Re: (OPE-L) Economic 'Armageddon' Predicted -- by Wall Street economist

From: Rakesh Bhandari (bhandari@BERKELEY.EDU)
Date: Wed Nov 24 2004 - 13:18:40 EST

At 12:58 PM -0500 11/24/04, glevy@PRATT.EDU wrote:
>Economic `Armageddon' predicted
>By Brett Arends/ On State Street
>Boston Herald, Nov. 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
>  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
>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.

At one level, I don't get this argument. The world is on a dollar not
gold standard (as MacKinnon and Davidson have underlined). And as
provider of the only near world money, the US is in obliged increase
the quantity of money to meet the growing international circulation
of commodities. The US Fed is in some ways like the gold sector in
Marx's reproduction schema: it's where the money comes from. The US
therefore runs massive  deficits (i.e. receives gratis real goods and
services), but isn't that just the US' exorbitant privilege as issuer
of (near) world money.

  Of course to maintain the dollar's global role Greenspan has to take
steps (viz target Baker's commodity index) to insure global
confidence that the dollar will remain as good as gold, i.e. it will
not lose its value. To maintain its monopoly as near world money, the
Pentagon ensures that the lifeblood of global industrial civilization
remains priced in dollar and that US firms maintain a monopoly over
the most advanced weapons systems.

The global lustre of the dollar comes dripping in blood and petroleum.

  A substantial part of the American working class is tied up in this
financial and military imperialism; there is a solid material basis
for the most reactionary ideas--national chauvinism, global racism,
denigration of socially useful activity. There are thus profound
divisions inside the American working class--the divisions are both
within all individual workers and among groups of workers.

It all does inspire daydreaming about there having to be weak links.


>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
>Its parachute failed to open over the weekend, when a meeting of the
>world's top finance ministers produced no promise of concerted
>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
>Roach could not be reached for comment yesterday. A source who heard  the
>presentation concluded that a ``spectacular wave of bankruptcies'' is
>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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