Soft landing or economic Armageddon?

Stephen Roach comes around to a more optimistic point of view

The constructive developments should not be minimized.  The recent plunge in oil prices is nothing short of stunning — 13% alone, for WTI quotes in the first three trading days of December.  I have no idea if this move is sustainable, but it has opened up a $7.50 gap from the $50 threshold that I have long felt would pose great risks to the global economy.  Moreover, the dollar’s weakness — despite the angst of the headline writers — fits the rebalancing script to a tee.  While euro and yen cross-rates are raising discomfort levels in Frankfurt and Tokyo, the dollar’s descent still looks like a well-managed soft landing to me.  In real terms, the Federal Reserve’s broad trade-weighted dollar index is down 15% from Febryary 2002 through November 2004 — a pace that equates to a decline of about 5% per year.  That’s a measured and encouraging adjustment path — provided, of course, the burden of currency realignment now spreads from Europe to Asia, including China. 

Furthermore the Chinese economy appears to be slowing in the appropriate, non-implosive fashion.  Roach’s bottom line?    

Even I have to concede that a number of positives have fallen into place recently.  I am on record of assigning a 40% probability to a global recession scenario in 2005…However, given recent favorable shifts in oil, the dollar, and China, I now believe that it is appropriate to reduce this risk to 25%.   

Note, however, that in his view (and mine) the U.S. still remains on a dangerous consumption binge when for demographic reasons more saving would be in order.  In my view the big problem lies in the long run, not the short run.  Now asset markets have a remarkable ability to compress long run problems into the here and now.  But how will this play out?  Most likely U.S. taxes in twenty or thirty years time will be much higher than today. Yes this will depress current asset prices but it should not, on its own, imply a current implosion or crash. Here is my previous post on economic Armageddon.


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