From Steve Roach, Chief Economist of Morgan Stanley, on Nov. 4
http://www.morganstanley.com/GEFdata/digests/20041104-thu.html"Since September 11, 2001, Bush Administration policies have been increasingly ideologically driven. That’s true of foreign policy and economic policy, alike. The election outcome points to more of the same. With respect to the US economy, that offers little chance of a traditional about-face on fiscal policy. Instead, under the guise of tax reform, temporary tax cuts are likely to become permanent. On the spending side of the equation, ongoing expansion of outlays for defense and homeland security are likely to swamp any cosmetic reductions in the nondiscretionary components of government expenditures. In that context, federal budget deficits of at least 3% of GDP are likely for as far as the eye can see. For a US economy that is lacking in private saving, this implies a chronic shortfall of overall domestic saving. And that, of course, spells an equally chronic US current-account deficit problem and all of its associated stresses and strains -- namely, foreign financing imperatives, dollar risks, and protectionist perils."
. . .
"Finally, there’s the fundamental flaw of the growth gambit, itself. To the extent that tax cuts aren’t self financing -- precisely the case with the supply-side initiatives of the 1980s -- there is the distinct possibility that the whole experiment will backfire. Depending on whether the Federal Reserve accommodates such a fiscal stimulus, ever-wider budget deficits could actually be accompanied by ever-increasing debt burdens, further reductions in personal saving, and renewed vigor in domestic demand. Given the shortfall of national saving that would imply, along with the high import propensity of incremental growth in domestic demand, there could be a significant further deterioration in already massive US current-account and trade deficits. That would only exacerbate America’s problematic dollar-interest-rate conundrum -- posing a huge risk to financial markets. Such are the perils of trying to grow your way out of an unbalanced macro climate.
These are heady days for the Bush Administration as it now looks forward to its second term. But unlike the case four years ago, the economic climate today in the US and around the world is beset with a number of profound imbalances. The ideological fervor of supply-side economics urges Washington to go for growth in attempting to finesse these imbalances. My guess is that US politicians will, indeed, play that hand. Yet it will require a new “coalition of the willing” to pull it off -- the Fed and other major central banks, as well as a broad consensus of politicians and policy makers around the world. With such a likely pro-growth gambit, the US is implicitly sending a very strong message to the rest of the world that it has no choice other than to go along for the ride. That puts Asia and Europe in the uncomfortable position of perpetuating their subservient position as suppliers of goods, services, and capital to saving-short Americans.
All this paints a tough picture of a new world order. In the years immediately ahead, the United States will be asking more and more of the rest of the global economy to keep America’s magic alive. I don’t think we in the US and those in the world at large truly appreciate the significance of this sea change. But America is now different and so is the global dynamic that spins out of a deeply entrenched US-centric paradigm. The election verdict of November 2 solidifies that conclusion beyond the shadow of a doubt, in my view. Maybe it will all work out perfectly, and those of us worried about deficits and imbalances will finally be put out to pasture. Anything is possible, but something tells me it’s not time for grazing just yet."
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