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  • Thursday, November 25, 2004


    Economic Armageddon

    I don't normally follow economic news much. I found this interesting because you don't generally see such pessimistic predictions from investment bankers. Caution, yes. Meltdown, no. From Economic "Armageddon" Predicted:
    Stephen Roach, the chief economist at investment banking giant MorganStanley, 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.

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