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U.S. economy’s atypical recovery may result in new crisis, says expert
NEW YORK, Aug. 6, 2018 (BSS/Xinhua) – While the U.S. economy is still trying to make a full recovery from the 2008 financial crisis, new uncertainties may put the
U.S. and the global economy in danger once again, an expert told Xinhua in a
recent interview.
Even though it’s very difficult to predict the future, yet “with
quantitative easing (QE) ending, risks mounting in an overvalued stock
market… a more disruptive outcome is quite possible,” Stephen Roach, former
chairman of Morgan Stanley Asia and a senior fellow at Yale University’s
Jackson Institute for Global Affairs, said .
STRUGGLING FOR RECOVERY
The U.S. economy has been struggling to make a post-2008 global crisis
recovery after the Federal Reserve (Fed) started the QE program to stimulate
the economy and increase liquidity.
“The absence of a classic vigorous rebound since the global financial
crisis means the global economy never recouped the growth lost in the worst
downturn of modern times,” Roach said.
The QE program, which is seen by Roach as the boldest policy experiment in
the modern history of central banking, was initially very successful in
arresting the financial crisis in 2009. However, subsequent rounds of QE were
far less effective and posed threats to sustainable economic growth.
The excess liquidity spilled over into both equity markets and the bond
market. While essential for income-short American consumers, it made the real
economy overly reliant on QE support of asset markets, Roach said.
QE also exacerbated America’s already severe income disparities. According
to the Congressional Budget Office, virtually all of the growth in pre-tax
household income over the QE period (2009 to 2014) occurred in the upper
decile of U.S. income distribution.
QE also blurred the distinction between fiscal and monetary policy, as Fed
purchases of government securities tempered the market-based discipline of
federal spending.
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Though this was not a big deal when debt-service costs were repressed by
the persistently low interest rates of the QE era, with federal debt held by
the public nearly doubling between 2008 and 2017 from 39 percent to 76
percent of GDP, and likely to rise considerably in the years ahead, “what is
inconsequential today could suddenly take on considerably greater
importance,” Roach pointed out
RISKS IN OVERVALUED STOCK MARKET
The current Shiller PE Ratio, which is based on average inflation-adjusted
earnings from the previous 10 years, stands at 32.67, a higher level than in
mid-2007, the brink of the subprime crisis.
Only twice in history has the ratio been higher than it is today – in 1929
, when the Great Depression started in the U.S., and in 2000, which saw the
after effects of the Asia crisis, the dotcom bubble bursting and other
crises.
“Those are not exactly comforting precedents,” Roach said.
In an increasingly asset-dependent U.S. and global economy, a sharp
correction in the U.S. stock market would be an especially worrisome
development, he warned.
“The outlook for 2018 is far from certain,” Roach said, “With tectonic
shifts looming in the global macroeconomic landscape, this is no time for
complacency.”
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