Tuesday, June 06, 2006

How's that rebalancing call working for you, Mr. Roach?

On May 1 of this year, Stephen Roach announced that the world, in an economic sense, was on the mend because world financial authorities were ready to take their medicine. The USDX had just fallen from 90 to 85, the Yuan was strengthening and interest rates were rising the world over.

Over the past month, however, these same authorities are starting to realize that the medicine does not taste good. Employment growth, according to the BLS has slowed appreciably and the US equity markets, along with those of other nations, have declined, in some cases substantially. Suddenly, there is talk that the Fed might need to pause. The Republican majority can ill afford a summer economic swoon going into November elections.

Also in the last month, Mr. Paulson has been named Treasury Secretary. Strangely, at least if we are to believe Mr. Roach's view of the authorities' willingness to take their medicine, the US$, the fulcrum for Mr. Roach's rebalancing, has stopped falling and rallied back to roughly where it was on May 1. Rising commodity prices in $ terms, to me a necessary consequence of a falling $, seem to have spooked the same authorities, who have trotted out the now very tired strong dollar mantra.

So are the authorities willing to take their medicine or not, now that they can see that there will be no rebalancing gain without consumer (a.k.a. voting citizen) pain? Perhaps in theory, but theory is not reality. We will see just how resolved the authorities are in the coming weeks.

Of course, things could get out of hand despite institutional support for the status quo, indeed, in my view, it takes just such a set of circumstances or constantly promising to get one's house in order, but just as constantly failing to follow through to produce such an outcome. Despair can drive men to do previously unthinkable things.

Going back a half millennia, it was widely known that the Vatican needed to reform (Jan Hus had railed against Church policies a century before Luther, and was burned at the stake for his efforts) and many promises were made to that effect, albeit only to be broken. I wonder when the monetary incarnation of Luther will appear posting his 95 theses on the doors of the Monetary Authorities' 21st Century Church.


Fullcarry said...


It seems to me as long as the government (both the Bush administration and the Fed) thinks it simply has a PR problem we will see no serious attempt at rebalancing.

Eventhough a dampening of the current elevated inflation expectations might delay our "day of reckoning," I don't see how we can avoid a total reformulation of the current monetary system.

And that reformulation must in the final analysis entail the repudiation of a good chunk of our debt.

jeff poppenhagen said...

Unkept promises, the bane of politicians, central bankers and cheating spouses. Interestingly, China seems to have caught on to the US game of running up deficits, then defaulting or debasing and starting the same process again (BW in 1971 and the Plaza Accord where foreign dollar holders were made to eat huge losses). Thought these comments from last Friday were among the most interesting that I have ever seen. Would love to hear your thoughts about this.

The director of China's National Economic Research Institute said that
China cannot have a freely floating currency until the U.S. sorts out
its twin deficit problem. He said the "dollar standard" needs to be
changed such that the twin deficit problem can have a long term solution;
"If you don't change the global monetary system with the dollar as
international currency, the U.S. problem will come up again and again and
again", meaning "that the Chinese will take responsibility for the
adjustment again and again and again, and that's not fair".