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Tuesday, June 24, 2003

An Historic Moment?

Well, I'm back from my weekend break, and I'm still stuck in the locutorio, France Telecom subsidiary Wanadoo are still benefiting from their contractual priviledge of charging while not providing service. Well, I lived through petrol rationing in the 56 Suez crisis, so I reckon I can ride this one out too. meanwhile the historic moment in the title is not my anticipated reconnection, but Steven Roach's assessment of the global macro picture. I can't help agreeing with him about the moment, even if I don't buy all the diagnosis and cure.

Far be it for any of us to render historical verdicts on current events. Yet to me it feels as if this is a pivotal moment for macro — one that challenges many of the key principles that have long shaped the modern era. At work is a collision of several mega-forces: Global imbalances have never been more acute. Global deflation has never been a greater risk. And there has been an extraordinary confluence of asset bubbles — from Japan to America. Moreover, the Authorities have never been so lacking in conventional weapons to meet these challenges. There’s an understandable bias to minimize the risks and trust the System to find a way out. The recent rally in global equity markets underscores those biases. But the basic question remains unanswered: Can equilibrium be restored easily in a dysfunctional global economy?........

I guess that’s what troubles me the most — the presumption that there is a quick and relatively painless fix to all that ails the world. I don’t buy that any more than I bought the “market-tested” rhetoric of the New Paradigm in the late 1990s. In my opinion, the world is facing its toughest array of macro problems since the end of World War II. The answers do not lie in the ideology of monetarists and supply-siders. Instead, I continue to believe that resolution will ultimately have to come more in the form of a rebalancing of an unbalanced world. And that can only occur with a realignment of the world’s relative price structure. Inasmuch as the dollar is the world’s most important relative price, the conclusion is fairly straight-forward — the dollar will have to continue to come down until this lopsided world finds a new and sustainable equilibrium. The main problem with this resolution is that it is too painful — that it can’t occur without the heavy lifting of structural reform in places like Europe and Japan. Such reforms challenge deeply entrenched political power structures and social contracts.

Like it or not, we’re in uncharted waters, both in diagnosing the world’s problems as well as in prescribing the remedies. Today’s dysfunctional global economy is replete with massive external imbalances and heightened deflationary risks. Traditional policy options have all but been exhausted. The Authorities are now being forced to improvise. Notwithstanding newfound optimism in world equity markets, there are no guarantees of policy traction in this post-bubble era. I never dreamt that I would live to see such profound challenges to core macro principles.
Source: Morgan Stanley Global Economic Forum

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