Morgan Stanley Is Arguing That We Don’t Need Further Global Policy Stimulus – Because The Market Is Already Delivering It

Now this is a contrarian argument if I ever heard one (excerpt):

Global: How I Stopped Worrying and Learned to Love the Double-Dip Scare - Manoj Pradhan

...policy-type stimulus is already under way - without central banks having to lift a finger or utter a word. How? Markets are doing the job for the monetary policymakers, and very efficiently at that. For one thing, asset price inflation far outstripping growth and accelerating inflation expectations could have tempted central banks to hike, but recession fears and sovereign risks from Europe have led to a moderation in both. Further, the rally in Treasury bond markets (except in the euro area periphery) is exactly the kind of reaction that one would expect if policy rates were cut and /or central banks had ramped up QE programs to buy more government securities. As long as a recession doesn't materialise, this prevailing combination of softer risky asset prices and moderating inflation expectations has set the stage for AAA (ample, abundant and augmenting) liquidity to be provided for longer. Delayed tightening along with the rally in bond markets will support economic growth going forward.

It’s an interesting perspective of what’s going on, and on the same level as the argument advocated by Scott Sumner that low interest rates are indicating tight money, not loose (and vice versa).

Also in the same issue of the Global Economic Forum is an analysis of optimal policy options for ASEAN (excerpts):

ASEAN: The Leverage Lesson, Double Dip and the Rebalancing Game - Deyi Tan, Chetan Ahya & Shweta Singh

...In conventional lingo, the Chinese-style macro rebalancing means reducing savings (read: current account surplus) and increasing consumption. However, in ASEAN, we think rebalancing is more likely to come via investment. Gross domestic savings in 2004-07 had actually fell (with the exception of Malaysia) compared to the pre-Asia crisis period of 1994-97, and total consumption ratios (private plus public) mostly rose even as ASEAN economies adapted to Asia's new exporter status...

...Indeed, rather than poorer consumption, ASEAN's export surpluses had came primarily at the expense of weaker capex. Put another way, ASEAN economies were simply not channeling their savings into investment, but were exporting it abroad...

...Is there room for more consumption? Comparing ASEAN economies with countries of similar income levels indicates that ASEAN's gross domestic savings rates are much higher compared to the average. Prima facie, this would suggest scope for consumption as a rebalancing tool, too. We think it depends. In our view, the scope is bigger for economies such as Singapore, which have already achieved high-income status, rather than for upper middle-income economies such as Malaysia or lower-middle income economies such as Indonesia and Thailand. Typically, savings rates tend to have a positive relationship with the economy's income level. This is why lower-income economies suffer from the dilemma of needing investment to ‘take off', but lacking the savings to finance it. Hence, rather than increasing consumption, we think Malaysia, Indonesia and Thailand are better placed, tapping on their high savings rates to increase investment and raise potential growth trajectory...

...However, smaller economies like Singapore will still be able to maintain an export-oriented strategy. Singapore faces a theoretically infinite export demand market by virtue of its small size and can ‘free-ride' on the positive externalities from macro rebalancing efforts in other economies...

...We think economies like Indonesia and Singapore are slightly ahead in the rebalancing process compared to Thailand and Malaysia. To begin with, Indonesia's economy is relatively more balanced as its current account surplus is smaller than other economies...

...However, in Thailand, fixed capex ratios fell further to 23.8% of GDP in 4Q09-1Q10 from 27.3% in 2004-07, and in Malaysia, it fell to 18.6% from 20.9%. In our view, the political climate will likely have to improve in Thailand to spur further investment. In Malaysia, policymakers will have to execute on their plans. Policymakers will have to shift their focus from physical to non-physical infrastructure such as education. A suitably qualified labour force will have to be built to unleash growth potential and drive government transformation. The subsidy systems, which have impeded progress on the competitiveness front, will have to be rolled back. A structural inflexion point in these areas will help to jump-start private investment momentum, both local and foreign.

In other words, we have to implement the NEM – in full. On a side note, I’ll add that only Indonesia and Malaysia of the countries covered have yet to undergo a demographic transition coming from falling birth rates and a lower dependency ratio – this factor will also boost consumption and growth over the long term, but will require considerable investment in education to fully leverage on.