Stephen Roach predicts an "economic Armegeddon" - 24-Nov-04 - Generational Dynamics

Generational Dynamics Web Log for 24-Nov-04

Stephen Roach predicts an "economic Armegeddon"

The Chief Economist at Morgan Stanley is privately telling clients that America has no better than a 10 percent chance of avoiding "economic Armageddon," according to a Boston Herald news report, based on leaks from attendees.

"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, Federal Reserve Chairman Alan Greenspan will be forced to raise interest rates further and faster than he wants. ...

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. Sustainable? Hardly.

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."

Readers of my book or my web site already know that the only thing I would disagree with is that the probability of avoiding a severe financial crisis as high as 10%. Generational Dynamics predicts that we're entering a new 1930s style depression with almost 100% certainty.

What strikes me is that there seems to be some sort of verbal cascade going on. Last week, Alan Greenspan made a blunt warning that there would be harsh "adjustments" in store for America unless spending were cut back, just after Treasury Secretary John Snow indicated that the weak dollar would not be supported. This was at the top of the business news around the world.

Today we have Roach's statement, followed by the news that Russia's central bank says that it plans to shift its dollar holdings to euros. Obviously the Russians believe that the dollar will be getting weaker against the euro.

Meanwhile, Asian central banks are hoarding $2.3 trillion in American currency reserves. If the dollar keeps weakening, then those reserves will be worth less and less. But if Japan and China try to do what Russia is doing, then Roach's economic Armageddon may well occur in the short run. (24-Nov-04) Permanent Link
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Generational Dynamics Web Log for 24-Nov-04 Stephen Roach predicts an "economic Armegeddon"

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Generational Dynamics Web Log for 24-Nov-04
Stephen Roach predicts an "economic Armegeddon"