If you want a bear then Morgan Stanley’s Stephen Roach is the one to look for first. In today’s FT he argues that America’s asset prices (particularly property) must come down with a bump. Its not if, but when, in Roach’s view.
Rising asset prices convinced Americans that they could get by without saving. The US has instead imported about three-quarters of the rest of the world’s surplus savings. The US must raise its domestic savings rate, ergo the share of consumption in GDP must fall. Fiscal stimulus will only postpone the inevitable, argues Roach. Keynes is not the man for this crisis.
A US recession might derail the recent commodity-price boom. Ten years ago we would have said ‘will derail’ not ‘might’. But of course China is now a big global economic motor (though not quite as big as we thought after the World Bank reduced its estimate of China’s share of global GDP). And Japan’s economy now has more life in it (partly thanks to China). Investors in emerging markets (both equity and debt) have so far kept the faith, and bought into the decoupling story: the BRICS train can cheerfully head on down the tracks, while Uncle Sam’s engine goes over the ravine. All the copper that went into wiring-up Florida’s condos simply gets diverted to China and India, and Zambia’s copper miners can sleep easy at night.
Roach ends his piece with a homily — to sit up straight, and take your medicine: “The longer America puts off this reckoning, the steeper the ultimate price of adjustment. Tough as it is, the only sensible way out is to let markets lead the way”. Schumpeter is the man for the moment, not Keynes: let a crisis purge the excesses from the capitalist system, and thereby lay the basis for the next upturn.
So no avoiding the hangover. Except some will suffer more than most — and it won’t be the folks on Wall Street who got the US economy into this mess. Instead it will be the NINJAs (No Income, No Job, No Assets) mortgage-holders, the poorest US neighbourhoods (repossessions are accelerating), and those in casual employment who get sacked first.
The latter include America’s vast reserve army of illegal immigrants: illegal but welcomed with open arms by US construction, hotels and agriculture when times were good. So expect reduced remittance flows to Mexico and everywhere else south of the border when Jose the carpenter loses that job he got during the US housing-construction boom. And expect this to start showing up in Mexico’s capital account soon, shortly followed by Mexico’s poverty numbers. Some of the bare necessities of life are going to be harder to come by.