'Grow now, ask questions later' formula will end in tears

Financial Times
By Stephen Roach
Published: March 10 2009 02:00 Last updated: March 10 2009 02:00
A crisis-torn world is in no mood for the heavy lifting of global rebalancing.
Policies are being framed with an aim towards recreating the boom. Washington wants to get credit flowing again to indebted US consumers. And exporters - especially in Asia - would like nothing better than a renewal of demand led by the world's biggest consumer.
It is a recipe for disaster.
That is not to say that the fiscal and monetary medicine being administered will not alleviate symptoms of distress. But if the policies end up perpetuating the imbalances that got the global economy into the mess, the next crisis will be worse than this one.
Lest I be accused of fearmongering, it pays to replay the tapes of a decade ago.
Then, the Asian crisis was viewed as the worst since the Great Depression. As contagion spread from Asia to Russia, Brazil and a large US hedge fund, the turmoil was dubbed the first crisis of modern globalisation. Alan Greenspan, then Federal Reserve chairman, was stunned by an unprecedented seizing up of capital markets. Sound familiar?
As appropriate as those superlatives might have seemed in the late 1990s, they ended up depicting a squall compared with the current tsunami.
That is the point. Until an unbalanced world faces up to its chronic imbalances, successive crises are likely to be increasingly destabilising.
While it is hard to believe that anything could be worse than what is happening today, I can assure you the same feeling was evident in late 1998.
Ironically, the seeds of the current crisis may have been sown by policies aimed at arresting the Asian crisis.
Then, US authorities did everything they could to ensure that the crisis would not infect the real economy. The Fed's three emergency rate cuts in late 1998 worked like a charm. The US consumer never looked back. The personal consumption share of real GDP rose from 67 per cent in the late 1990s to 72 per cent in the first half of 2007. The US antidote to the Asian crisis was the greatest consumption binge in history.
Bruised and battered Asia could not have asked for more. The bingeing US consumer was Asia's manna from heaven. It reinforced the region's conviction over its export-led formula for economic progress. Developing Asia was quick to up the ante, pushing the export share of its GDP from 36 per cent in 1997-98 to 47 per cent by 2007.
It did not stop there. An increasingly integrated Asian economy discovered the synergies of a Chinacentric supply chain. Moreover, commodity producers - especially Australia, Russia, Canada and Brazil - drew sustenance from a resource-intensive, export-led Chinese economy.
So it was in the aftermath of the Asian crisis. Imbalances became the rule, not the exception.
Yet just as the US was steeped in denial on the demand side of the global economy, a similar complacency was evident on the supply side.
That was true of the US consumption binge - accompanied by record debt burdens, zero saving rates, and a multiplicity of bubbles in asset markets (equity and property) and credit.
It was also true of Asia's export boom, which spawned ever rising current account surpluses, reservoirs of foreign exchange reserves and a mega-bubble in commodity markets.
Imbalances were a problem for another day. All that mattered then was the post-crisis fix.
That is the mindset today.
To its credit, the Obama stimulus package is framed around the imperatives of investing in infrastructure, alternative energy technologies and human capital. But the Washington subtext is far more short-term, focused on increasingly urgent efforts to jump-start personal consumption.
Towards that end, the Fed, the Treasury and the Congress are all eager to restart borrowing for over-extended consumers and prevent foreclosures of indebted homeowners. The costs of inaction are billed as prohibitive. The US body politic is perfectly prepared to ignore the debt implications of its stimulus actions.
In Asia, hopes are focused on the mirror image of this tale. The questions Asians ask these days pertain to the state of the US consumer.
Apparentlyit is too hard for Asian policymakers to establish robust social safety nets and stimulate internal private consumption. Unbalanced Asian economies are desperate for unbalanced US consumers to start spending again and spark another post-crisis recovery.
Grow now, ask questions later. That has again become the mantra for an unbalanced world in crisis.
Yet that is the biggest risk of all for global policy. The G8 failed to embrace the imperatives of global rebalancing after the Asian financial crisis. The G20 seems destined to follow the same script at its summit in early April.
What a reckless way to run the world.
Stephen Roach is chairman, Morgan Stanley Asia