Savers spend, spenders save

BUSINESS COMMENT

Policies that encourage such rebalancing will help world economy

Stephen Roach

 

DEBATE rages over the endgame For the Great Recession. The broad consensus among policymakers and business leaders is that the world economy is in the midst of its worst decline since the 1930s Depression. There is a presumption that another depression is a distinct possibility if immediate steps are not taken to contain the downward spiral.

This debate misses the point — and dangerously so. Monetary and fiscal authorities have made it quite clear that they are prepared to do everything in their power to avoid such an outcome. I suspect they will ultimately get their way. Yet there is a serious risk to this policy strategy. By fixating on the anti-depression drill, the authorities are failing to address the root cause of the current crisis and recession — the lethal unwinding of unsustainable global imbalances.

Unfortunately, the myopia of the political cycle pre-ordains such a policy response. A resumption of economic growth is all that ever seems to matter for poll-driven politicians. Tough problems are always deferred with a vacuous promise to tackle them in due course. Then that due course always is pushed out further and further in time.

This is the mindset that got us into this mess. The United States’ current account deficit, one of the most glaring manifestations of an economy built on quicksand, did not 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 American economy and a willingness of consumers to live well beyond their means through extracting equity from over-valued homes.

The denial was global in scope. Export-led economies were delighted to draw support from bubble-dependent American consumers. And now, that house of cards has collapsed.

The Depression Foil might well end up recreating this madness. Once again, the US is leading the charge. The Fed wants to get credit flowing again to still over-extended American consumers, Congress wants to stop the bleeding in the housing market, and the White House wants consumers to start spending again.

Put it together and it all smacks of a dangerous sense of deja vu — promoting a false recovery by kick-starting over-extended American consumers to borrow once again by leveraging their major asset.

The Depression Foil blinds policymakers and politicians to the imperatives of global rebalancing. This crisis and the wrenching recession it has spawned are all about a destabilising shift in the mix of global saving and aggregate demand.

That mix needs to be redressed. The excess spenders in the US need to save and the excess savers in the rest of the world, especially in Asia, need to spend. Policies that encourage such rebalancing will put the world economy on a more stable and sustainable path and go a long way in avoiding another crisis like this.

Yet, the Depression Foil makes it exceedingly difficult for an unbalanced world to get its act together. The recently concluded G20 summit was notable for its failure to address this critical challenge. Policymakers and politicians need to move beyond their depression fixation and aim at achieving a better balance in the global economy before it is too late.

The writer is the chairman of Morgan Stanley Asia. This is an abridged version of a commentary that first appeared on Bloomberg yesterday.

From TODAY, Business – Tuesday, 14-April-2009