Stephen Roach: Thanks, Ben Bernanke

by: Stephen Roach

Excerpt from Morgan Stanley economist Stephen Roach's June 9th essay:

I think there is an important implication of the Fed’s hair-trigger response to an arguable inflation scare: After years of excess accommodation, the US central bank may be trying to reclaim the "tough-guy" image that a credible monetary authority needs. And there is good reason to believe this sentiment is global in scope. Recent monetary tightenings by the ECB and by central banks in India, Korea, Turkey, South Africa, and even Iceland all speak to a similar disciplined mindset. And these actions all have comparable implications for the global liquidity cycle and world financial markets -- reducing the flow of high-octane fuel that has fed the multiple asset bubble syndrome of the past seven years.

I am not saying that central banks are united in their views in targeting asset markets. But I do believe that a strict adherence to inflation targeting may have become a foil that now enables the authorities to turn their attention to other important issues -- namely, the increasingly dangerous excesses of a very powerful liquidity cycle.

This sudden outbreak of monetary discipline around the world very much fits the script of my newfound optimism on global rebalancing. The world’s biggest imbalance -- America’s current account deficit -- is a direct outgrowth of a property-bubble-induced shortfall of income-based saving. Lacking in domestic saving, the US must import surplus saving from abroad in order to grow -- and run massive current account and trade deficits in order to attract foreign capital. To the extent central banks have promoted asset-bubble-related global imbalances by overly accommodative monetary policies, an emerging bias toward monetary discipline is a very encouraging development on the road to global rebalancing. While it’s "tough love" for bruised investors, this may well end up being the requisite correction that clears the decks for the next upleg in the markets. Thank you, again, Ben Bernanke.