Some musings, rather than well-formed questions. Even if Greenspan is right about financial markets evenutally bringing all these imbalances back into some sort of self-correcting balance, surely we've relearned one lesson over the past decade: financial markets overshoot, it takes some pretty liquid goods, asset and labor markets to find a new price level quickly where they'll clear at a new sustainable "equilibrium," and the shocks to the "real" economy can be quite dramatic (whether it's the Asia crisis or the "dot com bubble" bursting). The Japanese still haven't cleaned up their overbuilt real estate market from their "bubble economy" of fifteen yeras ago, and it continues to handicap their repeated attempts at financial system restructuring, which in turn has reduced the pace of needed industrial restructuring.
By comparison to the rest of the world, domestically the US clearly doesn't suffer from those sorts of sluggish markets. But there are some external structural factors in the international political economy that affect the international markets and that will make the "real" side of adjustment more challenging. Let's just take a couple of "China factors": the geopolitical dimensions of China's rising demand for energy, and China's understandable reluctance to undergo significant currency appreciation that could have major negative effects on its domestic financial system the development of industrial production.
Both factors may draw out the adjustment process not only in China but in countries that are major importers of energy and for whom China is a key trading partner-- a description that includes not only the US but a significant part of the OECD. A drawnout process doesn't necessarily mean less pain. If the financial markets price in not only all the risk and uncertainty but also overshoot, the global system may receive financial shocks that transmit the pain, but structural impediments may slow down adjustment on the "real" side that would be needed to bring the overall system back in balance.
Hmmm... wonder what Bob Rubin thinks about this.
[UPDATE 10-31-04] by nadezhda
Guess I'm not the only one doing some fretting on this score. A piece written by Jack Crooks, a currency trader and advisor, in the Asia Times trashes Greenspan and central bankers more generally for trashing the world economy. Although it is written from a strict monetarist vantage point, there's a great deal to be said for the author's view of the dangers of "pushing on a string," which is what we seem to have been doing lately. Lack of liquidity doesn't appear to our problem.
And he summarizes some warnings from two leading Wall Street economists:
Here are three major risks to the current arrangement of Asians funding the US, as perceived by Stephen Roach, chief economist at Morgan Stanley.1. The possibility of protectionism. If Asians don't adjust their currencies, ie, let them appreciate against the dollar, Roach expects the euro will "bear the brunt of what could be a very severe impact" and appreciate considerably. This could force the hand of European politicians and US politicians alike.
2. Rapid accumulation of foreign exchange reserves. This could cause financial instability in Asia.
3. The endgame of Asian development. At some point Asia will have to focus on stimulating domestic demand, which will absorb its surplus savings - its role as "export-led financier of American consumers" is in doubt.
It's no wonder some expect the US to revisit the stagflation of the 1970s. Morgan Stanley's Joachim Fels recently gave these reasons:1. The world economy has to digest a major increase in oil prices.The Fed has flooded the globe with credit. And it isn't working, to say the least. But, amazingly, some believe the Fed has achieved success. I would contend, any more of this kind of success and we'll soon see the words "banana republic" increasingly used in the same sentence with "the United States".
2. Just as in the 1970s, monetary policy has been highly expansionary, with real short-term interest rates in the major countries in negative territory for an extended period of time.
3. Government budget deficits rose, partly reflecting an expansionary fiscal policy stance to overcome recession.
4. The established industrialized nations in Europe and North America faced major new competitors in world markets in the 1970s, notably Japan and South Korea.
5. Worldwide productivity growth slowed in the 1970s - we could be on the tail end of the information-technology-induced growth cycle that started in the mid-1990s.
And Crooks has lots more cheery things to say on related topics, with lots of charts as well.
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