Wednesday :: Nov 24, 2004

Economic Armageddon?

by soccerdad

Stephan Roach is the chief economist at Morgan Stanley on Wall Street. I have posted on his analysis of the economy before. He has been sounding the alarm for some time now concerning the US economy. Briefly, he has stated that the US deficits are a major issue. The deficits for the most part have been supported by foreign central banks especially Asian central banks. Individual foreign investors have shied away from buying US notes because of the low rate of return. The central banks have been buying US treasury notes for their own political reasons, even though it loses them money. Roach has been saying that foreign central banks cannot go on forever paying for our mad spending spree. When you consider that US savings are at an all time low, there is no domestic source of funds to support the deficit spending.

Although Roach has often been less optimistic than other economists, his mood has apparently taken a very bad turn for the worse. In the Business section of yesterday’s Boston Herald, Brett Arends reports about a private meeting Roach had with fund managers in Boston last week.

His prediction: America has no better than a 10 percent chance of avoiding economic ``armageddon.''

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.''

Some facts he cited as important.
1. The US has to import $2.6billion dollars cash every working day
2. Twenty years ago the total debt of U.S. households was equal to half the size of the economy, where as today the figure is 85 percent.
3. nearly ˝ mortgage loans are flexible rates leaving the homeowner at high risk
4. Americans spending record amount of their disposable income on interest payments.

To draw foreign investors back to the US to support the sale of treasury notes the US could significantly increase interest rates. Since so many US families are up to their eyeballs in debt many with variable rate loans this would imply record number of bankruptcies.

For a long time the US dollar has been an important reserve currency. Also all oil sales are done in dollars. Iraq was the first country to execute sales in euros and they were followed by Iran. A move away from the dollar to, say, the eruo as a reserve currency would have serous long term implications for the US economy.

One could make the argument that given the aggressive US foreign policy of hegemony, many countries might be less inclined to throw us a lifeline as our economy declines, although this would be offset by any self interest.

The US has been for a long time the primary economic engine that could make demands on the rest of the world. Now with the rise of the economies of India and China and the sheer size of their populations, we will no longer be in that role. This could have severe consequences. How bad may depend on whether we change our attitudes towards the rest of the world. Continuation of American Exceptionalism backed by military might will lead us to a more isolated position in the world thereby further undermining our economy.

Now, an approach to solving these problems consistent with the neocon philosophy would be to seize by military might as much of the Middle Eastern oil fields as possible. That would mean a good supply of relatively cheap oil for us and would give us much leverage over the rest of the world. Of course whether the rest of the world would sit back and let us do it is a good question.

Here are a couple of other notes for your consideration.

Sean-Paul Kelly of the Agonist asks whether Bush will use a financial crisis as a means of accomplishing a long held conservative goal, i.e. dismantling of the US social security safety net.

Foreign investors may be souring on Wall Street. In September and August, they were net sellers of $5.9 billion of American stocks. NYT

Stephen Friedman an anti-supply side economist and one of the President Bush's top economic advisers, is leaving the White House to return to the private sector in New York, a senior administration official said Tuesday NYT

soccerdad :: 3:34 AM :: Comments (20) :: Digg It!