Dark Bilious Vapors

According to a report in the Boston Herald, Morgan Stanley chief economist Stephen Roach is peddling some scary news to fund managers:

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.

The economic policies of President Bush have set the country on a dangerous course that will likely end in crisis, Princeton economics professor Paul Krugman told Reuters in an interview.

Krugman, who may be best known for his opinion column in The New York Times, said he was concerned that Bush's electoral victory over Sen. John Kerry earlier this month would only reinforce the administration's unwillingness to listen to dissenting opinions.

That, in turn, could spell serious trouble for the U.S. economy, which under Bush's first term was plagued by soaring deficits, waning investor confidence and anemic job creation.

"This is a group of people who don't believe that any of the rules really apply," said Krugman. "They are utterly irresponsible."

...

The most immediate worry for Krugman is that Bush will simultaneously push through more tax cuts and try to privatize social security, ignoring a chorus of economic thinkers who caution against such measures.

"If you go back and you look at the sources of the blow-up of Argentine debt during the 1990s, one little-appreciated thing is that social security privatization was a important source of that expansion of debt," said Krugman.

In 2001, Argentina finally defaulted on an estimated $100 billion in debt, the largest such event in modern economic history.

BANANA REPUBLIC?

"So if you ask the question do we look like Argentina, the answer is a whole lot more than anyone is quite willing to admit at this point. We've become a banana republic."

Len on 11.23.04 @ 12:57 PM CST