Economic `Armageddon' predicted

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Tue, 23 Nov 2004 17:50:12 -0500

Subject:Fw: Economic `Armageddon' predicted

 

 

http://business.bostonherald.com/businessNews/view.bg?articleid=55356

 

Boston Hearald

 

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.