Nouriel Roubini's Global EconoMonitor

Archive for October, 2004

  • New Global “Soft Patch” or the Beginning of a “Deep Murky Swamp”?

    While markets are waiting for the third quarter US GDP figures, everyone’s attention is now concentrated on the fourth quarter and 2005 growth prospects for the US and the global economy. In Q3 the US recovered from the Q2 soft patch (as GDP growth is expected to end up in the 4% range for the past quarter); but now, with oil prices above $50, the concern is not any more that we are in a “soft patch” but rather falling in a deep murky swamp of global growth slowdown. The most alarmed are folks such as Steve Roach who is now predicting that the US , Europe and Japan will reach a stall speed of 1.5% growth by the beginning of 2005. And indeed the US flow of macro news has been poor: continued weak job numbers in september, falling consumer confidence while retail sales are holding, falling housing markets, weak industrial production, slow income/wage growth, increased inventory build-up, soft durable goods figures, large and growing trade deficit, mixed signals from inflation (with now core up more than expected).

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  • BW2: Are we back to a new stable Bretton Woods regime of global fixed exchange rates?

    What is the hottest current policy debate among academic geeks, policy wonks and market gurus? The Bretton Woods 2 hypothesis: i.e. the view that the world is effectively back to a regime of global fixed exchange rates pegged to the US dollar like the original Bretton Woods regime that lasted from 1945 to 1973. Global fixed exchange rates? This BW2 hypothesis has been forcefully advanced by three economists affiliated with Deutsche Bank, namely David Folkerts-Landau (Global Head of Research at DB), Peter Garber (Global Strategist at DB) and Michael Dooley (formerly head of EM research at DB and now back to academia at UC Santa Cruz). David, Peter and Mike are three extremely smart folks and when they speak and write, people listen to them. They have recently written four papers (An Essay on the Revived Bretton Woods System; The Revived Bretton Woods System: The Effects of Periphery Intervention and Reserve Management on Interest Rates & Exchange Rates in Center Countries; Direct Investment, Rising Real Wages and the Absorption of Excess Labor in the Periphery; and The US Current Account Deficit and Economic Development: Collateral for a Total Return Swap ) where they argue that the international financial system is experiencing today the reemergence of a new Bretton Woods regime of global fixed exchange rates (Bretton Woods 2 or BW2). In this view, this new BW2 regime will allow the U.S. to finance its large current account deficit at a low cost for a long time; consequently, the United States growing external indebtedness poses few immediate concerns. So, while everyone else is worrying about the US current account deficits and the global imbalances, the three DB gurus tell us not to worry about them and enjoy the US current account deficit.

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  • The employment report, the US $ and the US current account deficit

    The dismal employment report today – a miser increase in jobs of 96K in September – led to the expected textbook asset markets reaction: stocks fell, bond prices rallied and long yields fell while the dollar sharply depreciated. In spite of the continued economic soft patch and the dollar weakening, the US current account deficit keeps on growing (with only a modest improvement in the trade balance in July) as the fiscal deficit is still out of control: we are on the way to record current account deficit of over $600 billion in 2004.

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  • Bush and Kerry Effects on the Stock Market and Bond Market

    Recent conventional wisdom on the financial markets impacts of a second Bush administration or first Kerry administration is that Kerry would be good for the bond market (pushing yields down) while Bush will be good for the stock market.

    This conventional wisdom is only partially correct. It is certainly the case that fiscal deficit reduction will be more significant during a Kerry administration as one of the key elements of deficit reduction will have to be an increase in taxes (something that Kerry plans to do while Bush would like to make his unsustainable tax cuts permanent). Deficit reduction will ensure, over time, that bond yields do not creep up excessively because of unsustainable fiscal deficits. Note that bond yields have remained low so far, in spite of growing deficits, because of low short rates (the Fed Funds rate is still only 1.75%), softness in the economy and the labor market, more stable inflation outlook and the massive purchases of Treasuries by Asian central banks.

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  • Steve Roach on the Global Imbalances…and China’s FX regime…

    Steve Roach, chief economist at Morgan Stanley, correctly pointed out this week that the global current account imbalances are unsustainable and cited, in that context, my paper with Brad on the US current account deficit as providing the “best forecasts” of the future trends in the US current account. He also agrees with our view that the “Bretton Woods II” new regime of fixed exchange rates (the dollar axis between US and Asia) is not sustainable. In addition to the points in our paper, he stresses how this new regime is creating severe financial problems for China.

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