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.