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| Leading Analyst Warns of "Painful Aftershocks" of the US Bubble Economy A leading New York analyst, Stephen Roach of the Morgan Stanley, Dean and De Witter, has warned that now that "the equity bubble has popped, its time to come to grips with the painful aftershocks in the real economy". He goes on to argue that "there is no way to avoid a purging of the excesses that have built up over the past six years. The same is true of the global economy at large. Much of what was thought to be so permanent about the New Economy could be turned inside out. That leaves us with the most haunting question of all: how could we have let this happen?" Roach argues that America's stock market bubble had its counterpart in the real US economy, leading to unsustainable and dangerous distortions in both consumer and business decision-making. Moreover, to the extent that the global economy had become hooked on the bubble-like leadership of the US economy, the world itself may now be in a very precarious position. "In a post-bubble climate" argues Roach, the negative feedback loop from wealth destruction to the real economy could unleash a powerful - and painful - purging of long-simmering excesses". A bubble-driven United States was the engine of the global economy over the past several years. Roach estimates that the US directly accounted for nearly 30% of total world GDP growth since 1994 and close to 40% if the indirect effects of trade linkages are added in. Reflecting the imbalances of this brave new world, the US current-account deficit widened to a record 4 .5% of GDP - leaving America more dependent than ever on foreign financing of its investment bubble. In a post-bubble world, an unwinding of current account adjustments could put considerable pressure on US external financing. In other words, countries that are no longer able to sell (export) into US markets, could withdrawing financing for the US deficit. "The global movie of the late 1990s" says Roach, "would then start to run in reverse". |
