Low US interest rates fuelling bubbles, warns top economist
Roubini underscores risks of keeping monetary policy loose for too long
By CONRAD TAN
IN HONG KONG
LOOSE monetary policy in the United States is fuelling asset bubbles worldwide that could badly damage the global economic recovery should they burst, said New York University economics professor Nouriel Roubini yesterday.
Mr Roubini, who is also the founder and chairman of consulting firm Roubini Global Economics and is widely known for his early warnings of the recent financial crisis, said that economies that have rebounded rapidly such as China should act soon to prevent overheating and to ease inflationary pressures.
China's economy grew by 10.7 per cent in the fourth quarter of 2009 compared to a year earlier, official estimates showed yesterday. But consumer-price inflation there also accelerated, with prices rising 1.9 per cent over the year to December, compared with a 0.6 per cent increase in the year to November.
While the economic recovery in advanced economies such as the United States, Europe and Japan will be slow, dragging down global growth, some emerging markets are already showing signs of overheating in parts of the economy, Mr Roubini said.
'The easy monetary policy by the United States has become a global monetary easing and this excess of liquidity and credit creation is causing asset bubbles around the world - in emerging markets, commodities, equities.
'If these asset bubbles were to go on for much longer, funded by a dollar carry trade, eventually there could be an unravelling and a significant correction of asset prices which will be damaging for global and regional economic growth.'
While 'a lot' of the recent rally in financial markets and asset prices is justified by improvements in fundamental business conditions, 'part of it is too much, too fast, too soon', he said.
'The economic conditions in China and emerging markets are stronger and more robust than in advanced economies. But even in the case of Asia and China, if this overheating were to continue, if this easy monetary policy were to continue, and lead to further asset bubbles in commodities, real estate and equities, eventually, when there is a massive slowdown in economic growth in advanced economies, it might also lead to a correction in emerging markets.'
Speaking at the Asian Financial Forum in Hong Kong and to reporters afterwards, he said that it was 'necessary to increase interest rates' and to slow down credit growth in China now. That would avoid the need for 'much more severe tightening of policy in the second half of the year', he said. 'Doing it sooner rather than later probably is the right policy.'
While inflation is unlikely to be a worry in the advanced economies this year, in emerging market economies such as China and India, inflation is returning and 'there's already signs of overheating of some parts of the economy'.
He acknowledged that policymakers worldwide had a difficult task in choosing when and to what extent to withdraw direct government support for their economies. While it was clear that removing stimulus measures too quickly could choke off the nascent economic recovery in advanced economies, 'the risk is that you make the other policy mistake - that you maintain the fiscal stimulus, that you keep raising spending and reducing taxes and get runaway fiscal deficits', he said.
Eventually, investors could demand much higher interest rates on bonds issued by the governments of such countries to finance their national budgets, imposing a high cost that wipes out the benefits of the stimulus spending, he warned.
'Especially in an election year, the risk of a major policy mistake in the US is significant,' he said. 'The path of exit that is correct is very narrow.'
Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.
Time for action: Mr Roubini says economies that have rebounded rapidly such as China should act soon to prevent overheating
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