The dreaded inflationary endgame is looming, warns Stephen Roach

published 22 March 2011

The "Japan shock" is a serious blow for a global economy on "life-support", says former Morgan Stanley chief economist Stephen Roach.

Roach, now chairman of Morgan Stanley Asia, is known for his bearish outlook and in the run-up to the crisis made prescient calls on soaring US property values and consumer spending. He admits that "on the surface" the global economy has "little to fear" from Japan's crisis. After all, "20 years of unusually sluggish growth" mean that Japan "doesn't really matter anymore".

But this "narrow view" misses the point. The Japan shock has hit a global economy struggling "to recover from the worst financial crisis and recession since the 1930's". The economy is also being hammered by "sharply rising oil prices" and "ongoing sovereign debt problems in Europe".

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This matters because it means that governments and central banks had already reached the limits of conventional monetary and fiscal policy. As a result unconventional ideas, like 'quantitative easing', have "become the rage among central bankers". The problem is as the shocks keep coming the "exit strategy" from the "temporary fix" keeps being deferred.

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"Just as it is next to impossible to take a critically ill patient off life-support treatment, it is equally difficult to wean post-bubble economies from their now steady dose of liquidity injections."

With "extraordinarily high unemployment" it is unlikely that politicians will make difficult decisions anytime soon. Instead they will pursue an open-ended monetary expansion "that ends in tears". Watch out "the dreaded inflationary endgame suddenly looms as a very real possibility".

James graduated from Keele University with a BA (Hons) in English literature and history, and has a certificate in journalism from the NCTJ. James has worked as a freelance journalist in various Latin American countries.He also had a spell at ITV, as welll as wring for Television Business International and covering the European equity markets for the Forbes.com London bureau. James has travelled extensively in emerging markets, reporting for international energy magazines such as Oil and Gas Investor, and institutional publications such as the Commonwealth Business Environment Report. He is currently the managing editor of LatAm INVESTOR, the UK's only Latin American finance magazine.