‘Dismal science’ suggests more economic challenges ahead

Las Vegas—-Amid a dreary short-term U.S. and global financial outlook, Stephen Roach, Morgan Stanley's managing director and chief economist, offered ways the U.S. and world can perform better in the long run. Mr. Roach made his comments here, Oct. 10, as part of "The Resource Revolution Symposium" by Invensys plc (London).

By Control Engineering Staff October 11, 2002

Las Vegas— Amid a dreary short-term U.S. and global financial outlook, one economist offered ways the U.S. and world can perform better in the long run.

Beginning by characterizing economics as a ‘dismal science,’ Morgan Stanley’s Stephen Roach, managing director and chief economist, was introduced in a conference here as one of Wall Street’s most influential analysts. He set the tone by paraphrasing Woody Allen at a long-ago Columbia University commencement address, saying graduates could choose two paths: chaos, fire, and turmoil or despair and utter helplessness. ‘ `And I pray you choose the correct path,’ ‘ Mr. Roach quoted Mr. Allen as saying.

Boom and bust cycles in NASDAQ, over-investment in information technology, and a glut in telecommunications capacity have contributed to our present economic situation. Over-priced housing, the high dollar in global financial markets, and unnatural global dependence on U.S. consumer spending are other threats.

This U.S.-centric dependence has allowed other regions of the world to avoid some hard decisions within their economies, based on the unsustainable hope that U.S. consumer spending can continue at a rate high enough to cure the world’s woes, Mr. Roach suggests. Because of unemployment, job uncertainty, and a dangerously low 1% savings rate, U.S. consumers are trying to continue unnatural spending with a frenzy in home mortgage refinancing (to create more available capital). Another recession could occur if the real estate bubble bursts, a real threat given the 27% spike in real house prices over five years—the strongest five-year increase on record. The gap between that and private residence rent has never been higher—another warning sign.

Further, Mr. Roach says, expect a U-shaped, rather than V-shaped recovery curve, possible multiple economic dips, and risk of deflation…harmful when current debt payments cannot be supported because assets don’t appreciate as anticipated. If all that isn’t enough, lack of savings could make retirement an unachievable dream for many in coming years.

Mr. Roach made a direct link between high oil prices and recession and made a point of saying if current policies extend uncertainty or require our long-term occupancy of the Mideast, oil prices could stay high. Three weeks at $40 per barrel during the Gulf War brought recession. Previous downturns can be coupled with spikes in oil prices. Policies that lead to prices in the $20-something per barrel would have the effect of a global tax break and temporary economic boost.

Weakening the dollar, not currently popular politically, could also do some good for long-term global economic health.

Mr. Roach made the comments here, Oct. 10, as part of ‘The Resource Revolution Symposium’ by Invensys plc (London).

Control Engineering Daily News Desk
Mark T. Hoske, editor-in-chief