Stephen Roach Warns "The US Is Trapped In Perils Of Linear Thinking"

Tyler Durden's picture

Authored by Stephen Roach - former Chairman of Morgan Stanley Asia, originally posted at JewishBusinessNews,

The temptations of extrapolation are hard to resist. The trend exerts a powerful influence on markets, policymakers, households, and businesses. But discerning observers understand the limits of linear thinking, because they know that lines bend, or sometimes even break. That is the case today in assessing two key factors shaping the global economy: the risks associated with America’s policy gambit and the state of the Chinese economy.

Quantitative easing, or QE (the Federal Reserve’s program of monthly purchases of long-term assets), began as a noble endeavor – well timed and well articulated as the Fed’s desperate antidote to a wrenching crisis. Counterfactuals are always tricky, but it is hard to argue that the liquidity injections of late 2008 and early 2009 did not play an important role in saving the world from something far worse than the Great Recession.

The combination of product-specific funding facilities and the first round of quantitative easing sent the Fed’s balance sheet soaring to $2.3 trillion by March 2009, from its pre-crisis level of $900 billion in the summer of 2008. And the deep freeze in crisis-ravaged markets thawed.

The Fed’s mistake was to extrapolate – that is, to believe that shock therapy could not only save the patient but also foster sustained recovery. Two further rounds of QE expanded the Fed’s balance sheet by another $2.1 trillion between late 2009 and today, but yielded little in terms of jump-starting the real economy.

This becomes clear when the Fed’s liquidity injections are compared with increases in nominal GDP. From late 2008 to May 2014, the Fed’s balance sheet increased by a total of $3.4 trillion, well in excess of the $2.6 trillion increase in nominal GDP over the same period. This is hardly “Mission accomplished,” as QE supporters claim. Every dollar of QE generated only 76 cents of nominal GDP.

Unlike the United States, which relied largely on its central bank’s efforts to cushion the crisis and foster recovery, China deployed a CN¥4 trillion fiscal stimulus (about 12% of its 2008 GDP) to jump-start its sagging economy in the depths of the crisis. Whereas the US fiscal stimulus of $787 billion (5.5% of its 2009 GDP) gained limited traction, at best, on the real economy, the Chinese effort produced an immediate and sharp increase in “shovel-ready” infrastructure projects that boosted the fixed-investment share of GDP from 44% in 2008 to 47% in 2009.

To be sure, China also eased monetary policy. But such efforts fell well short of those of the Fed, with no zero-interest-rate or quantitative-easing gambits – only standard reductions in policy rates (five cuts in late 2008) and reserve requirements (four adjustments).

The most important thing to note is that there was no extrapolation mania in Beijing. Chinese officials viewed their actions in 2008-2009 as one-off measures, and they have been much quicker than their US counterparts to face up to the perils of policies initiated in the depths of the crisis. In America, denial runs deep.

Unlike the Fed, which continues to dismiss the potential negative repercussions of QE on asset markets and the real economy – both at home and abroad – China’s authorities have been far more cognizant of new risks incurred during and after the crisis. They have moved swiftly to address many of them, especially those posed by excess leverage, shadow banking, and property markets.

The jury is out on whether Chinese officials have done enough. I think that they have, though I concede that mine is a minority view today. In the face of the current growth slowdown, China might well have reverted to its earlier, crisis-tested approach; that it did not is another example of the willingness of its leaders to resist extrapolation and chart a different course.

China has already delivered on that front by abandoning a growth model that had successfully guided the country’s economic development for more than 30 years. It recognized the need to switch from a model that focused mainly on export- and investment-led production (via manufacturing) to one led by private consumption (via services). That change will give China a much better chance of avoiding the dreaded “middle-income trap,” which ensnares most developing economies, precisely because their policymakers mistakenly believe that the recipe for early-stage takeoff growth is sufficient to achieve developed-country status.

The US and Chinese cases do not exist in a vacuum. As I stress in my new book, the codependency of China and America ties them together inextricably. The question then arises as to the consequences of two different policy strategies – American stasis and Chinese rebalancing.

The outcome is likely to be an “asymmetrical rebalancing.” As China changes its economic model, it will shift from surplus saving to saving absorption – deploying its assets to fund a social safety net and thereby temper fear-driven precautionary household saving. Conversely, America seems intent on maintaining its current course – believing that the low-saving, excess-consumption model that worked so well in the past will continue to operate smoothly in the future.

There will be consequences in reconciling these two approaches. As China redirects its surplus saving to support its own citizens, it will have less left over to support saving-short Americans. And that is likely to affect the terms on which the US attracts foreign funding, leading to a weaker dollar, higher interest rates, rising inflation, or some combination of all three. In response, America’s economic headwinds will stiffen all the more.

It is often said that a crisis should never be wasted: Politicians, policymakers, and regulators should embrace the moment of deep distress and take on the heavy burden of structural repair. China seems to be doing that; America is not. Codependency points to an unavoidable conclusion: The US is about to become trapped in the perils of linear thinking.

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TahoeBilly2012's picture

The US is trapped by Zionist's plain and simple.

I MISS KUDLOW's picture

Folks, free market capitalism is the best path to prosperity

max2205's picture

Exactly how do you get people 45-55 spend money they don't have and not to mention they will only have soc sec to live on at 65 ish

Yelling drinking something good

Harbanger's picture

Deflation so prices would adjust to what people can afford.  But that would destroy the entire bankster debt ponzi.

markmotive's picture

This is a post-Minsky-moment world.

Nothing linear about this sh!t.

PIMCO's McCulley: "We are getting a flavor of exuberance"

Marco's picture

In the short term it would adjust what they can afford faster than the prices unless goverment steps in with huge tax increases to keep funding the wellfare system ... and if government decides to cut them instead say hello to fascists in the next election.

ebworthen's picture

I miss Kudlow too, and mustard seeds.

I miss a semblence of free markets too.

messystateofaffairs's picture

Larry died? He interviewed Dick Cheney once, said they were good buds, encouraged Dick to recharge the batteries on his pump.

sgt_doom's picture

Right, Roach, top economist pig at Morgan Stanley for many years who spews out:

Quantitative easing, or QE (the Federal Reserve’s program of monthly purchases of long-term assets), began as a noble endeavor.

One would normally say Roach is out of his frigging mind --- noble, to buy up the banksters' junk paper, then pay them interest on acceptance of the free money?

Noble Roach's skanky ass!

Roach is such a farce . . .

ebworthen's picture

My thoughts exactly.

It's like letting rapists go free with a jar of Astroglide, $10,000 in cash, and 100 Viagra tablets.

QE saved the world from what?  Some crooked banks/insurers/corporations from getting what they deserved?

Oh no, the FED couldn't possibly have made individual depositors and share/bondholders whole because that would be immoral - yet handing out money to the crooks on Wall Street who caused the problem to begin with was so God-damned moral.

Is that it, Mr. Roach?

NotApplicable's picture

That was exactly where I stopped reading his tripe.

Sooooooo sick of the Intelligentsia.

MrTouchdown's picture

Now that you mention it - I haven't seen too many ML bankers get suicided. Maybe this is him doing some CYA work.

Harbanger's picture

America is trapped in a keynesian debt sling created by 20th century progressive statists who sold us the FED and feudal socialism.  And that's the fucking hard to swallow truth MOFOs, we all live and die by the truth. 

Chief Wonder Bread's picture


That's true but short-term it's also trapped in a monetarist linear CB debt sling of free money for the .01% from which there is no escape w/o bringing down the TBTP banks. (So on second thought, maybe that's long-term. I can't tell anymore.)


Harbanger's picture

QE is a basic tenet of Keynesian central command fiscal governance.  The Fucking FED was unconstitutional from it's inception.

Chief Wonder Bread's picture

I thought Keynes stressed running fiscal deficits but no matter. He likely approved of monetary central planning as well. One big statist cluster-fuck.

Harbanger's picture

Keynesian economics is an olde bankster formula that allows a Gov't to borrow from private banks against the future to correct it's current fiscal "problems", hence allowing it to grow in size and power
at the expense of future generations.  Keynes was a definite statist, probably also a homo but that's just my intuition.

Chief Wonder Bread's picture

Whatever. The gay thing is just misdirection by the Mincing Rascals wing of the Party to keep the low-information voter going to the polls. All carefully orchestrated with the High-Class Hooligan wing of the party of course.

TahoeBilly2012's picture

Fuedal capitalism too, don't foget the pigmen get to print their funding money.

Marco's picture

But Harbanger ... feudalism is the opposite of socialist, it's anarcho-capitalist (property owners get to make all the rules for anyone wishing to live on their lands).

SAT 800's picture

Somebody made the mistake of publishing his book and that's why we get to read this mindless meandering.

buzzsaw99's picture

originally posted at JewishBusinessNews...

813kml's picture

Makes for a kosher birdcage liner.

SAT 800's picture

I have to admit, I didn't read tooo carefully after that part. but sure enough he's trying to sell you something; his book. Whoo. think I'll run right out and buy one.

CHX's picture

Linear like in "price stability with a yearly inflation of ~2%"

walküre's picture

I just want one of these fuckers to say the truth, just once. The unemployment numbers are garbage and GDP growth is negative.

One of them just say that the US economy is crap, that the US consumer is virtually dead and that it's all because of a few bankers who cheated their way to prosperity.

813kml's picture

Fat chance, that kind of honesty would only come at the gallows.

TahoeBilly2012's picture

Oh, and they want to takeover the world for the "indespensable Country"...yea just one of those little side notes, global hedgemony is...

teslaberry's picture

what a bunch of jargon. 

part of the game of soothsayer talking head is coming up with new sounding ways to describe and old problem. that way , people think you've said something new


kurt's picture

Roach, eh?

Mr. Maggot said we were thinking much too "ANGULAR" with an occasional whimsidasical twist-a-roo!  Now I don't know WHO to believe.

disabledvet's picture

I blame Papa Roach myself.

Uber Vandal's picture

The lyrics from Papa Roach's BURN are rather fitting for this......

I didn't know you were a fake
Every lie straight to my face
So blind I could not see
Right behind my back you stabbed me
Should've know you were a bitch
Shut up you're making me sick
Little man you're nothing like me
Lying cheating so deceiving
I trusted you broke me down
And you screwed me over

You turn me inside out
My world is upside down
You're not hurt are you happy now......
I trusted you sold me out...........

Good video BTW


Barry Freed's picture is hard to argue that the liquidity injections of late 2008 and early 2009 did not play an important role in saving the world from something far worse than the Great Recession.

Is it really?  I'd argue that without "liquidity injections" the Wall Street pyramid would have collapsed, and the bankers and policians would be where they belong - hanging from lampposts.  6 years later, we'd already be emerging from the rubble and heading on a new trajectory.  Yea, QE shored up the pyramid and gave the rich enough time to fortify their private islands, but when the next collapse comes, and its much, much worse, can we really say that those, "liquitidy injections" to shore up the pyramid were a good idea?  I'd argue no.

Midnight Rider's picture

This is exactly correct. It makes no sense that Wall Street went from self-proclaimed bankruptcy in need of a bailout to immediatly paying themselves record bonuses every year, never missing a beat. If these injections were to have been made at all, they should have been done with massive conditions that would have limited Wall Street's ability to continue to rape the American economy. I would venture to say that maybe 1% of what Wall Street does has any positive effect on main street and the economy. In fact, it does so much harm that the net effect is actually negative for the overall economy. It has essentially turned into a massive insider trading ponzi casino.

Rainman's picture

So the Chinese illuminati are going for that trickle down bullshit too, huh ...?

disabledvet's picture

The Fed met the immovable object called "the Federal Government."

It's easy to think of one's "self" as the purveyor of the Holy Grail...and indeed Washinton DC and The Media specialize in one and ONLY one thing..."elevating you to God like status should you succeed." So when your ego suffers from being unceremoniously dismissed do not take it personally...because he whole point is always the same: "we're gonna tear you down to nothin."

What most don't get of course is the elevation phase. "Just ask General SHINSEKI" as "somebody's got to take the fall here and it isn't an Agency that actually is providing health care instead of Jewish Confetti bullshit."

The Supremes will report for duty I's what they do. "Don't ever call the Chief lazy." Still...

If it were me I would advise them to take the decade off. "There's someone (perhaps many "ones") here who think(s) the Third Reich won" and are looking for a repeat.

"After this mission all I knew is that I would never want another."

dojufitz's picture

The USA is not the only country using the dollar......

people on ZH talk about it as if the dollar is only used by US citizens.....

bunnyswanson's picture

Mexico is not the only country which uses the Peso.  But as with the Peso, it will not be that way for long.

dojufitz's picture

Hate to break it to you...the Peso is not the World's Reserve Currency.........

falak pema's picture

Keynes would pee down super-spiderman's nose like a Greek God who sat on Olympus's toes.

Jack Burton's picture

Agreed. The powers of the USA have become locked into linear thinking, the people as well. The American dream is locked into place as a slowing improving prospect for all, years after year America's power and wealth grows and opportunity for the people grows as a result. When in fact, the linear progression based on America's last century is way off base. We have moved into a new era in the economy, geo-politics and the environment, since 2000, all of these has suffered a total phase shift into a totally new world in which the old norms, expectations and rules serve only to lock America into a death spiral. I think events speak for themselves, any honest approach to world events and economics proves this point. But we still act like we are just in a modern version of 1959, looking to the past glories to judge our future prospects.

The next 20 years will blow all this to hell, but it seems all American's can say when reality hits is "Nobody could have seen this coming". Such as 9/11, such as 2008 bankers crisis, such as the record food prices soon to hit the world where it hurts. Many other things are changing in an exponential manner. Most of these are things the political climate has tryed to hide and deny.

AdvancingTime's picture

Our system is geared at getting politicians reelected and fulfilling the most pressing needs of today.  Things like profit, greed, and quenching our unrelinquishing desire for growth are placed in front of longer term issues and needs.

Sick's picture

The fact that all central banks are doing essentially the same thing, money printing, leads me to believe they are all taking direction from the same powers toward a shared goal.  I do not believe it will work.

TrustWho's picture

Would somebody explain how Japan can continue to function paying 25% of tax revenues on debt interest payments with debt interest rates lower than USA? If Japan is "ok", China and USA economies are flying high

bilejones's picture

Because it has a highly educated population, and doesn't polute the labor pool with semi-literate immigants?

Duc888's picture



"Quantitative easing, or QE (the Federal Reserve’s program of monthly purchases of long-term assets), began as a noble endeavor....


Kinda blew it right there.... he just put a skid mark in his shorts... nuthin' much to read after that, it all smells.

Duc888's picture



Jack Burton :The next 20 years will blow all this to hell......


3 years, tops.