Is economic "Armageddon" on the horizon?
Stephen Roach, the chief economist at Morgan Stanley, argues yes:
Roach met select groups of fund managers downtown last week, including a group at Fidelity.
His prediction: America has no better than a 10 percent chance of avoiding economic "armageddon."
[snip]
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.
The result: U.S. consumers, who are in debt up to their eyeballs, will get pounded.
Roach argues that circumstances are set for a tidal wave of bankruptcies in the near future. In his presentation, Roach appealed to the following facts for the "reality-based" in the audience:
- 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.
- 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.
The way out of the trap, suggest others, is to inflate the dollar to reduce the debt in real terms.
At any rate, I don't think we'll be seeing Mr. Roach on Kudlow and Kramer anytime soon.
[Thanks to EA]
10:58:10 AM 
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