财经观察 1583 --- Insight: Post-bubble realities

Insight: Post-bubble realities
By Stephen Roach 

Published: December 2 2008 16:29 | Last updated: December 2 2008 16:29
The textbooks have little to say about post-bubble economies. That makes the current prognosis all the more problematic. A profusion of asset bubbles has burst around the world – from property and credit to commodities and emerging market equities. That’s an especially rude awakening for a global economy that has become dependent on the very bubbles that are now imploding. It is as if the world has suddenly been turned inside out.

The American consumer is a case in point. Real personal consumption expenditures are on track for rare back-to-back quarterly declines in the second half of 2008, at roughly a 3.5 per cent average annual rate. Since 1950 there have been only four instances when real consumer demand fell for two consecutive quarters. Declines will exceed 3 per cent in both quarters for the first time. Never before has there been such an extraordinary capitulation of the American consumer.

Similar extremes are evident elsewhere. Europe and Japan have joined the US in the first synchronous G3 recession of the post-second-world- war era. Nor has the developing world been spared. While most big developing economies should avoid outright contractions in overall output, sharp deceleration is evident in China, India and Russia. Hong Kong and Singapore – Asia’s two prosperous city states – are both in recession. Moreover, reminiscent of the Asian financial crisis of 1997-98, the currencies of South Korea, Indonesia and India are under severe pressure. As the commodity bubble implodes, a similar boom-bust pattern is unfolding in Australia, New Zealand, Canada and the Middle East.

Crises invariably trigger finger-pointing. This one is no exception. Global observers have been quick to blame the US, arguing that it’s all about the excesses of Wall Street and America’s subprime fiasco. Some would take it even further and condemn the freewheeling model of market-based capitalism. Let the record show, however, that while the US certainly made its fair share of mistakes, the rest of the world was more than happy to go along for the ride.

That’s especially the case in Asia. China and other producers upped the ante on their export-led impetus to economic growth. By 2007, the export share of Developing Asian gross domestic product exceeded 45 per cent – fully 10 percentage points higher than the share prevailing during the Asian crisis of the late 1990s. Moreover, the Chinese led the way in recycling a disproportionate share of their massive reservoir of foreign exchange reserves back into dollar-based assets. That kept the renminbi highly competitive, as any export-led economy likes, but also prevented US interest rates from rising – keeping the magic alive for bubble-dependent American consumers. In effect, the world’s bubbles fed off each other.

Nor did anyone force the German Landesbanks and the Swiss universal banks to invest heavily in toxic assets. And the new mega-cities of the Gulf region – Dubai, Doha, Riyadh, and Abu Dhabi – owe their very existence to the oil bubble. Now all of these bubbles have burst, leaving a bubble- dependent world in the lurch.

A post-bubble shakeout is likely to be the defining feature of the global economic outlook over the next few years. Three conclusions are most apparent:

One, do not analyse a post-bubble recession as a normal business cycle. As economies that levered their asset bubbles to excess – especially the US – come to grips with tough post-bubble realities, a powerful deleveraging will ensue. That could prolong the duration of the downturn, as well as inhibit the vigour of the subsequent recovery.

Two, on the demand side, focus on the American consumer – the biggest and most over-extended consumer in the world. With personal saving rates still close to zero and debt loads remaining at all-time highs, US consumption is heading for a Japanese-style multi-year adjustment. After 14 years of nearly 4 per cent average growth in US real consumer spending, gains could slow to 1-2 per cent over the next 3-5 years. And no other consumer in the world is likely to step up and fill the void.

Three, on the supply side, focus on China. Industrial production growth has been cut in half in China – rising at just 8 per cent year on year in October following five years of average gains of about 16.5 per cent. With the global economy in recession, this outcome should hardly come as a surprise for a Chinese economy that has seen its export share of total gross domestic product rise from about 20 per cent to nearly 40 per cent over the past seven years. China is paying a price for its own imbalances – especially a lack of support from internal private consumption.

In short, look for a post-bubble world to remain in recession throughout 2009, followed by an anaemic recovery, at best, in 2010. In an era of globalisation, we became intoxicated with what cross-border linkages were able to deliver on the upside of a boom. But as that boom went to excess and spawned a lethal globalisation of asset bubbles, the inevitable bust now poses an exceedingly tough hangover.

The writer is chairman of Morgan Stanley Asia