Stephen Roach on US, the Fed, China, and Europe

Stephen Roach says the Fed is going all in in support of QE and I agree. But what else are they going to do? Seriously. I have some thoughts; for example, I would never have had a zero rate policy. I do recognise the severity of the situation though. Look at Europe, for example. The ECB there has a hydra-headed problem with sovereigns and banks on the brink of insolvency and they too have expanded the balance sheet like mad. Yet the Europeans are in worse shape than the US, both in terms of sovereign crisis and lack of banking capital as well as in terms of the deleveraging process. None of this will be solved until banks take the credit writedowns and consumers have delevered. Europe is in recession and the US is still at stall speed.

China faces many of the same challenges with excess credit growth and fragile financial firms in the face of asset price deflation. They will socialise the losses associated with this to maintain growth to the best of their ability. Roach thinks the Chinese can do it. Nevertheless, I say growth must take a hit and a hard landing is still a threat.

Video below (hat tip Stevie B)

  1. Stevie b. says

    Hi Ed

    “None of this will be solved until banks take the credit writedowns and consumers have delevered”

    Don’t you think it’s too late for that now? The decision has already been made. The debt must be devalued, whatever the cost. Any deflation will never be tolerated even for 1 minute. The (few) bankers must be bailed, never mind the cost for (the many) everyone else. Give everyone $500/ $1000 / $whatever each. The PTB are gonna get us out of here by hook or by crook & screw us all. It doesn’t take a genius to be buying gold.

    1. Edward Harrison says

      Agree that the intention is to inflate by any means necessary but so far the Feds haven’t gotten it sorted. Buying up bonds ain’t gonna cut it. A friend of the more Austrian persuasion tells me that the issue is the ratio of unreserved bank credit to base money because the stock of unreserved bank credit dwarfs the stock of secular base money. 

      Bottom line: The Fed has a lot more buying to do unless they start purchasing real assets

    2. Anonymous says

      In the last few months I have been giving thought to deflation. Is it such a bad thing? It cannot go on indefinitely. Look at the electronics industry. Electronics have been in a deflationary process for decades, and yet they are still coping. The simple fact that people have to eat means that they will have to spend even if there is widespread deflation. 

      I am of the opinion that the debts need to be written off, fast. This will release income for expenditure or rebuilding savings. Deflation might actually rebalance economies even faster. It will force unsustainable debts to be written off. 

  2. Stevie b. says

    Ed – thanks and I’ll need to get my head round that one!

    As an extra thought, how about a break-up of the Euro?  Competitive devaluations (European and/or Global) are coming one way or another – one more reason to buy some gold.

    1. Edward Harrison says

      Yes, you can look at the Fed’s decision to extend rate easing out to three years as a one-up on the ECB’s policy of monetising peripheral debt and trying to get the euro down. Clearly this is a race to the top i.e. to the top of the balance sheet expansion pile. Jim Bianco gets it down well here:

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