The Energizer Bunny

On the eve of another Fed Policy meeting, it's always good to check in with Stephen Roach, chief economist at Morgan Stanley. In many ways, when it comes to criticizing the Greenspan Fed, Stephen Roach is like the Energizer bunny - he just keeps going and going and going.

It's nice to see that a big financial services firm allows their head economist to speak out about problems and imbalances that he observes - it seems the job of most economists (especially at big Wall Street firms and business new shows) is to always predict blue skies and clear sailing while at the same time attempting to explain what just happened in a way that calms investors ... to keep the game going even if there are fundamental flaws in the system.

Roach's latest commentary, Trapped, starts out with a jab at the "soft patch crowd" - a reference to Greenspan's remarks about a year ago when there was a precipitous decline in share values concurrent with the first big run up in oil prices into the $40+ range. He then goes on to note the eerie resemblance between US patterns and those in Japan in the 1990's, as our "post-bubble shakeout" churns on, and wonders if we may suffer the same ultimate fate:

"I fully realize the indelicate nature of this question. Everyone -- from investors and recovering dotcomers to policymakers and politicians -- seems united in their conviction to dismiss this possibility as nothing short of blasphemy. Federal Reserve Chairman Alan Greenspan summed up the consensus view on this critical issue over two years ago, when he famously declared that '…our strategy of addressing the bubble's consequences rather than the bubble itself has been successful'."

"The risk, in my view, remains that the Chairman may have been premature in taking this victory lap."

You just don't hear this kind of commentary on CNBC or in SmartMoney Magazine - "investors" may lose faith.

Now, if you really want a good scare, go to last Friday's commentary Asia's Only Hope. We all know that the rest of the world is lacking in internal demand - that they rely on the crazed US consumer to continue to spend, spend, spend even though this spending is now much more a function of increased asset prices and increased debt, rather than increased wages.

More than ever, Asian economies are vulnerable to downturns if and when the American consumer starts to retrench - we all know this is inevitable. What is happening with jobs and real estate prices and consumer debt in this country is a system that is fundamentally flawed and sure to revert to historical norms (unless of course it really is different this time) ... it's just a matter of the timing. But, the shocker here is what do the Asians think about the inevitable retrenching?

"Little wonder Asians now have a new edge in their voices when they ask me about the fate of the American consumer."

"Needles to say, my message has not been received with open arms as I travel through this region. Most Asians react with sheer disbelief when I even dare to mention the possible demise of the American consumer. Never mind the juxtaposition between excess US consumption and subpar wage income generation: Consumer outlays have surged to a record 71% of GDP since 2002 versus a 67% norm over the 1975 to 2000 period, while real private sector wage and salary disbursements are up only 5% in the first 39 months of this recovery versus a 15% average increase in the five previous cycles. Nor do Asians want to hear about the excesses of the household debt cycle -- in terms of the record stock of indebtedness as a share of GDP as well as debt service payments that are near historical highs in an historically low interest rate climate. Believe it or not, one client out here was so angry with me he actually tore my chart of the vanishing personal saving rate into tiny little pieces. Asians want to believe that the income-short, saving-short, overly indebted, asset-dependent American consumer will never stop spending."

Uh oh - this may end badly.

Asian business leaders and policymakers may be in as much denial as their US counterparts.

Roach has been consistent, and consistent for a long time in his criticism of the Greenspan Fed. If you peruse the Morgan Stanley Global Economics Forum Archives, you'll see that he's been saying pretty much the same thing, every Monday and Friday for the last few years - that Federal Reserve policy has been fundamentally flawed for the last ten years. They have facilitated asset bubbles, which have enabled excess US consumption, which has created burgeoning growth and rampant job creation in the low-wage Asian exporting countries - that this system is wholly unsustainable and we are not doing the right things fast enough to keep these imbalances from getting worse and worse ... that the resulting correction will be more severe than it otherwise could have been.

So, get ready for today's installment of the ongoing Federal Reserve crusade against world imbalances - another quarter point rate hike.