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CNBC EXCLUSIVE: CNBC TRANSCRIPT: CNBC'S "POWER LUNCH" SITS DOWN WITH STEVEN ROACH, MORGAN STANLEY ASIA CHAIRMAN, TODAY

LIESMAN: PLEASED TO WELCOME STEVEN ROACH, CHAIRMAN OF MORGAN STANLEY ASIA TO POWER LUNCH. SPEAKING OF LUNCH, STEVEN IS THE DOLLAR TOAST?

ROACH: THE DOLLAR PEAKED IN FEBRUARY OF 2002. WENT DOWN FOR SIX YEARS AND THEN WHEN REST OF THE WORLD STARTED TO IMPLODE, POST SUBPRIME. THE DOLLAR THEN HAS REBOUNDED RATHER SMARTLY. WE HAVE A MASSIVE EXTERNAL DEFICIT THAT NEEDS TO BE FUNDED BY FOREIGN CREDITORS.THE MOVE IS DOWN, DOWN, DOWN.

LIESMAN: OVER THE PERIOD OF TIME THAT THE OBAMA ADMINISTRATION ANNOUNCED A SERIES OF TRILLION DOLLAR DEFICITS GOING OUT MANY YEARS OVER THE COURSE OF THE TIME THE FED ESSENTIALLY HAS PRINTED MONEY. IF YOU GO BACK ONE YEAR AND LOOK AT THE DXY IT WAS AT 72. NOW IT'S AT 80. IT'S OFF THE PEAK WHICH WAS AROUND 89 OVER THE 52 WEEK PERIOD. IN FACT, IF YOU WERE A TREASURY SECRETARY, YOU MAY SAY SOMETHING LIKE YOU KNOW WHAT, GIVEN ALL WE'VE DONE THE DOLLAR HAS REALLY HUNG IN THERE.

SHACTMAN: WAIT UNTIL THEY DEFICITS ARE REAL DEFICITS OVERTIME.

ROACH: I AGREE. THE DOLLAR HASN'T GONE INTO A MAJOR CRISIS. IT PROBABLY WON'T UNLESS WASHINGTON MAKES A REALLY DUMB MISTAKE, LIKE IMPOSE TRADE SANCTIONS ON CHINA. BUT BARRING THAT, I THINK THE DOLLAR CONTINUES A GRADUAL DECENT OVER THE NEXT SEVERAL YEARS.

HERERA: BUT IS THAT BECAUSE THERE IS NO OTHER ALTERNATIVE TO IT? I MEAN THAT'S WHAT'S BEING --

ROACH: CURRENCIES ARE -- WITH PRICES SO YOU HAVE TO LOOK AT THE DOLLAR VIS A VIS WHAT? IF YOU DON'T LIKE THE DOLLAR WHAT DO YOU GO BUY? YOU GO BUY THE EURO?

HERERA: NOT ME, BUT THAT'S THE QUESTION. YOU HAVE ALL OF THESE COUNTRIES FLOATING THE FACT THAT THEY WOULD LIKE TO HAVE ANOTHER RESERVE CURRENCY OR A BASKET OF CURRENCIES. IS THAT A POSSIBILITY OR NOT IN YOUR BOOK?

ROACH: THE CHINESE IN PARTICULAR HAVE LEAD THAT DEBATE. THEY HAVE TO BE CAREFUL WHAT THEY WISH FOR. IF THE DOLLAR WERE TO GO DOWN, THEIR MMB WOULD GO UP. THIS IS AN EXPORT DEPENDANT ECONOMY THAT NEEDS A CHEAP CURRENCY. DO THEY WANT TO UNDERMINE THEIR OWN EXPORT COMPETITIVENESS BY WISHING FOR A NEW FOREIGN EXCHANGE? NO WAY.

LIESMAN: AND THEY DON'T AND THE CRITICAL ISSUE HAS BEEN OVER THE COURSE OF THE LAST 10 YEARS, YOU HAVE CORRECTLY POINTED OUT THE IMBALANCES AROUND THE GLOBE. THE ISSUE IS NOBODY WANTS TO DO ANYTHING ABOUT THEM AND NOBODY IS GOING TO STEP UP AND ESSENTIALLY EAT THE US TRADE DEFICIT. I AGREE WITH WHAT YOU SAID, ALL WE ARE DOING RIGHT NOW IS PUSHING THESE IMBALANCES DOWN ROAD AND NOT DOING ANYTHING ABOUT IT.

HERERA: MORT ZUCKERMAN JOINS US ON THE PHONE RIGHT NOW HE WINGED HIS WAY BACK FROM A BUSINESS TRIP AND I KNOW YOU GENTLEMEN ARE OLD FRIENDS. MORT IT'S GREAT TO SEE YOU, WELCOME BACK. I'M GLAD WE COULD REUNITE YOU TWO.

ZUCKERMAN: I'M BARELY AWAKE.

HERERA: WE WILL WAKE YOU UP.WHAT ABOUT STEVEN'S POINT ABOUT THE DOLLAR, I MEAN YOU HAVE SUCH A GLOBAL PERSPECTIVE. DO YOU AGREE WITH HIM THERE IS NOTHING TO REPLACE THE DOLLAR?

ZUCKERMAN: ABSOLUTELY, I THINK THAT HE IS ABSOLUTELY RIGHT. AND WHEN YOU TAKE MOST OF THE GLOBES ECONOMIES, MOST OF THE WORLD ECONOMIES, I THINK THE UNITED STATES ONCE AGAIN WILL RECOVER THE FASTEST AND THE BEST. IT HAS THE MOST FLEXIBLE FINANCIAL AND THE MOST FLEXIBLE POLITICAL SYSTEM AND PARTICULARLY IN THE FINANCIAL WORLD IF YOU SEE WHATEVER HAPPENED HERE WHICH IS VERY, VERY UGLY. IT IS PRETTY BY COMPARISON TO WHAT HAPPENED IN ENGLAND AND OTHER FINANCIAL CENTERS. SO I THINK WHEN THERE IS A TURN AROUND AND I'M NOT SAYING THAT IS GOING TO BE IN THE VERY SHORT-TERM, CAUSE AGAIN, I AGREE WITH STEVE ON THIS I THINK THE UNITED STATES WILL BE AGAIN THE WORLD RESERVE CURRENCY. NO SUBSTITUTE FOR IT, ESPECIALLY CHINA. CHINA IN ANOTHER WAY OF PUTTING IT, IT'S MUTUALLY ASSURED DESTRUCTION, BECAUSE IF CHINA WANTS TO HAVE A LOWER DOLLAR, THEY ARE AN EXPORT DEPENDANT ECONOMY, THEIR EXPORTS ARE OFF SOMETHING LIKE 40% AND THEY DON'T WANT TO STAY IN THAT PLACE. THEIR WHOLE EMPLOYMENT BASE OF TRANSFER OF PEOPLE RURAL AREAS TO THE URBAN AREAS AND THE FACTORIES IS ALL BASED ON EXPORTS AND THAT'S WHERE THEY ARE HURTING. THEY CANNOT AFFORD TO POLITICALLY TO ALLOW THAT TO ERODE.

SHACTMAN: DOES SOME OF THE HEALTH OF THE US DOLLAR STEVEN DEPEND ON THE FED AND HOW IT REDUCES IT'S BALANCE SHEET. WE TALK ABOUT THE PUNCH BOWL AND HOW IT PULLS IT BACK. IF THEY DON'T TIME IT RIGHT, ALL THESE SCENARIOS MIGHT BE A PROBLEM.

ROACH: THE FED HAS GONE OVER THE DEEP END IN PROVIDING JUST A MULTIPLICITY OF LIQUIDITY INJECTIONS AND INTEREST RATE CUTS AND DOING EVERYTHING THEY CAN TO AVOID A WORSE CASE OUTCOME. IT'S FINE WHEN THE U.S. IS ON THE BRINK OF COLLAPSE, BUT NOW THAT THE ECONOMY IS STABILIZED, WE WANT TO KNOW WHAT THE EXIT STRATEGY IS. THE FED IS NOT AT ALL CLEAR ON HOW IT'S GOING TO TAKE THE PATIENT OFF OF LIFE SUPPORT. LOOK AT JAPAN, 10, 20 YEARS LATER, THE PATIENT IS ON LIFE SUPPORT. INVESTORS ARE CONCERNED THAT THE SAME THING IS GOING TO HAPPEN AGAIN.

CARUSO-CABRERA: A LOT OF PEOPLE SAY THAT JAPAN TRIED TO TAKE THEIR ECONOMY OFF LIFE SUPPORT TOO SOON AND WE SHOULDN'T MAKE THAT MISTAKE.

ROACH: YEA, SO WHAT ARE WE LEFT WITH? WE'RE LEFT WITH DEBT TO GDP RATIOS THAT WILL GO UP ENDLESSLY AND CONTINUE TO ZAP PROSPERITY IN AMERICA. INTEREST RATES THAT STAY LOW AND RUN THE RISK OF CREATING ANOTHER ROUND OF BUBBLES SOMEWHERE. THERE HAS TO BE A BUBBLE WE HAVEN'T INVENTED. THIS IS NOT A GREAT WAY TO RUN THE U.S. OR THE GLOBAL ECONOMY

CARUSO-CABRERA: GET ME SOME PROZAC.

HERERA: EXACTLY. YOU KNOW MORE YOU ARE CHAIRMAN OF BOSTON PROPERTIES. WE TALKED TO YOU A LOT ABOUT THE COMMERCIAL REAL ESTATE MARKET IT AND ONE OF THE THINGS THE FED IS WORRIED ABOUT, IS IT TOO SOON TO TAKE BACK ANY KIND OF STIMULUS OR ACCOMMODATION BECAUSE WE DON'T KNOW WHAT WILL PLAY OUT IN SPECIAL REAL ESTATE.

ZUCKERMAN: WELL NOT JUST COMMERCIAL REAL ESTATE, I DON'T THINK WE REALLY KNOW WHAT'S GOING TO PLAY OUT IN THE ECONOMY AT LARGE AND THEREFORE I DO FEEL THAT THE DOWNSIDE RISK OF TAKING THE PATIENT OFF LIFE SUPPORT ARE TOO GREAT COMPARED TO WHAT THE POSSIBILITIES ARE THAT WERE CURED. I THINK THE FED SHOULD BE CAUTIOUS AND IT IS WAY TOO EARLY IN MY JUDGMENT AND THERE IS A VERY GOOD CHANCE SINCE I'M MORE BEARISH THAN MOST THAT THIS ECONOMY WILL TURN DOWN AGAIN. AND THEREFORE I THINK IT'S TOO EARLY TO MAKE THAT JUDGMENT. I WILL BE MORE COMFORTABLE ABOUT MAKING THAT JUDGMENT IF WE SAW THIS CONTINUATION OF THE IMPROVEMENT OF THE ECONOMY THROUGH THE YEAR.

LIESMAN: THERE IS A DIFFERENCE BETWEEN THE ECONOMY TURNING DOWN AGAIN AND THE ECONOMY TURNING DOWN AGAIN AND BEING IN THE MIDDLE OF A BANKING CRISIS THAT COULD CAUSE PANIC, I THINK THE ECONOMY TURNING DOWN AGAIN AND THE GOVERNMENT LETTING THINGS FALL IS A GOOD THING BECAUSE IT'S HELPS CLEAR MARKETS TO THE POINT WHERE WE CAN AVOID PANIC LIKE WE HAD BACK IN SEPTEMBER OCTOBER . IT STRIKES ME I THINK ONE OF THE THINGS STEVEN ROACH IS SAYING RIGHT HERE IS THE ECONOMY IS IN BETTER SHAPE TO ACCEPT LOSSES THAT IT MUST EVENTUALLY ACCEPT.

ZUCKERMAN: I THINK THAT'S FAIR. THE REAL QUESTION IF YOU WANT TO TALK ABOUT THE BANKING SYSTEM, SINCE THE WHOLE SECURITIZATION MARKET IS VIRTUALLY EVAPORATED AND WE ARE DEPENDENT TO A GREATER DEGREE THAN BEFORE ON CONVENTIONAL BANKING TO PROVIDE THE FINANCING. I STILL THAT THINK WE DON'T KNOW HOW BAD THE LOAN BOOKS ARE OF MOST OF THE BANKS AND WON'T KNOW FOR A WHILE EITHER. I SUSPECT THERE ARE A LOT WORSE OR SOMEWHAT WORSE THAN AT THIS POINT WE PROBABLY THINK THEY ARE. I WOULD NOT TAKE THAT RISK AT THIS POINT AND I DON'T THINK THE FED WILL TAKE THAT RISK BECAUSE IF THEY ARE WRONG, WE CAN GET INTO VERY, VERY, VERY DEEP TROUBLE. THAT JUDGMENT IS A FAIR JUDGMENT THAT THEY ARE MAKING NOW. I WOULDN'T SAY THAT A YEAR FROM NOW IF WE HAVE THE CONTINUATION OF WHAT WE SEE NOW OR LESS. BUT FOR THE MOMENT I ABSOLUTELY WOULD NOT MOVE OFF THE COURSE.

LIESMAN: AIR ON THE SIDE OF ACCOMMODATION.

HERERA: MORT STAY WITH US. HOPEFULLY SOMEONE WILL GET YOU A CUP OF COFFEE. I KNOW YOU ARE JET LAGGED. WITH STEVEN AND MORT, WE WILL TALK ABOUT WHETHER CHINA AND OR ASIA OR INDIA WILL BE THE DRIVER TO TAKE US OUT OF THE RECESSION AND IS THE COMMODITY PLAY THAT WE HAVE SEEN STILL A LEGITIMATE INVESTMENT.

HERERA: LET'S TALK ABOUT WHAT IS GOING TO BRING US OUT OF THIS RECESSION. IS IT GOING TO BE ASIA, CHINA, INDIA ANY OTHER COUNTRIES? STEVEN ROACH JOINS US AND THAT'S HIS NECK OF THE WOODS. HE IS CHAIRMAN OF MORGAN STANLEY ASIA. AND MORT ZUCKERMAN IS WITH US AS WELL BOSTON PROPERTIES CHAIRMAN EDITOR AND CHIEF AND OWNER OF U.S. NEWS AND WORLD REPORTER AND DAILY NEWS AND TRAVELER EXTRAORDINAIRE. SO I'D LIKE TO HEAR YOU GUYS TALK THIS OUT IF YOU WILL. I MEAN STEVEN IS IT GOING TO BE ASIA?

ROACH: HERE'S AT LEAST A SHOT AT IT. HOW CAN AN EXPORT-LED REGION WHICH ASIA IS, BRING THE WORLD OUT OF RECESSION IF IT DOESN'T HAVE MARKETS TO SELL THINGS TO? ASIA BACK IN THE ASIA FINANCIAL CRISIS, DEVELOPING ASIA, ABOUT 36% OF THE GDP WENT TO EXPORTS. TODAY THAT NUMBER IS 47. IT'S BECOME MORE RELIANT ON EXPORTS. IT'S NOW DEALING WITH THE BIGGEST EXTERNAL DEMAND SHOCK IT'S EVER SEEN. ALL THE MAJOR MARKETS IN THE WEST ARE IN A RECESSION, HOW IS THIS REGION GOING TO LEAD US OUT?

HERERA: I DON'T KNOW. MORT, WHAT DO YOU THINK? I MEAN STEVEN MAKES A COMPELLING ARGUMENT, BUT DO YOU AGREE? THERE ARE A LOT OF PEOPLE WHO SAY CHINA IS RAMPING UP PRODUCTION THEY ARE BUYING THESE COMMODITIES THEIR DIVERSIFYING --. WHAT DO YOU THINK OF WHAT YOUR BUDDY SAYS?

ZUCKERMAN: I DON'T THINK THE U.S. IS GOING TO BE EXPORTING A LOT TO CHINA. SO WHATEVER HAPPENS IN CHINA IN MY JUDGMENT IT'S NOT GOING TO REALLY AFFECT MOST OF THE WESTERN ECONOMIES. CHINA'S AN EXPORT ECONOMY AS STEVEN SAYS, NOT AN IMPORT ECONOMY AND THEIR IMPORTS ARE NOT GOING TO DRIVE THE ECONOMIES OF THE WEST. ONE THING THAT GETS THE UNITED STATES OUT OF THE CURRENT RECESSION IS THE UNITED STATES ECONOMY. THAT IS SOMETHING THAT WE HAVE TO DEAL WITH HERE.

HERERA: YOU ARE GETTING A THUMBS UP

ZUCKERMAN: AND THAT'S WHERE WE CAN MAKE THE DIFFERENCE.

ROACH: HERE'S THE NUMBER. LOOK AT CONSUMERS AROUND THE WORLD. THE U.S. IS ONLY 4.5% OF THE WORLD'S POPULATION. WE ARE A $10 TRILLION CONSUMER. CHINA AND INDIA COLLECTIVELY NEARLY 40% OF THE WORLD'S POPULATION. YOU KNOW HOW MUCH THEY CONSUME TOGETHER? $2 TRILLION.

CARUSO-CABRERA:THAT'S THE POINT IF YOU GET JUST A LITTLE BUDGE THERE YOU HAVE HAVE EXPLOSIVE GROWTH.

LIESMAN: FROM KEVIN WARSH, THE FEDERAL RESERVE GOVERNOR, SAYING DON'T UNDER ESTIMATE THE TRAUMA OF CONSUMER TO FIRMS HE'S SAYING THE US JOBLESS RATE MAY STAY HIGH FOR LONGER THAN USUAL AND SPENDING TO BE WEAK FOR THE NEXT SEVERAL QUARTERS. OVERALL A VERY DOWNBEAT OUTLOOK FOR THE US ECONOMY. HE WARNS OF FALSE OPTIMISM IN THE ECONOMY.

SHACTMAN: I WANT TO ASK BOTH OF YOU, IF THAT'S THE CASE NOW, WHICH ECONOMY, CHINA OR INDIA SOME DAY COULD HAVE A DOMESTIC ECONOMY THAT COULD ACTUALLY DO SOMETHING LIKE BRING US OUT OF A DOWNTURN?

ZUCKERMAN: I WILL TAKE A CRACK AT THAT. IT WON'T HAPPEN IN MY LIFETIME. STEVEN IS A LOT YOUNGER THAN I AM. IT'S NOT GOING TO HAPPEN FOR A VERY, VERY LONG TIME. A COUPLE OF GENERATIONS. IT SEEMS BEFORE THEY CAN BE BIG ENOUGH. IF YOU WANTED TO TAKE ALL THE EUROPE TOGETHER, YOU MAY HAVE AN ECONOMY THAT WILL BEING HAVE AN IMPACT. I THINK WE ARE THE DRIVER OF THE WORLD'S ECONOMY AND IT WILL BE UP TO US TO REGENERATE THE GROWTH. I DON'T THINK WE ARE AT THAT POINT YET. I'M NOT SURE WHEN WE GET OUT OF THIS PARTICULAR RECESSION. IT'S GOING TO BE UP TO US.

HERERA: YOU MAKE -- YOU AND STEVEN HAVE BOTH MADE THE POINT IN THE PAST THAT THERE POTENTIALS OUT THERE. INDIA IS ONE OF THEM. WE HAVE A CHANGE IN GOVERNMENT STEVEN I THINK YOU THINK SETS THE STAGE IF INDEED THE GOVERNMENT ACTS QUICKLY AND APPROPRIATELY.

ROACH: I'M VERY OPTIMISTIC ON INDIA. IN THE LAST 10 DAYS I'VE BEEN IN THREE OF THE FOUR BRICS. I WAS ALSO RUSSIA, I'M STILL THAWING OUT FROM A FEW DAYS THERE, IT'S FREEZING IN ST. PETERSBURG. INDIA COULD BE THE SLEEPER IN ASIA. EVERYBODY IS FALLING IN LOVE WITH CHINA AFTER DECADES OF DOUBT. INDIA WITH GOOD COMPANIES AND VERY GOOD MICRO IN TERMS OF MARKETS AND WORK FORCE. AND THE MACRO IS GETTING BETTER IN TERMS OF SAVING, FOREIGN INVESTMENT. NOW THAT GOVERNMENT HAS CHANGED, THEY CAN PUSH THROUGH REFORMS IF THEY DO THAT, WATCH OUT FOR INDIA. BUT LOOK THE SCALE EFFECTS OF WHAT YOU ARE LOOKING FOR, MORT IS ENTIRELY RIGHT. THESE ECONOMIES ARE TOO SMALL TO MOVE TO GLOBAL NEEDLE.

LIESMAN: BOTH OF YOU AGREE THAT THE U.S. HAS TO LEAD THE WORLD OUT OF RECESSION. THE WAY THAT'S DONE IS THROUGH THE US CONSUMER WHICH IMPLIES MORE DEBT RIGHT BACK OFF TO THE RACES. IS THERE A SOLUTION THAT YOU HAVE WHERE THE U.S. LEADS THE WORLD OUT OF THE ECONOMY WITHOUT GOING BACK OR SOLVING THE IMBALANCES THAT EXISTED OVER THE LAST 10 YEARS?

ROACH: YEAH STEVE, YOU HAVE THE FRAMEWORK RIGHT, BUT THE US CONSUMER IS NOT GOING TO LEAD THE WAY WE ARE ACCUSTOMED TO SEEING THE AMERICAN HOUSEHOLDS SPEND. SO PREPARE YOURSELF FOR A WEAK RECOVERY IN THE UNITED STATES AND GLOBALLY. WE ARE SO HOOKED ON THIS GREEN SHOOTS TYPE NOTION.

LIESMAN: WHEN IT COMES TO RELATIVE PERFORMANCE, IF THE U.S. IS THE ENGINEER OF THE WORLD AND IT IS SUBPAR, DOES THAT MEAN OTHER NATIONS WILL BE SUBSUBPAR AND THAT AS AN INVESTOR I AM BETTER OFF BEING IN THE U.S. RELATIVE TO OTHER PLACES IN THE WORLD?

ROACH: IT'S POSSIBLE. IT DEPENDS ON RELATIVE EVALUATIONS AND ATTRACTIVENESS OF COMPANIES AND ASSETS AROUND THE WORLD. THE REST OF THE WORLD IS DEPENDENT ON US. WHERE I LIVE NOW, EXPORT-LED DEVELOPING ASIA, THEY ARE NOT GOING TO BE THE LEADERS WHEN THEIR BIGGEST MARKETS ARE ON THE SKIDS.

HERERA: IF IT'S GOING TO BE THE UNITED STATES YOU REALLY HAVE YOUR FINGER ON THE PULSE OF CONSUMER THROUGH YOUR PUBLISHING AND ALSO THROUGH YOUR REAL ESTATE INTEREST, BUT CERTAINLY THROUGH PUBLISHING. DO YOU THINK THE CHANGES THAT WE HAVE SEEN IN THE CONSUMER ARE PERMANENT OR AT LEAST LONG LASTING? BECAUSE IF YOU DO, I WOULD SAY THAT'S A LITTLE BIT OF A PIVOT POINT BETWEEN THE YOU AND STEVEN.

ZUCKERMAN: HERE'S THE WAY I LOOK AT IT, THE LARGEST ASSET ON THE BALANCE SHEET OF THE AVERAGE AMERICAN FAMILY IS THEIR HOME AND HOMES ARE DOWN 30% WHICH MEANS IF YOU WANTED TO TAKE EQUITIES PERSE IN HOMES GIVEN THE FACT THEY ARE MORTGAGES, THEIR EQUITIES IN THEIR HOMES ARE PROBABLY DOWN AT LEAST 50% OR 60%, SO TOO ARE THEIR FINANCIAL ASSETS AND THEY ARE GOING TO WANT TO REBUILD THOSE AND SAVINGS IF THEY WERE SAVING FOR THEIR RETIREMENT YEAR AND THEREFORE I THINK WE ARE GOING TO SEE A MUCH HIGHER SAVINGS RATE, I SUSPECT THAT IT IS GOING TO GET INTO THE RANGE OF 8-10%. ALL OF THAT MONEY COMES OUT OF CONSUMPTION, SO I BELIEVE AS STEVEN IS SAYING THAT WE ARE GOING TO HAVE A VERY SLOW RECOVERY BECAUSE I THINK CONSUMPTION IS GOING TO BE QUITE WEAK.





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