Wall Street’s most notorious bear has turned bullish. Stephen Roach, the chief economist at Morgan Stanley, has publicly taken an optimistic view on the world economy for the first time since 1999.One of the main reasons for his change of mood is the steady increases in short-term interest rates. “Central banks are carefully adjusting the liquidity spigot – taking advantage of the luxury of low inflation to move very slowly in doing so.” (Morgan Stanley Global Economic Forum May 1, 2006). In addition, Roach is positive about the shift of international institutions, such as the G7 and the International Monetary Fund, towards multilateral surveillance (see Fund Strategy, May 1, 2006, IMF moves towards a multilateral approach). “They are now hard at work developing a multilateral solution to a multi-economy problem,” he says. Roach also welcomes the resumption of orderly currency adjustments. These include a gradual decline of the dollar, which he regards as long overdue given America’s huge current account deficit. However, he warns there are still serious risks in the global economy. Those he sees as threatening are oil, geopolitics, fiscal paralysis and protectionism. “But the world now appears to be getting its act together, and that encourages me,” he says. Roach has long been one of the most vocal advocates of the view that global imbalances pose a serious threat to the world economy. Rather than blame Asia for saving too much, he held to the view that the main problem is low savings in America. In addition, Roach has been a trenchant critic of central banks, particularly America’s Federal Reserve. He argues that in their attempt to counter the impact of the bursting of the 1990s stockmarket bubble they have created a property bubble. Interest rates have been kept too low for too long. “The jury is still out in America as one bubble [equities] has morphed into another [housing],” he says. Japan has already suffered from protracted, although mild, deflation as a result of the Bank of Japan condoning asset bubbles. The Fed has studied the lessons of Japan and tried hard to avoid these pitfalls following the Japanese experience.