Economic `Armageddon’ predicted


Richard Moore

From: "Janet M Eaton" <•••@••.•••>
To: •••@••.•••
Date: Wed, 24 Nov 2004 13:49:56 -0400
Subject: Economic `Armageddon' predicted -- Stephen Roach [Boston Herald.comNov 

Boston Herald -  Business Today 

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

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

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

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

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Richard Moore (rkm)
Wexford, Ireland

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