One Economist's Yin and Yang


By Michael Mandel Is it possible to view the global economy with depressing pessimism and striking optimism at the same time? I recently spoke with someone who holds this seemingly schizophrenic set of views: Roger Bootle, the 53-year-old former group chief economist for HSBC (HSBA) and head of the fast-growing London economics firm Capital Economics.

One of the best-known economists in Britain, Bootle worries that in the short term the global economy may face financial disaster, especially if the U.S. housing bubble pops. "I can't remember a time when the world economy felt more fragile," says Bootle. Indeed, Capital Economics recently published a report calling for a 30% chance of a U.S. recession by early 2007 (see BW Online, 11/28/05, "The Case for a Long and Deep Recession").

"VERY RUDE." Unlike most economic pessimists, however, Bootle is ultrabullish about global growth in the medium run -- say, 5 to 15 years out -- because of technological progress and the rise of China and India. "The underlying forces in the world economy are massively positive," Bootle told me. "I see the potential for a great leap forward. It's like the combination of the Industrial Revolution and the discovery of the North American continent rolled into one."

One reason to listen to Bootle: He has defied doubters before. Most economists jeered his 1996 book, The Death of Inflation, which argued that inflation had been definitively beaten. "People were very rude about my economic credentials," says Bootle, who taught economics at Oxford for three years and had written a textbook on monetary economics. In the end, global inflation dropped further and faster than almost anyone else had predicted.

The whole experience left Bootle a bit cynical about academic economists. "The economics profession has gone down the tubes in a big way," he told me. "The best brains are obsessed with some abstruse piece of mathematical economics."

INDEPENDENT OPINIONS. In a rather witty section of his book Money for Nothing (2003) -- which has just come out in an updated paperback edition -- Bootle writes about what he calls the three essential elements of modern economics: "The conclusion is derived by relentless logic and elegant economy of reasoning. It induces a state of unrelieved gloom in all those who are exposed to it. It is outrageously wrong."

Of course, the big financial firms aren't necessarily that much better. Bootle started Capital Economics in 1999, in part because he increasingly felt a conflict between the interests of HSBC and those of its clients. Capital Economics started slowly, but last year sales increased by 40%, according to Bootle, with more and more clients, such as managers of small funds, interested in getting research independent of the big financial houses.

He says his clients mainly want the short-term outlook, which tends to be gloomy. "You never want to put disaster as the central case, but the dangers are pretty high," he points out. Besides the overheated U.S. housing market -- which he calls "simply the biggest bubble in financial history"-- he's worried about insufficient consumption growth in Asia, the Japanese tightening monetary policy too early, and the possibility of a financial crisis brought about by the fall of the dollar.

WHEN BUBBLES POP. Some potential scenarios look even more dismal. "If America enters a significant slowdown, one can only imagine the protectionism pressures in Congress will grow, " says Bootle. And that could set the global economy down a bad path. In his revised book, in a section titled "The Threat of War," he recalls World War I, writing that, "in my nightmares, I sometimes imagine a repeat: a war between America and China that reduces all the hope and optimism of this book to nought."

One issue: Why should there exist so much fragility in the short run when there's all this supply potential in the medium run? Perhaps it has resulted in part from the succession of burst bubbles that have generated excessive caution around the world.

For example, Bootle notes that since the Asian currency crisis of 1997, almost all of the large Asian countries have attempted to run trade surpluses, in effect restraining domestic demand. The bursting of the dot-com bubble led to excessive caution on the part of corporations. And the bursting of the housing bubble, when it happens, will restrain consumer demand.

SWEET ON EQUITIES. More generally, the uncertainty generated by technology and globalization exerts a dampening effect on demand. "It's all very well saying that the world has all these opportunities," says Bootle. "But corporations perceive threats."

What does this all mean for investors? In the short run, the investing climate is tricky, says Bootle, since "there is no asset class which is attractive." But in the medium run, as the global economy picks up speed, "I'm much more keen on equities than on bonds," he says. "Judicious investment in an equity portfolio will give you excellent returns."

That's good news for investors -- if they can just get past the next few years.

Mandel is BusinessWeek's chief economist. For more discussion of economics, see his blog, Economics Unbound


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