[Global Money] Roach, “The fourth dollar crash in history has begun!”

[Global Money] Roach, “The fourth dollar crash in history has begun!”

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Professor Stephen Roach, Yale University. [AP=연합뉴스]

Professor Stephen Roach, Yale University. [AP=연합뉴스]

“We have to worry about the weak dollar before inflation”
Stephen Roach, a professor at Yale University (economics), is called’Mr. Hardlanding’. It is to take the lead in warning of the unstable aspects of the global economy, centered on the United States.

Interview with Professor Stephen Roach, Yale University

The dollar has since ceased to convert gold in 1971
30% off three times
Potential drop of 35% due to pandemic
Double Dip-Expanded Financial Deficit Triggers

Nowadays, it is diagnosed that the global economy is rapidly egressing from the trough of the downturn caused by the novel coronavirus infection (Corona 19). Can I take a sigh now?

To answer this question, JoongAng Ilbo and Sampro TV jointly interviewed Prof. Roach by giving him a joint interview.

Recently, stock prices in the US and Korea have risen considerably.
“As an economist, it’s not advisable to talk about the stock market sloppy. However, it can be said that there is a controversy over the current trend. The current share price level is very high. The current share price is higher than just before the 1929 Great Depression in terms of the adjusted economically adjusted share price-earnings ratio (CAPE) created by Yale University colleague Professor Robert Schiller. There was only one enemy that was higher than the present. It was just before the collapse of the dot-com bubble in 2000. The current stock price is overvalued based on historical standards, reflecting the fact that the Federal Reserve (Fed) has a zero interest rate policy and other central banks have adopted similar policies. The central bank is fueling the global stock market boom.”

Double dip is not an exception, it is a rule

The US economy rebounded rapidly in the third quarter of last year. How about in the future?
“I think it rebounded rapidly in the third quarter of last year as the suspension of economic activity (lockdown) was released in the US. The fourth quarter was also good. However, in the first quarter of this year (2021), I think the economic downturn is highly likely. This is because economic activity has been slowing from the end of last year to the present due to the outbreak of the third corona infection. Americans want the vaccine to be available quickly and the economy will grow again on a stable basis, but I think there is a risk of a double dip.”
A double dip in American history. Graphic = Reporter Cha Junhong cha.junhong@joongang.co.kr

A double dip in American history. Graphic = Reporter Cha Junhong [email protected]

As the pandemic started in earnest, he kept warning of double dips.
“In history, double dips were common. After World War II, there have been 11 recessions in the United States. Eight of them recovered and then turned down again. The double dip is no exception. Rather, it happens regularly.”
Why is the double dip repeated?

“I think it’s because of two things. One may be because the economy rebounds right after the recession, but is still vulnerable. In addition, new shocks often occurred, leading to a second downturn. Currently, both conditions are met. 10 million jobs were lost in the US alone due to the first pandemic. Another third pandemic occurred. This is a typical double dip situation.”

Double dip triggers dollar fall

Will Fed’s Jerome Powell have the means to deal with the double dip?
“The pandemic is happening again. What the central bank can do is keep injecting liquidity to keep the financial markets running. Interest rates are already at zero. The base rate can no longer be lowered. Quantitative easing (QE) is also very disruptive. There is nothing the Fed can do to mitigate the 3rd pandemic shock while the US government in the US is strengthening social distancing with the pandemic.
Jerome Powell Fed Chair. [게티 이미지]

Jerome Powell Fed Chair. [게티 이미지]

Is there anything the Joe Biden administration can do?
“At the end of last year, we started to invest 900 billion dollars (about 990 trillion won) in additional support. The Biden administration is pushing for another $1.9 trillion in economic stimulus. If Biden’s stimulus bill passes through Congress, the economic stimulus to combat Corona 19 will reach $5 trillion. It amounts to 24% of the US gross domestic product (GDP). However, stimulus is only a stimulus. It cannot cure the virus.”
Recently, concerns over inflation are growing.
“Currently, the US and other economies are in a very slump. Already in 2008~9, there was a big crisis. The economy is struggling to get out of the downturn. I don’t think it’s a situation where prices will rise quickly. Rather, inflation can be caused by other factors.”
“What I worry more about in the short term is the weak dollar. The savings rate in the United States is likely to decline further due to the economic stimulus, which is 24% of GDP. If the savings rate falls, the current account deteriorates rapidly, which could put pressure on the dollar to fall. If a weak dollar becomes a reality, inflation concerns could partially increase.”

Historically, the weak dollar wave has been three times

If so, the dollar’s position as the key currency seems to be shaken.
“It is too early to say that the dollar will lose its key currency status. 60% of foreign exchange reserves in various countries are in dollars. Although it fell from 70% in 2000, the euro is in second place at 20%.”
How much can the dollar fall?
“At the end of last year, I predicted that the dollar could decline by 35%. And so far, it has fallen by about 12%. It’s moving as I predicted. It could be better in the future. However, there have been three waves in which the value of the dollar declined by about 30% after the cessation of gold exchange in 1971 (the collapse of the Breton Woods system). It was the early 70s, 80s, and early 2000s. I think this dollar depreciation will be as bad as the previous three weaknesses.”
When the dollar value fell, foreign investment in Korea and others would increase. But is there any shock to the asset market?
“If the dollar’s value drops significantly, it will have an impact on the global financial markets, although there are good things. In order to stabilize the dollar, the Fed must intervene in the market and raise the base rate. The asset market may fluctuate first due to the possibility of the Fed’s base rate hike. However, the Fed declared that it would not tighten it for a considerable period of time. The US current account deficit will be the largest ever (by aggressive economic stimulus).”
Dollar index. Graphic = Reporter Cha Junhong cha.junhong@joongang.co.kr

Dollar index. Graphic = Reporter Cha Junhong [email protected]

Trump’s Chinese pressure stems from misunderstanding

Now is the time for US-China relations to ask. In the meantime, he has been leading the criticism of the US policy of pressure on China.
“Former President Donald Trump wrote a policy of pressure on China based on some serious misunderstandings about the way global trade works. Trump argued that the large US trade deficit puts a burden on Americans, especially American companies. However, the US current account deficit is the result of a snowballing fiscal deficit (not because of China).”
What should the Biden administration do?
“We need to create a better communication system between the two countries. President George W. Bush gave a’Strategic Economic Dialogue’. President Barack Obama holds two summits a year. On the other hand, Trump did nothing but fight. I think President Biden should create a’US-China Research Center’ that analyzes the US-China economic conflict and finds solutions.”

Stephen Roach

He was born in 1945, the year that World War II ended. After receiving a Ph.D. in economics from New York University, he worked at the Brookings Institute and became an economist in the Federal Reserve System (Fed). In particular, he was in charge of the Fed’s economic outlook for the year 72-79, stained with stagflation and stagnation caused by oil shock. Afterward, he moved to Morgan Stanley, an investment bank, and served as chairman of the Asian division, and is now a professor at Yale University.

Reporter Kang Nam-gyu [email protected]


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