Working Papers

Cranking Up the Wayback Machine on Stephen Roach

Stephen Roach accuses central banks of promoting ‘bubbles’ through excessively accommodative monetary policies.  So I thought I would dig up what Roach had to say at the time of the last Fed easing in 2003 (emphasis added):

the key objective for the authorities is to get the US economy back to a sustainable 4% growth pace - and hold it there for several years.  That’s the only way the deflationary gap between aggregate supply and demand can be closed once and for all.  A temporary growth spurt won’t do the trick, and yet that’s a classic symptom of a post-bubble economy.  I continue to fear that a post-bubble US economy plagued by a lack of policy traction will be unable to complete the critical transition from subpar to rapid growth.  And that underscores the ultimate risk: A persistence of subpar growth in the current climate could take the US economy further down the slippery slope toward outright deflation.

Once again, financial markets are telling me that I’m dead wrong.  The sharp run up in equities speaks of expectations of a sustained upturn in earnings that only a vigorous economy could deliver.  The recent sharp sell-off in Treasuries speaks of a bond market that now believes that the Fed has done enough to fight deflation and spark a snapback in the real economy.

Yet, if I’m even close to being right on the economy, the markets could well be blindsided by the next in a long string of relapses.

That’s the problem with Roach: you are either in a ‘bubble’ or a ‘post-bubble.’  The ‘bubble’ paradigm is an all-purpose analytical framework that explains everything and nothing.


posted on 18 June 2006 by skirchner in Economics, Financial Markets

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