Friday, January 16, 2004

Elusive Global Healing

Sorry for the absence. Been on vacation in Florida. Steven still seems to be doing the best job of explaining global imbalances and the problems it poses, so I am posting his material again. At this point in time, many more people need to awake from their Rip-Van-Winkle sleep! We need international financial architecture reform, now! On another note check out Bonobo's new look.

Morgan Stanley

Steven Roach

With the world economy rebounding smartly in the second half of 2003, talk of global healing is back in the air. But compared with the circumstances prevailing in late 1998, when the stage was set for a spectacular rebound from the Asian financial crisis, today’s global economy is in a very different place. Despite the hopes and dreams of momentum-driven financial markets, I would attach a slim probability to another bout of global healing.

It’s hard to forget the stunning turnaround in the global economy in 1999 that we dubbed “global healing.” For me, it was just about the last time I was bullish on global growth prospects. Back then, the confluence of an ever-deepening Asian financial crisis, together with the failure of Long-Term Capital Management, had pushed the world economy to the brink of something awful. Financial markets had effectively seized up, pricing assets for the twin perils of a deep recession and deflation. In the midst of that despair in late 1998, we turned bullish on the global outlook. The world economy had gotten the functional equivalent of a massive tax cut — more than $160 billion in IMF-led bailouts worth about 0.5% of world GDP, coordinated G-7 monetary easing, and a disinflationary shock that boosted consumer and business purchasing power in the developed world. Just as it seemed that the crisis was spiraling out of control, the seeds were, in fact, being sown for a powerful revival. Global healing took a bruised and battered world by storm. Why can’t it happen again?

A replay of this glorious scenario is highly unlikely today, in my view. The main reason is that today’s global economy is far more unbalanced than the world was five years ago when global healing took hold. The evidence is compelling: As I have noted repeatedly, the US accounted for fully 96% of the cumulative increase in world GDP over the 1997–2002 period — the most lopsided mix of global growth on record. A similar conclusion can be drawn from the dispersion of the world’s current-account deficits and surpluses. In 1997, prior to the onset of the Asian crisis, the world’s external deficits (mainly America) amounted to –0.8% of world GDP, whereas the world’s surpluses (mainly Asia and, to a lesser extent, Europe) totaled 0.7% of world GDP. By contrast, in 2003, the disparities had widened dramatically: Deficits hit –1.6% of GDP, whereas surpluses amounted to about 1.1%. (Note: Due to long-standing statistical anomalies, the world’s current-account surpluses and deficits never seem to add up). In other words, the spread between the world’s current-account surpluses and deficits in 2003 was about twice as wide as it was in 1997. ...Continued

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