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Wed 24 Nov, 2004 09:47 am
From the
Boston Herald:
Quote:Economic `Armageddon' predicted
By Brett Arends/ On State Street
Tuesday, November 23, 2004
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.
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.''
Press were not allowed into the meetings. But the Herald has obtained a copy of Roach's presentation. A stunned source who was at one meeting said, ``it struck me how extreme he was - much more, it seemed to me, than in public.''
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, 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.
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.
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.
You don't have to ask a Wall Street economist to know this, of course. Watch people wielding their credit cards this Christmas.
Roach's analysis isn't entirely new. But recent events give it extra force.
The dollar is hitting fresh lows against currencies from the yen to the euro.
Its parachute failed to open over the weekend, when a meeting of the world's top finance ministers produced no promise of concerted intervention.
It has farther to fall, especially against Asian currencies, analysts agree.
The Fed chairman was drawn to warn on the dollar, and interest rates, on Friday.
Roach could not be reached for comment yesterday. A source who heard the presentation concluded that 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.
You wouldn't want to hold 30-year Treasuries, which today yield just 4.83 percent.
I've been reading an uncomfortable number of articles such as this one lately...
Cycloptichorn
Keep posting them, I 'enjoy' reading them too.
Can you imagine OBL gloating on TV if the US economy finally fails?
'The result: U.S. consumers, who are in debt up to their eyeballs, will get pounded.'
I'm glad I've managed to work my way out of debt, for the most part.
neue regel wrote:'The result: U.S. consumers, who are in debt up to their eyeballs, will get pounded.'
I'm glad I've managed to work my way out of debt, for the most part.
For most it takes a level of reasonable spending to keep from getting into debt. If people only by the things they need instead of the things they want, they will keep themselves out of debt. I had to learn this the hard way. People have stepped away from the saving money to buy the things they want to putting them on a credit card. This is only going to make things worse for them.
If someone is using personal responsibility in their spending, how much can inflation used as an excuse for their debt. It isn't as if the price of an xbox is going to go from $150 to $300 overnight. The most things go up at a time is small. I doubt the price of milk is going to cause someone to go broke. People have to control themselves in their spending and not get things just because they want them. Even the poorest among the population have a TV and cable. Is cable necessary for survival?
This is a very real problem...but many rightist have justified the spending, and have somehow maintained that it is not insurmountable, but manageable and consistent with inflationary qualifications...but I just don't see it.
But...the American people voted and they stated loud and clear that Iraq is more imprortant to them than their own economy....or anything else that should matter to them.
I suppose PD meant inflation makes debt easier to repay. Of course, it is rougher on the creditors, who tend to demand higher interest to offset anticipated inflation.
Being personally out of debt is fine from a personal perspective, but the national averages can drag us down in spite of our own strong balance sheets.
Baldimo wrote:If someone is using personal responsibility in their spending, how much can inflation used as an excuse for their debt. It isn't as if the price of an xbox is going to go from $150 to $300 overnight. The most things go up at a time is small. I doubt the price of milk is going to cause someone to go broke. People have to control themselves in their spending and not get things just because they want them. Even the poorest among the population have a TV and cable. Is cable necessary for survival?
Inflation helps people with debt, although their debt would be unlikely to go from the equivelent of two xboxes to one xbox overnight.
Interest tend to counterbalance though.
Edit: Beat me to it you did.
'The result: U.S. consumers, who are in debt up to their eyeballs, will get pounded.'
I'm glad I've managed to work my way out of debt, for the most part.
There's two unsustainable things we're doing. The first is the Federal deficit, which is running at about $35 Billion a month. Some of this is Iraq, but most is Mr. Bush's tax cuts compounded by a Congress out to buy votes by promising everthing to everyone.
The second thing is our trade deficit, currently running at $50 Billion a month. I've heard Walmart called "a factory outlet store for China". I guess that sums it up pretty well.
Sooner or later the rest of the world is going to stop lending us money to finance both of these deficits. Or worse yet, they're going to demand to be repaid. It's not going to be pretty for us when that day arrives.
The more the rest of the world is involved in our economy, the more they have to lose. Only Terrorists and hardcore leftists want to see the U.S. go down. The U.S. has plenty of resources to maintain itself. In the event of a collapse, there will be an intial shock, but we will equilize. We have at least 10 billion barrels of oil, and coal up the yin yang. The U.S. is BIG. Were sittin pretty, in my opinion.
for the most part ,lets face it , Americans are spoiled . even the poor in this country have it good compared to most other nations . so big deal , we'll have to cut back a little , conserve now so that we can bounce back later it's hardly the end of our economic good fortune. there are too many other countrys that depend on American spending to support their systems. btw a large # of economist have predicted similar "armageddon" type scenarios during every war in american history , and we are still hear
in fact there was a man who used the word armageddon to describe the down fall of the American economy if we attained independence from the british , give me till after the holiday to look up the name , i have it in a book at home. to sum it up , times of war are always a little harder we work through it and move back up after the storm is over.
The thing you people don't seem to realize, is that there are many many people out there who don't have a sense of personal responsibility re: money and debt; many of these people are not poor, either, as debt is just as much of a problem for the middle and upper classes.
Once we get into serious financial problems, the bottom drops out for those who are already close to the edge. But the real problem isn't that people will go broke, or lose their jobs and have none to replace them(that's happening today), it's that those people don't go away!
Imagine 4 million extra jobless, homeless people in America, many of them women and children. It's a real problem if you don't want those people to starve, creating an even bigger drain on an economy which is already strained. Crime would definately rise, and why not? If it comes to feeding my kid, I'd rob the hell out of people...
Cycloptichorn
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