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谢国忠

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麻省理工学院经济学博士

个性介绍: 1960年出生于上海,1983年毕业于上海同济大学路桥系,1987年获麻省理工学院土木工程学硕士,1990年获麻省理工学院经济学博士。同年加入世界银行,担任经济分析员。在世行的五年时间,谢国忠所参与的项目涉及拉美、南亚及东亚地区,并负责处理该银行于印尼的工商业发展项目,以及其他亚太地区国家的电讯及电力发展项目。1995年,加入新加坡的Macquarie Bank,担任企业财务部的联席董事。1997年加入摩根士丹利,任亚太区经济学家,2006年9月辞去该职务。

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谢国忠:v形反弹?  

2009-08-18 06:18:53|  分类: 言论 |  标签: |举报 |字号 订阅

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v形反弹?

2009-08-17 
  

The V Mirage

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Andy Xie/August 15, 2009

 

TheUS economy is beginning to report strong growth data. Analysts areupgrading their outlook for the US economy. It is now expected to growat annualized pace of 3-4%. China showed quick rebound in its economicdata in the second quarter. Now the US is doing so in the thirdquarter. Is the global economy staging a V-shaped bounce? In the pastthree months the buoyant financial market has been expecting this. Isthe market right?

 

At the end of last year I expectedglobal stock market to stage a big bounce in the spring of 2009 and theglobal economy to stage a rebound in the second half. I also expectedanalysts to upgrade their outlook at about the current time. I warnedthen that the economic pickup was due to inventory cycle and stimulus,and the global economy would have a second dip in 2010.

 

Ina normal economic cycle inventory-led recovery would be followed bycorporate capex, which leads to employment expansion. Rising employmentleads to consumption growth, which expands profitability and morecapex. Why wouldn’t it work this? The reason, as I argued in this pagebefore, is that the big bubble distorted the global economic structure.The re-matching of supply and demand will take a long time. The processis called Schumpeterian creative destruction. The Keynesian thinkingignores structural imbalance and focuses only on aggregate demand. In anormal situation the Keynesian thinking is ok. However, when arecession is caused by the bursting of a big bubble, the Keynesianthinking no longer works.

 

Many policymakers actuallydon’t think along the line of Keynes vs. Schumpeter. They think interms of creating another bubble to fight against the recession impactof a bubble bursting. This type of thinking is especially popular inChina and on Wall Street. The central banks around the world, thoughthey haven’t been deliberate, have created another liquidity bubble. Ithas manifested itself in surging commodity prices first, stock marketsnext, and lately in some property markets also. Would this strategysucceed? I don’t think so.

 

How long a bubble lastsdepends on its impact on demand. The most lasting are property andtechnology bubbles. The multiplier effect of a property bubble ismultifaceted. It stimulates both investment and consumption in theshort term. The supply chain that it impacts is very long. Fromcommodity producers to real estate agencies it could stimulate over onefifth of an economy on the supply side. On the demand side itstimulates credit growth and financial sector earnings, and oftenboosts consumption through the wealth effect. Because the propertybubble is so powerful, the negative effect from its bursting is verydamaging, because the excess supply during the bubble takes time toconsume, and it destroys the credit system.

 

A technologybubble happens when investors exaggerate its impact on corporateearnings. A breakthrough technology like the internet improvesproductivity enormously. However, most of its benefit goes toconsumers. Competition eventually shifts temporary high corporateprofitability to lower consumer prices. Because the emergence of animportant technology brings down consumer price, central banks oftenrelease too much money that travels into asset markets and createbubbles. As the underlying technology leads to an economic boom, thebubble feels real. More and more capital pours into the technology. Itleads to overcapacity and destruction of profitability. The bubblebursts, when speculators finally realize that the corporate earningswouldn’t come. The cost of a technology bubble is essentially theoverinvestment. Because a breakthrough technology expands the economicpie, it makes it easier to absorb the cost of a technology bubble.Economy can recover relatively quickly.

 

A pure bubble inone or multiple financial assets due to excess liquidity doesn’t lastlong. Its multiplier impact on the broad economy is limited. It couldhave some impact on consumption due to the wealth effect. As it doesn’tstimulate the supply side nor boosts productivity, whatever story it isbased on will have holes apparent to speculators. It doesn’t take longfor them to flee. Further, a pure liquidity bubble without productivitysupport can easily lead to inflation, which causes tighteningexpectation that triggers the bursting of the bubble.

 

Whatwe are seeing now is a pure liquidity bubble in the global economy. Ithas manifested itself in several asset classes. The most prominent arecommodities, stocks, and government bonds. The story that supports thisbubble is that the stimulus would lead to a quick economic recovery andthe output gap could keep inflation down and, hence, central banks cankeep interest rates low for a couple more years. Therefore, accordingto this story, investors could look forward to strong corporateearnings and low interest rates at the same time, sort of a goldilocksscenario for stock market.

 

What have occurred in China inthe second quarter and the US in the third quarter seems to lendsupport to this view. I think the market is misled. The driving forcesfor the current bounce are inventory cycle and government stimulus. Thefollow-through from corporate capex and consumption are severelycontained by structural challenges. These challenges have their originsin the bubble that led to misallocation of resources. After the bubbleburst, the mismatch between supply and demand limits the effectivenessof either stimulus or bubble in creating demand.

 

Thestructural challenges arise from global imbalance and over expandedindustries due to exaggerated demand that cheap credit and high assetprices supported in the past. At the global level the imbalance betweendeficit Anglo-Saxon economies (Australia, the UK, and the US) on theone hand and surplus emerging economies (mainly China and oilexporters) on the other. Roughly, the imbalance was $1 trillion or 2%of global GDP. The imbalance was supported by (1) the willingness ofthe central banks among surplus emerging economies to hold down theirexchange rates and recycle their surpluses into the deficit economiesby purchasing their government bonds, (2) the willingness of consumersin the deficit countries to spend with borrowed money, and (3) the WallStreet’s ability to dress up high risk consumer loans as low riskderivative products. I am describing these factors to show that it isunlikely that central banks could revive yesterday’s equilibrium.

 

Therecent data point to sharp increase in the household savings rate inthe US. In two years it has risen above 5% from -2%. The current levelis still below the historical average of 8%. If normalization remainson track, it should rise above 8%, probably above 10%, to bring debtlevel down to the historical average. Some argue that, if the lowinterest rate revives property market again, American households maybecome willing to borrow and spend again. This scenario is possible butnot likely. The US has not experienced serial property bubbles in thepast. The reason is that its land is privately owned and plentiful. Thesupply overhang from one bubble takes a long time to digest. And,American culture tends to swing to frugality after a bubble. One’soutlook either for a normal recovery or a bubble-inspired boom dependson the outlook for the US household savings rate. Unless the UShousehold sector is willing to borrow and spend again, emergingeconomies can’t revive the export-led growth model.

 

Ifone accepts the US household savings rate will continue to rise, theemerging economies must decrease their savings rates, increaseinvestment, or decrease production. The best choice is to decrease thesavings rates. But savings rates are hard to change. They depend mainlyon demographics and wealth level. The quickest possible way would be tocreate an asset bubble that inflates household wealth and decreasessavings. Many advocates for inflating property and stock market inChina have this effect on their mind. Japan’s bubble after the PlazaAccord in 1985 had its origin in the same dilemma. This approach, if itworks, has catastrophic long-term consequences. Japan remains mired instagnation two decades after its bubble began to burst.

 

Someanalysts are expecting that China would repeat Japan’s bubbleexperience in the second half of 1980s. At the time Japan’s export-ledgrowth model was stymied by the doubling of its currency value afterthe Plaza Accord. It tolerated a massive asset bubble to stimulatedomestic demand to stabilize its economy. China’s export-led model isfacing rising savings rate and declining import demand in the US. Assetinflation could be a way out in the short term.

 

Chinadoesn’t need to repeat Japan’s experience. First, in 1985 Japan was adeveloped country. It couldn’t divert its vast savings intoinfrastructure investment. China’s urbanization still has 20-30percentage points to go. If the right mechanism can be established,China could divert more savings into urbanization.

 

Second,China can decrease its savings rate substantially through structuralreforms. Half of China’s gross savings are from the public sector. Thegovernment and state-owned enterprises should decrease their revenueraising and increase borrowing for funding investment. For example,China’s high property price is due to the need of local governments toraise revenues for funding investment. If China’s property prices arecut by one third, the national savings rate could decrease by two tothree percentage points.

 

Third, Chinese government couldgive its shares in the listed state-owned enterprises to the householdsector. The increased household wealth due to this factor coulddecrease national savings rate by 3-4 percentage points.

 

China’sexports are roughly down by one fifth. It needs the national savingsrate to drop by about 6 percentage points for the economy to functionnormally. Otherwise the economy would experience either recession orbubble. The purpose of the bubble, as mentioned above, is to decreasesavings rate temporarily.

 

The above discussion soundslike digression from the analysis on the sustainability of the currenteconomic recovery. Its purpose is to bring out two points: (1) the oldequilibrium is impossible to return to, and (2) there are manystructural barriers to a new equilibrium. The current recovery is basedon a temporary and unstable equilibrium in which (1) the US slows downthe rise of its national savings rate by increasing fiscal deficit and(2) China boosts its government spending and inflates an asset bubbleto decrease its savings surplus. This temporary equilibrium depends ongovernment actions. It doesn’t have the market foundation to supportsustained and rapid growth.

 

Nevertheless, the improvingeconomic data will excite financial markets. China’s stock market iscooling because the Chinese government is jawboning it down, fearingthe downside of a bigger bubble, and the economy is beginning to slow.Markets elsewhere will likely do well for the next two months. Thediverging trends reflect that China’s market recovered four monthsbefore others’ and adjusts before others also.

 

Financialmarkets will turn down again when investors realize that the globaleconomy will have a second dip in 2010 and the Fed will raise interestrate soon. The turning point may well be sometime in the fourthquarter. By then it would become apparent that (1) China has sloweddown, (2) the US employment hasn’t improved and, hence, its consumptionhas remained stagnant, and (3) the production data that are pushingexpectation now have cooled after the inventory cycle has run itscourse.

 

Most analysts would argue that central bankswouldn’t raise interest rates if the recovery isn’t on solid groundyet. As I argued above, the problem is that monetary stimulus couldn’tsolve the structural problems that are blocking a sustained recovery.Liquidity is the wrong medicine for the global economy now. Overusingit brings out its side effect-inflation.

 

The conventionalwisdom says that inflation wouldn’t happen in a weak economy: capacityutilization rate is low in a weak economy and, hence, businesses cannotraise prices. This one dimensional thinking is not applicable whenthere are structural imbalances. Bottlenecks could appear in a fewareas first. Excess liquidity tends to flow to where there is shortage.The prices in those areas could surge, which would bring up inflationexpectation and trigger general inflation. Another possibility is thatexpectation alone is sufficient to bring about general inflation.

 

Oilis the most likely commodity to lead inflation. Its price has doubledfrom the March low despite declining demand. The driving force for itsinflation is liquidity. Financial markets are so developed now thatretail investors could express their inflation fear by buying exchangetraded funds in a single or a basket of commodities.

 

Oilis uniquely suited as an inflation hedging device. Its supply responseis very low. Over 80% of the global oil reserves are with sovereigngovernments. They don’t respond to rising prices with more production.Indeed, when their budgetary needs are met, high prices may decreasetheir desire to increase production. The demand doesn’t drop quicklyagainst rising prices either. Oil is essential for routine economicactivities that its reduced consumption has a large multiplier effect.As its price sensitivities are low on both demand and supply side, itis uniquely suited to absorb excess liquidity and reflect inflationexpectation ahead of other commodities.

 

If central banksrefuse to raise interest rates as long as economies remain weak, oilprice may double from here. I think that central banks, especially theFed, will begin to raise interest rate early next year or even latethis year. I don’t believe that they are willing to raise interestrate. They just want to cool inflation expectation by showing that theystill care about inflation. Hence, they will raise interest rateslowly, i.e., deliberately behind the curve. The consequence is thatinflation would rise faster than interest rate, which is what theindebted US household sector needs.

 

This fool-the-marketstrategy may work temporarily. Its effectiveness must be reflected inoil price, i.e., the Fed needs to target oil price in its interest ratepolicy. If oil price runs away from the current level, it means thatthe market doesn’t believe the Fed. It would force the Fed to raiseinterest rate quickly, which, unfortunately, would trigger another deeprecession.

 

Instead of a V-shaped recovery, we may get a Winstead. The dip next year, though may not be deep statistically, willdeliver a profound psychological shock. Financial markets are buoyantnow because they believe in the government. The second dip willdemonstrate the limits to government power. The second dip could sendasset prices down and keep them there for a long time.

  

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