Roach: Global Stimulus Sets Stage for Next Crisis

Money News (Link) - Dan Weil (June 22, 2010)

Governments and central banks aren�t moving fast enough to exit their fiscal and monetary stimulus, says Morgan Stanley Asia Chairman Steve Roach.

�Policy makers are making a mistake by keeping monetary and fiscal policy in stimulus positions for too long, injecting a lot of excess liquidity into markets and economies,� he told Bloomberg.

�It ends up setting the stage for the next crisis. This is a recipe that didn�t work out well in the period following the (2000) bursting of the equity bubble. And I see no reason why it�s going to work out differently this time either,� he said.

The Federal Reserve is keeping the federal funds rate at a record low of zero to 0.25 percent, and last year�s $787 billion fiscal stimulus is still working its way through the economy.

Exploding government debt burdens represent another major problem, Roach says. U.S. debt hit a record high of $13 trillion. �Excess sovereign debt is a problem that is endemic in the developed world,� Roach said. �At this point, we still have ample slack in the global economy and an absence of inflation pressures.�

But if monetary and fiscal policy remain too accommodative, serious inflation could ensue, he says.

Many echo Roach�s view of the debt crisis.

�Economic historians such as Kenneth Rogoff point out that at debt levels of 80-90 percent of GDP, a country�s real growth becomes stunted,� Pimco�s Bill Gross wrote on the firm�s website.