Stephen Roach was the third interviewee in the Wall Street Journal’s new video format "the Big Interview." He sees a weak recovery and believes a double dip is more likely than the consensus. Roach also talks about the Federal Reserve and why he would not have voted for Ben Bernanke.
His case for a double dip is the one I have made (and I put the odds at 50-60%).
- Consumption by individuals represents 70% of economic activity.
- Households are still massively over-extended in terms of debt and they are unprepared in terms of savings.
- So, a weak recovery is predicated on a weak labour market and weak consumer spending
- Moreover, we can’t rely on property and credit bubbles to support excess consumption (unless policy makers can pull a rabbit out of the hat).
- So this puts us at permanent stall speed where any exogenous shock tips the economy into recession.
However, notice that Roach says he sees no need for the Fed to act any more aggressively than it is. This puts him on the hawkish side of the monetary debate now raging. He also says that Alan Greenspan’s policy of ultra-low rated in 2003 and 2004 were the wrong medicine for the post-bubble economy. Obviously that doesn’t answer the question as to whether higher rates would have caused a double dip. That said, Warren Mosler has said to me there is no evidence that interest rates are strongly correlated with GDP.
Roach also talks about the Chinese asset bubble. He admits things have gotten out of hand but he has faith in Chinese policy makers to get things right. I find him less convincing here. See Edward Chancellor’s Ten ways to spot a bubble in China on that score.
Also see Bair: Financial Reform Bill Will End Too Big To Fail with the Big Interview from two weeks ago. Last week’s piece was with Carol Browner on the BP spill.