Roach vs Krugman: a no-win blame game

23 March 2010

Don King, hop on a plane to China for the fight of the year.

The world of economic forecasting just became more exciting, with even a threat of violence. The legendary boxing promoter King can put Nobel laureate Paul Krugman in one corner. In the other, Stephen Roach, Morgan Stanley’s Asia chairman.

Location: Beijing, the focus of their spat.

Format: Steel cage, of course.

Prize: Bragging rights in world’s most heated debate.

Mr. Roach says a ‘baseball bat’ should be taken to Mr. Krugman over his call for a stronger yuan. Mr. Krugman is miffed that Mr. Roach is criticising his view that ‘China is adding to the problems of the rest of world’. It hardly matters who wins the Battle of Beijing. The real story is that this matchup is even necessary. It shows we are still only debating the global imbalances we have been obsessing over for years now – not addressing them. The blame game continues.

Roach versus Krugman echoes the verbal clash between the US and Chinese governments. As this epic finger-pointing contest unfolds, we are all losers.

That goes for the richest investors, the savviest corporate executives and the most unassuming of households from New York to New Delhi.

The trouble with Mr. Roach’s spat with Mr. Krugman is that both men are a bit right, and both are a bit wrong. I am not taking the middle road here or offering an ambiguous on-the-one-hand-on-the-other-hand analysis. The truth really does lie somewhere in between, and that’s just the point.

The Group of Two nations needs to get into a room and negotiate a rebalancing of the world’s most important economies. Not take cheap shots, not assign blame, but agree to do X, Y and Z over the next 12 to 24 months.

Yes, China needs to let the yuan appreciate (as Mr. Krugman argues). It would reduce the pressure on China’s economy and trim a trade gap that may eventually lead to a U.S. credit downgrade. The US drastically needs to increase savings (as Mr. Roach says).

It must begin exporting something other than debt to return the biggest economy to health.

One nation acting isn’t enough to fix the other’s problems. Nor is unilateral action a panacea for global markets. These steps must be taken in tandem and telegraphed transparently to both nations’ populations and markets.

The opposite is happening. If only US Senators Charles Schumer of New York and Lindsey Graham of South Carolina, who are introducing legislation to make it easier to punish China, looked in the mirror. Spend less time beating up on China and more telling Americans to stop living beyond their means.

If only US lawmakers were more focused on financial reforms needed to avoid another crisis. If only they would tell Americans that shared responsibility is what’s needed to restore the US brand. Tell Americans that tax cuts aren’t always the answer. Why bother, when China is assuming the scapegoat role that Japan played in the 1980s and early 1990s? And then there’s Chinese Premier Wen Jiabao. If only he would admit how many of China’s problems are wrapped up in the currency peg. Forget the ill will it generates. Focus, instead, on inflation risks, hot money flows and those US$2.4 trillion of currency reserves with which China is stuck.

China’s embryonic financial system won’t grow up until it can do more borrowing in yuan and investors have a real bond market in which to hedge stock holdings. Things won’t cool down until Chinese have something to buy other than overpriced property.

China is like an Airbus A380 super-jumbo flying with a broken engine. It’s huge, it can go a long way, yet it’s operating unsteadily.

As hypocrisy reigns, think of the global economy as a game of musical chairs. Everyone is tiptoeing around the dwindling number of chairs, hoping to have one when the music stops. That might be fine if we had more growth engines on which to rely.

The US is still sputtering, Europe isn’t much better amid Greece’s crisis, and Asia is still developing, but not without risks. Politicians in Washington and Beijing seem to think that as long as they find a chair when the game is over, all’s well.

Not so in this G-2 world. A Chinese crisis would reverberate everywhere, including the US as it’s beginning to stand again. Another US crisis could be even more devastating for China. Rapid growth aside, it’s a developing economy that will find it harder to generate domestic growth.

It would be fun to be a fly on the wall the next time Mr. Roach and Mr. Krugman bump into each other. It would be highly entertaining if Mr. King, who staged bouts for fighters such as Mohammad Ali and Mike Tyson, could match the two economists.

If we can’t stop debating who is to blame for the sorry state of global affairs, let’s get ready to rumble.


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