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Friday, November 26, 2004Stephen Roach Predicts Economic "Armageddon"Stephen Roach, the chief economist at investment banking giant Morgan Stanley,has a public reputation for being bearish.But you should hear what he's saying in private, says Boston Herald.Roach met select groups of fund managers downtown last week, including a group at Fidelity, for a private meet.His prediction: America has no better than a 10 percent chance of avoiding economic ``armageddon.''Roach sees a 30 percent chance of a slump soon and a 60 percent chance that ``we'll muddle through for a while and delay the eventual armageddon.'' The chance we'll get through OK: one in 10. Maybe. In a nutshell, Roach's argument is that America's record trade deficit means the dollar will keep falling. To keep foreigners buying T-bills and prevent a resulting rise in inflation, Alan Greenspan will be forced to raise interest rates further and faster than he wants. The result: U.S. consumers, who are in debt up to their eyeballs, will get pounded. Less a case of ``Armageddon,'' maybe, than of a ``Perfect Storm.''Roach marshalled alarming facts to support his argument. To finance its current account deficit with the rest of the world, he said, America has to import $2.6 billion in cash. Every working day. That is an amazing 80 percent of the entire world's net savings, hardly sustainable. Meanwhile, he notes that household debt is at record levels. Twenty years ago the total debt of U.S. households was equal to half the size of the economy.Today the figure is 85 percent.Nearly half of new mortgage borrowing is at flexible interest rates, leaving borrowers much more vulnerable to rate hikes. Americans are already spending a record share of disposable income paying their interest bills. And interest rates haven't even risen much yet. Recent events give it extra force - The dollar is hitting fresh lows against currencies from the yen to the euro. It has farther to fall, especially against Asian currencies, analysts agree. Analysts warn a "spectacular wave of bankruptcies" is possible. Smart people downtown agree with much of the analysis. It is undeniable that America is living in a ``debt bubble'' of record proportions. But they argue there may be an alternative scenario to Roach's. Greenspan might instead deliberately allow the dollar to slump and inflation to rise, whittling away at the value of today's consumer debts in real terms. Inflation of 7 percent a year halves "real" values in a decade.It may be the only way out of the trap. Higher interest rates, or higher inflation: Either way, the biggest losers will be long-term lenders at fixed interest rates. | |
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