Nov 9th 2022

Stephen S. Roach on US monetary tightening, China's growth sacrifice, the Sino-American rivalry, and more 



Project Syndicate: You have been strongly critical of the US Federal Reserve for its delayed response to US inflation, likening its inaction to your own experience at the 1970s-era Fed, working under then-Chair Arthur Burns. With inflation remaining stubbornly high and the Fed hiking rates by sizable increments, can the US avoid a repeat of the prolonged stagflation that marked that decade?

Stephen S. Roach: I view stagflation as a protracted period of high inflation, below-potential economic growth, and rising unemployment. In the stagflation of the late 1970s, the Fed was, indeed, a key actor. Convinced that idiosyncratic supply-side disruptions like energy and food shocks should not be addressed by monetary policy, Burns erred on the side of excessive accommodation, allowing the real federal funds rate to fall deeply into negative territory from late 1974 to early 1978, setting the stage for the Great Inflation that was to come.

The Fed’s current chair, Jerome Powell, seems determined to avoid that mistake. But in reacting to pandemic- and war-related shocks, the Powell Fed initially succumbed to the Burns-era mindset and viewed sharply higher inflation as transitory. In fact, from November 2019 through October 2022, the Fed has held the real federal funds rate at -3.7% – fully two percentage points below the Burns Fed’s average of -1.7% in 1974-78. 

Today, the real fed funds rate stands at around -5% (based on the three-month average of the headline consumer price index – my preferred measure). Excessive monetary accommodation is quicksand; a painless exit is exceedingly difficult to achieve. And Powell’s Fed remains mired in it. We thus need to take seriously his warning that pain – i.e., a recession – is unavoidable, as the Fed attempts to bring inflation under control.

PS: China is facing economic headwinds as well, many of which you have linked to President Xi Jinping’s policy approach, including a regulatory crackdown and a new focus on redistribution. At the recent National Congress of the Communist Party of China, Xi was confirmed for a precedent-breaking third term, delivered ideological speeches focused on security concerns, and touted his zero-COVID policy. What does this augur for Chinese economic growth?

SR: In conventional macroeconomics, an economy’s longer-term growth potential is determined by the sum of labor-force and productivity growth. If one of those factors slows, the other must accelerate. Otherwise, long-term growth suffers. 

China is in serious trouble on both fronts. An unsustainable one-child family-planning policy –subsequently changed to a two- and now three-child policy – means that the working-age population is declining, and Xi’s speech at the 20th Party Congress suggested that already-strong productivity headwinds are likely to intensify. 

China’s productivity problems don’t stem only from its unsustainable zero-COVID policy and continued property-sector deleveraging. They also reflect a confluence of more fundamental pressures, arising from the shift toward a less market-driven and more state-directed economy. China is now home to less indigenous innovation than would be desirable, with more regulatory constraints encumbering the “animal spirits” that typically drive entrepreneurialism and underpin vibrant consumer societies.

Moreover, Xi’s more muscular foreign policy, with its fixation on national security, stands in stark contrast to the “hide and bide” approach that enabled the reform-driven dynamism of the Deng Xiaoping era. In short, China’s growth sacrifice of the past few years is likely to persist.

PS: As you note in your new book Accidental Conflict: America, China, and the Clash of False Narratives, China seeks to match the US in terms of “geostrategic clout.” After Russia invaded Ukraine, China had an opportunity to make progress on this front by leveraging its partnership with Russia to help restore peace and stability. You suggest that Xi should abandon his “unlimited partnership” with Russia. But hasn’t that already de facto happened, with Xi issuing not-so-veiled criticism of the war and refusing to provide Russia with weapons and technology? What would he gain from a more formal break with Putin?

SR: Xi is talking out of both sides of his mouth. Any criticism of Russia’s unconscionable actions has been oblique at best, and although China has not provided direct miliary assistance, it has helped to fund Putin’s brutal campaign through its purchases of Russian energy products.

If Xi abrogated his new partnership with Russia, he would obviously risk a venomous response from Russian President Vladimir Putin. But he would gain considerable clout as a global statesman at a treacherous point in world history. Not only would that advance China’s great-power aspirations; it would be consistent with China’s long-standing “Five Principles of Peaceful Coexistence.” 

As the greatest beneficiary of globalization, China stands to lose the most from deglobalization – a trend that its partnership with Russia only intensifies. If China clings to its alliance with a pariah state, it may be judged guilty by association and end up even more deeply isolated from the rest of the world. Xi is the only world leader who could put a stop to Putin’s madness – and he would probably win a Nobel Peace Prize in the process!

By the Way…

PS: “While China scores high in absolute comparisons to the US, both in nominal GDP and in its military clout,” you write in Accidental Conflict, “it scores much worse on a per capita basis.” Are Xi’s recent statements – including re-emphasizing his commitment to Taiwan’s “reunification” with China – further evidence of what you call “premature overreach”? What risks does premature overreach imply for China and the CPC?

SR: Yale historian Paul Kennedy famously stressed that premature overreach – projecting military power before establishing a solid economic foundation – was a recipe for great-power decline. It’s not just Xi’s approach to Taiwan that is worrisome in that regard. China’s militarization of the South China Sea and the rapid expansion of its military – now featuring the largest naval force in the world – also ring alarm bells. I would also add China’s $30 trillion Belt and Road Initiative to the list.

The economic side of the equation reinforces the case for overreach. China has not yet managed to rebalance from an export-driven to a consumption-led economy. The longer China puts off the difficult structural change that is needed, the greater the risks to its political-economy balancing act – and to the CPC that leads it.

PS: You conclude your book by considering how the US and China can “overcome the gravity of accidental conflict,” proposing a “diagnostics-focused framework approach to conflict resolution.” Can you briefly explain the logic and conceptual pillars of this approach?

SR: Accidental Conflict concludes with a three-pronged strategy for Sino-American conflict resolution – one that breaks from the dysfunctional approach of the past. The first prong is a rebuilding of trust, with the two countries working together to address issues of indisputably mutual interest: climate change, global health, and cybersecurity.

The second prong is a fundamental shift in the economic relationship. The current zero-sum approach has fueled bilateral trade tensions and produced the failed “phase one” trade agreement of January 2020. Both sides should instead embrace a positive-sum, growth-enhancing bilateral investment treaty, which provides a mechanism for dealing with structural arbitrage in areas like technology transfer, innovation policy, and subsidies of state-sponsored enterprises.

The third prong is to establish a new, robust architecture for engagement that features a permanent US-China Secretariat responsible for overseeing and managing all aspects of the relationship, from economics and trade to human rights and military/cyber tensions. Such a Secretariat – staffed by an equal number of professionals from each country – would better reflect the importance of managing the relationship between the world’s two most powerful countries than periodic Strategic and Economic Dialogues or high-level discussions between leaders.

PS: You dedicate your book to your students. Is there a particular insight to which your students – or the teaching process – led you?

SR: I have benefited enormously from engagement in the classroom. Over 13 years teaching at Yale, some 1,400 students took my course on the “Next China.” From the start, I stressed that the course’s subject matter was a moving target. But even I could not have predicted just how quickly that movement would occur.

Students wrote great papers aligned with my initial emphasis on the analytics of consumer-led Chinese rebalancing. But when Sino-American tensions began to intensify in 2016, their research papers – and my own interests – began to shift toward the sources and avenues of conflict between the two countries. The classroom became a laboratory for my own research and writing, with student feedback serving as an invaluable sounding board to stress-test our collective assessment of the ever-changing Next China and its conflict-prone relationship with the US.

Stephen S. Roach, a former chairman of Morgan Stanley Asia, is a faculty member at Yale University and the author of Accidental Conflict: America, China, and the Clash of False Narratives (Yale University Press, November 2022). 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see:

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.



Browse articles by author

More Current Affairs

Dec 5th 2022
EXTRACT: "After a decade of unconstrained growth – when it seemed that a new billionaire was minted every day – the tech industry has finally hit a rough patch. Elon Musk’s erratic behavior following his takeover of Twitter has left the financially leveraged platform in a precarious state. The crypto exchange FTX’s sudden implosion has vaporized a business that was recently valued at $32 billion, taking many other crypto firms with it. Meta (Facebook) is laying off 11,000 people, 13% of its workforce, and Amazon is shedding 10,000. What are we supposed to make of these setbacks? Are they isolated incidents, or signs of structural change?"
Dec 3rd 2022
EXTRACT: "Just looking at explicit debts, the figures are staggering. Globally, total private- and public-sector debt as a share of GDP rose from 200% in 1999 to 350% in 2021. The ratio is now 420% across advanced economies, and 330% in China. In the United States, it is 420%, which is higher than during the Great Depression and after World War II."
Dec 3rd 2022
EXTRACT: "The Conservative leadership must stand up to the party’s extremists, and it must do so sooner rather than later. If moderates cannot defeat the hardliners by the next election, and the outcome turns out to be as bad for the Tories as recent polls suggest, they will find they have the same fight on their hands in opposition. --- Conservatives must never underestimate the importance of their moderate supporters. If the Party continues to disregard centrists whenever the Brexiteer right stamps its feet, it may find itself out of power for a long time to come."
Nov 24th 2022
EXTRACT: "....young voters did reach the polls they voted overwhelmingly for Democrat candidates across the country. According to reports, 63% of 18- to 29- year olds voted Democrat and 35% voted Republican in the House of Representatives elections. Voters between 30 and 44 split their vote between the two parties, while older voters tended to vote Republican."
Nov 24th 2022
Nouriel Roubini: "Central banks are in both a stagflation trap and a debt trap. Amid negative aggregate supply shocks that reduce growth and increase inflation, they are damned if they do and damned if they don’t. If they increase interest rates enough to bring inflation down to 2%, they will cause a severe economic hard landing. And if they don’t – attempting instead to protect growth and jobs – they will be left increasingly far behind the curve, leading to a de-anchoring of inflation expectations and a wage-price spiral. Very high debt ratios (both private and public) complicate the dilemma further. Raising interest rates enough to crush inflation causes not only an economic crash, but also a financial crash, with highly leveraged private and public debtors facing severe distress. The resulting financial turmoil that intensifies the recession, creating a vicious cycle of deepening recession and escalating financial pain and debt distress. In these circumstances, central banks will blink. They will wimp out in the fight against inflation, in an effort to avoid an economic and financial crash. But that will lead to a higher permanent inflation rate, while only postponing the arrival of stagflation and debt crises. In other words, central banks in the United States, Europe, and other advanced economies have only bad options."
Nov 13th 2022
EXTRACTS: "Today’s autocrats wear staid business suits and pretend to be democrats, and that has been sufficient to grant them access to high-level meetings in Davos or at the G20, where they actively recruit former Western politicians, lawyers, public-relations consultants, and think tanks to make their case in the West." ---- "....whatever the weaknesses of Western democracies, they still command a degree of soft power that their autocratic competitors could only dream of. Democracy remains popular around the world – among citizens of both democratic and nondemocratic countries. That is why modern dictators pretend to be democrats." ---- "....there is no shortage of criticism about how the US and Europe function. But that itself is a product of the press freedom and political opposition that one can find only in democracies. But actions speak louder than words: Immigrants from around the world are eager to come to Europe or America, whereas few are trying to get into Russia or China."
Nov 9th 2022
EXTRACT: "In conventional macroeconomics, an economy’s longer-term growth potential is determined by the sum of labor-force and productivity growth. If one of those factors slows, the other must accelerate. Otherwise, long-term growth suffers.  China is in serious trouble on both fronts. An unsustainable one-child family-planning policy –subsequently changed to a two- and now three-child policy – means that the working-age population is declining, and Xi’s speech at the 20th Party Congress suggested that already-strong productivity headwinds are likely to intensify. "
Nov 1st 2022
EXTRACTS: "First and most obvious – it has happened before. And in an historical sense, it has happened relatively recently, with the collapse of the USSR in 1991 rightly considered a seismic event in world politics. The rub is that nobody predicted the end of the USSR either. In fact, it was confidently assumed in the West that Mikhail Gorbachev would go on ruling the Soviet Union, until the hard-line coup that failed to topple him (but left him mortally wounded in a political sense) made that view obviously redundant." ---- "So is it speculative to talk about a future Russian collapse? Yes. Is there evidence it is imminent? No. But in many ways that’s the problem: when authoritarian regimes implode, they tend to do so very quickly, and with little warning."
Oct 25th 2022
EXTRACT: " But in celebrating the CPC centennial, he [XI left little doubt of what those challenges might portend: “Having the courage to fight and the fortitude to win is what has made our party invincible.” A modernized and expanded military puts teeth into that threat and underscores the risks posed by Xi’s conflict-prone China."
Oct 8th 2022
EXTRACTS: "Recent inflation news from the eurozone’s largest member, Germany, is particularly alarming. In August, producer prices – which measure what is happening at the preliminary stages of industrial production – were a whopping 46% higher than in the same month last year. Given the long-term correlation between the growth rate of producer and consumer prices, this suggests that the latter could soar to 14% in November. Price stability – which is supposed to be the ECB’s uncompromising goal, per the Maastricht Treaty – is no longer perceptible" ----- "Since the 2008 global economic crisis, the ECB has allowed the central-bank money supply to increase twice as fast, relative to economic output, as the US Federal Reserve has. Of that growth, 83% was the result of the ECB’s purchases of government bonds from eurozone countries. With those purchases – which totaled an estimated €4.4 trillion – the ECB pushed interest rates on government bonds to around zero. This spurred countries to disregard European debt rules and accumulate debt at a breakneck pace."
Oct 7th 2022
EXTRACTS: "While some Russians have opposed the attack on Ukraine from the outset and publicly protested against the mobilisation that has just been declared, others, on the far right, feel that Russia is holding back too much and are increasingly calling for total mobilisation, the carpet-bombing of Ukrainian cities, and even the use of nuclear weapons." ----- "Will the Kremlin be able to channel the growing warmongering zeal? In view of the intensity of the rhetoric of the various wings of the Russian far right, backed recently by several Putin allies including the Chechen leader Ramzan Kadyrov, it is doubtful: whatever the outcome of the war in Ukraine, nationalist pressure is likely to become a serious and lasting threat to Russia’s internal stability."
Oct 3rd 2022
EXTRACT: "But US and global equities have not yet fully priced in even a mild and short hard landing. Equities will fall by about 30% in a mild recession, and by 40% or more in the severe stagflationary debt crisis that I have predicted for the global economy. Signs of strain in debt markets are mounting: sovereign spreads and long-term bond rates are rising, and high-yield spreads are increasing sharply; leveraged-loan and collateralized-loan-obligation markets are shutting down; highly indebted firms, shadow banks, households, governments, and countries are entering debt distress. The crisis is here."
Sep 29th 2022
EXTRACTS "Ever since she became a prominent political figure 12 years ago, Truss has been a shapeshifter. She started as a Liberal Democrat before becoming a Conservative, and she voted to remain in the European Union before championing Brexit. As a minister, it is hard to think of anything she accomplished. She signed a few EU trade deals as Secretary of State for International Trade, but most of those were rollovers." --- "But if until recently it seemed that Truss was driven solely by political ambition, her government’s 'mini-budget' proposal sheds light on her deeper ideological affinities."
Sep 20th 2022
EXTRACT: "Russia’s focus on Ukraine and Putin’s choice to frame this as a civilisational struggle with the west has created opportunities for China to enhance its influence elsewhere – at Russia’s expense."
Sep 20th 2022
EXTRACTS: ”The Ukrainian army is making spectacular advances,” --- “…the European Union has fully mobilized to confront the energy crisis.” ---- “we are helping our partners in the Global South to handle the fallout from Russia’s brutal aggression and cynical weaponization of energy and food.” ---- “In short: the overall strategy is working. We must continue to support Ukraine, pressure Russia with sanctions, and help our global partners in a spirit of solidarity.”
Sep 8th 2022
EXTRACT: "In 1950, a team of sociologists, including the philosopher Theodor Adorno, conducted an empirical study, later published as The Authoritarian Personality, which ....... “If a potentially fascistic individual exists, what, precisely, is he like? What goes to make up antidemocratic thought? What are the organizing forces within the person?... what have been the determinants and what is the course of his development?”
Aug 29th 2022
EXTRACT: "Russian aggression certainly poses a threat; but it is a familiar one that we know how to deal with. Rising temperatures, dry riverbeds, parched landscapes, falling crop yields, acute energy shortages, and disruptions to industrial production are something else."
Aug 25th 2022
EXTRACTS: "As the revolutionary founder of a new Chinese state, Mao emphasized ideology over development. For Deng and his successors, it was the opposite: De-emphasis of ideology was viewed as necessary to boost economic growth through market-based 'reform and opening up.' Then came Xi. Initially, there was hope that his so-called 'Third Plenum Reforms' of 2013 would usher in a new era of strong economic performance. But the new ideological campaigns carried out under the general rubric of Xi Jinping Thought, including a regulatory clampdown on once-dynamic Internet platform companies and associated restrictions on online gaming, music, and private tutoring, as well as a zero-COVID policy that has led to never-ending lockdowns, have all but dashed those hopes." ----- "With the upcoming 20th Party Congress likely to usher in an unprecedented third five-year term for Xi, there is good reason to believe that China’s growth sacrifice has only just begun."
Aug 23rd 2022
EXTRACTS: "Less widely noted, however, is that the prices of many commodities fell this summer. The price of oil decreased by about 30% between early June and mid-August. The politically sensitive price of gasoline in the United States fell by 20% over the same period, from $5 per gallon to $4 per gallon. The overall index fell 12%." ---- "There are two macroeconomic reasons to think that commodity prices in general will fall further. The level of economic activity is a self-evidently important determinant of demand for commodities and therefore of their prices. Less obviously, the real interest rate is another key factor. And the current outlook for both global growth and real interest rates suggests a downward path for commodity prices."
Aug 22nd 2022
EXTRACT: "How Trump planned to use the classified documents remains a question that investigators presumably have made a high priority. Depending on the answer and the resulting charges, if any, one thing is certain: Trump will play hardball, including by amplifying his claims of victimhood at the hands of the fictional Deep State, and denying any wrongdoing in purloining the documents. His lies and hyperbole, however, don’t preclude seeking a plea deal. In his previous tangles with the law, such as his Trump University scam, he agreed to compensate the victims (in that case $25 million) after his prevarications were exhausted."