Roach Describes the “Frothy” 2000’s

Stephen Roach (chief economist at Morgan Stanley) is attending the annual World Economic Forum at Davos, Switzerland right now. He sends back this report:

I conceded the near-term outlook to the momentum crowd, [but] I dug in my heels on what I continue to believe is the key bone of contention in the macro debate — sustainability.

The response was right out of the script of the late 1990s. One new paradigm after another was offered as explanations as to why this global recovery is for real… [and] these are precisely the assumptions that ever-frothy financial markets must be making in order to sustain asset values at current levels.

…[H]ave we truly learned nothing from the Great Bubble? As was the case in the late 1990s, the sustainability of a wealth-driven US economy is critically dependent on the permanence of asset appreciation. Yet bubbles are, by definition, the antithesis of such permanence.

I don’t always agree with Roach, but I do think that in this case he has hit the nail on the head.