumer led the charge, with trend growth in real consumer demand hitting 3.5% per annum in real terms
over the 14-year interval, 1994 to 2007
– the greatest buying binge over such a protracted period for any economy in modern history.
Household sector indebtedness surged to 133% of disposable personal income by year-end 2007 – up over 40 percentage points from debt loads of 90% prevailing just a decade earlier. It was the height of folly. Yet the longer it lasted, the more it became deeply ingrained in the American psyche. And now it is finally over.
Full text /more or less/ at naked capitalism
Stein's Law: If something cannot go on for ever it will stop.
A simple explanation of a big, big problem