As a long standing Stephen Roach admirer, I am becoming more and more frustrated these days with the seeming montonic nature of his 'bubble' and 'post bubble' explanatory framework. (This reminds me of the joke about even stopped clocks being right twice a day). He clearly hasn't given any thought at all to changing demography and its implications. This means he doesn't understand either Europe or Japan's problems at all (Doesn't he bother to read his colleagues Fels and Guzzo :) ). For similar (but opposite reasons) I think that the Chinese 'long wave' may be so broad and so deep that it will prove more resilient to business cycle ups-and-downs than many expect. However there is still *one thing* I do agree with Roach about:
"The problem arises when that disinflation occurs from a low starting point. The lower the pre-recession rate of inflation, the closer a cyclical disinflation can push the aggregate price level toward outright deflation. That was very much the case with America’s deflation scare of mid-2003: The post-bubble recession of 2001 hit a US economy whose core CPI inflation rate was running at only 2.2% at the prior cyclical peak in early 2000. If a recession were to occur today when core inflation is also running at just a 2.2% pace, the resulting cyclical disinflation could well give rise to yet another deflation scare."
As Bonobo and Afoe readers know I've been arguing this for some time myself. However, I don't think this is simply being 'optimistic' about inflation: either Germany, or the US (depending on the relative currency values) or both could join Japan 'mired in deflation' the next time we bottom, and personally (and here I am very 'Keynesian')I would prefer a larger helping of inflation to that anytime.
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