Stephen Roach, Chairman of Morgan Stanley Asia says there is ample economic slack in the global economy, and an absence of inflationary pressures. Fiscal contraction and fiscal consolidations could raise the distinct possibility of a double-dip recession. The current non-inflationary or benign inflation climate could give way to a more severe inflationary climate down the road, as efforts to keep economic stimulus in place remain in force.
Roach says that economic policymakers may be setting the stage for the next economic crisis by replaying the post-equity bubble decisions and leaving stimulus measures in place for too long.
Look, excess sovereign debt is a problem that is endemic in the developed world right now. And right - at this point in time, we still have ample slack in the global economy and a notable absence of inflationary pressures. But with central banks likely to remain excessively accommodative for - to use Ben Bernanke's word, an extended period of time with fiscal authorities likely to keep stimulus packages in place for equally extended periods of time. Then you know the current benign environment for inflation could give way to more serious inflation down the road and then the bond market vigilantes will be well positioned to drive longer term sovereign bond yields a good deal higher.
On interest rates...
I think policymakers are making a mistake by pretty much replaying the movie that we saw in the aftermath of the bursting of the equity bubble, keeping monetary policy and fiscal policy in stimulative positions for too long, injecting a lot of excess liquidity into markets and economies and it ultimately ends up setting the stage for the next crisis. This is a recipe that did not work out well in the period following the bursting of the equity bubble and I see no reason to believe it's going to work differently this time either.
Where to invest?...
I think a soft landing in China is the right thing at the right time and lays out very promising opportunities in that country. I'm also very optimistic in India, which has gotten its macro-act together in recent years, but certainly does need some monetary tightening here to address a significant deterioration in domestic inflation.
Here is the full transcript of the interview with Stephen Roach:
(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)
STEVEN ROACH, CHAIRMAN OF MORGAN STANLEY ASIA, TALKS ABOUT EUROPEAN ECONOMIES
JUNE 15, 2010
SPEAKERS: STEVEN ROACH, CHAIRMAN, MORGAN STANLEY ASIA FRANCINE LACQUA, REPORTER, BLOOMBERG NEWS
3:34
FRANCINE LACQUA, REPORTER, BLOOMBERG NEWS: Well, moody blues for Greece, the debt-strapped country's had its credit rating slashed to junk as default fears refuse to go away. While assessing sovereign debt crisis, I'm joined from Hong Kong by Stephen Roach, the Chairman of Morgan Stanley Asia. Mr. Roach, thank you so much for joining us on the show today. And it does seem like we're just not getting the good news that we're hoping for out of Europe. How concerned are you about the situation over here?
STEVEN ROACH, CHAIRMAN, MORGAN STANLEY ASIA: Well, Francine, I think it's pretty clear that post-crisis recoveries tend to suffer from the combination of deleveraging and periodic aftershocks. We're seeing signs of both and Europe, in my opinion, is very much an aftershock of the subprime crisis, which led to sharp recessions and revenue shortfalls in the heavily indebted economies of Southern Europe.
And the deficit to GDP, debt-to-GDP ratios have blown up as a result. And this region is now going through a wrenching, will have to go through a wrenching fiscal consolidation, which will take up protracted toll on economic activity and look potential spillover effects to Northern Europe and the broader global economy.
LACQUA: So are you concerned just like the U.S. is saying that actually the austerity measures in Greece will push this region down to possibly a double-dip recession?
ROACH: Well, I think for the economies in Southern Europe; Greece, Portugal, with some potential risk in Spain and Italy, fiscal contractions, fiscal consolidation are - will certainly raise the distinct possibility of double-dip recession. For the broad Euro-region as a whole, I think it will be able to avoid an outright contraction, but it will be very weak and anemic growth. Again, with broader implications to the rest of the world, which depends heavily on cross-border linkages through trade flows into Europe.
LACQUA: But, Mr. Roach, how concerned are you actually about the credit freeze for the European banks? The ECB is giving immense support to these banks, but a lot of the analysts are saying this could end up like a second Lehman Brothers here in Europe. Do you share those concerns?
