As per Bloomberg

Bloomberg.com

Obama Must Face Up to Frugal China, Says Morgan Stanley’s RoachInterview by Le-Min LimJan. 23 (Bloomberg) -- Stephen Roach, Morgan Stanley Asia Ltd.’s chairman, sees gloomy times ahead for the debt-saddled U.S. consumer and export-reliant Asia. Roach’s predictions usually mean trouble for economies. In 2004 he warned of a U.S. crisis caused by record deficits.Since taking up his post in April 2007, Roach, 63, has been spending about three weeks a month in Asia, a region that he says is “forward-looking” yet wedded to its old ways. In his book “The Next Asia,” scheduled for release later this year, Roach chronicles its changes and predicts the future. He spoke in his sun-soaked office on the 47th floor of the International Commerce Center in Hong Kong’s Kowloon district, where he gets an unblocked view of the harbor. Lim: The $800 billion U.S. stimulus package that is pending House and Senate approval is heavy on infrastructure spending and tax cuts for the middle- and lower-class. What else should President Barack Obama do to pull the economy out of recession? Roach: He (Obama) is saying to the American people: “Lower your expectations, there’s no quick fix.” If Washington goes for=2 0the silver bullet (such as rebates), then we are in trouble, so (it should) stay focused on what Obama does in terms of short term versus medium- to longer-term. The approach of focusing the stimulus on infrastructure, alternative energy technology, investing in human capital, providing some support to the innocent victims of recession through expanding unemployment benefits, that’s the best we can do right now. ‘Won’t End Recession’It won’t end the recession immediately, but it will set the U.S. up for a more sustainable and better balanced recovery. That’s what we need. Lim: Does this mean Asia shouldn’t count on U.S. consumer spending to get global trade and growth going again?Roach: The U.S. consumer is tapped out. We are in the early stages of a multiyear adjustment of U.S. consumption growth. The world, especially export-led developing Asia, has to get used to a more subdued spending climate for American consumers. The U.S. consumer is in a Japanese-like multiyear adjustment. TARP, zero interest-rate by the Fed -- is that going to change the need for the U.S. consumer to slow down? We have debt up to here, we have had massive asset-value destruction for property and equity and 401K plans; now, we have rising unemployment, job insecurity. ‘Height of Folly0Are consumers going to go back to spending the way they used to? I hope not. That would be the height of folly. The Obama administration gets it: we need to have American families once again live within their means. For American, the mantra for the Brave New World is “Live within your means.” What worries me is the pressure to get credit flowing again, get consumers back into credit-financed consumption. I don’t want to see that. Lim: What will the post-crisis economic world look like?Roach: (It might be a rebalanced world) that sees U.S. consumers spending within their means and other consumers especially in this part of the world turning into more substantial rather than frugal spenders. Do the Chinese authorities have the wherewithal to say, “This is the time we have to stimulate internal private consumption.” China is hit by the mother of all external demand shocks. Do they really believe it’s temporary, or lasting? This is a big debate. I was in Beijing over the weekend debating this with senior Chinese officials. They sort of think, “America will be back, we need to buy some time with this infrastructure stimulus, then we will be fine, then we’ll go back to export.” They talk the talk about stimulating private consumption, but I am not convinced they are contemplating the major moves they need to get internal private consumption going . Buying Dollar AssetsLim: Would China stop buying dollar assets?Roach: The Chinese are natural buyers of the dollar because their currency is a critical ingredient of the externally led growth dynamic. As much as the Chinese are worried about the path of the dollar and being overweight in dollar-based assets, until they develop Plan B by developing internal private consumption demand, they don’t have a big choice. The biggest risk in the reserve recycling story is if politicians in Washington decide to impose some type of trade sanctions on China. In that event -- and I would not rule that out in this very difficult environment -- then the Chinese won’t show up at the next (Treasuries) auction. Kindness of StrangersIf we impose trade sanctions, then they won’t be buyers of dollar-based assets. Then we have a dollar crisis because America’s need for external financing is going from heavy to gigantesque. We have a massive current-account deficit and now a trillion-dollar deficit. The current account is going to get worse again. For a savings-short economy, how do you keep growing unless you rely more and more on “the kindness of strangers,” to quote Tennessee Williams. Lim: Does that mean the dollar is safe as an investment haven, at least for now?Roach: As lo ng as the U.S. doesn’t do anything on the policy front either with trade policy or with monetary or fiscal policy that destabilizes the world. Look, we are in a challenging period right now. It’s reasonable to question the dollar’s longer-term role as an anchor to the system if we haven’t built savings and we are going into a trillion-dollar budget-deficit mode. Can we expect the U.S. to keep funding our economy without having significant repercussions on the currency or long-term real interest rates? It’s a big question. “The Next Asia: Opportunities and Challenges for a New Globalization” will be published by Wiley in May (304 pages, $39.95). (Le-Min Lim writes for Bloomberg News. This interview was adapted from a fuller conversation. The words in brackets are contractions of longer phrases.) To contact the writer on the story: Le-Min Lim in Hong Kong at lmlim@bloomberg.netLast Updated: January 23, 2009 04:49 EST
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