business.bostonherald.com/businessNews/view.bg?articleid=55356
Homeless ranks see growth in current econ omic slump Economic Armageddon' predicted By Brett Arends/ On State Street Tuesday, November 23, 2004 Stephen Roach, the chief economist at investment banking giant Morgan Sta nley, has a public reputation for being bearish. Roach met select groups of fund managers downtown last week, includi ng a group at Fidelity. But the Herald has obtaine d a copy of Roach's presentation. In a nutshell, Roach's argument is that America's record trade defic it means the dollar will keep falling. To keep foreigners buying T-bills and prevent a resulting rise in inflation, Federal Reserve Chairman Ala n Greenspan will be forced to raise interest rates further and faster th an he wants. The result: US consumers, who are in debt up to their eyeballs, wi ll get pounded. To finance its current account deficit with the rest of the world, h e said, America has to import $26 billion in cash. That is an amazing 80 percent of the entire world's net savings. Meanwhile, he notes that household debt is at record levels. Twenty years ago the total debt of US households was equal to half the size of the economy. 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 p aying their interest bills. You don't have to ask a Wall Street economist to know this, of cours e Watch people wielding their credit cards this Christmas. 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 interven tion. It has farther to fall, especially against Asian currencies, analyst s agree. The Fed chairman was drawn to warn on the dollar, and interest rates , on Friday. A source who heard the presentation concluded that a spectacular wave of bankruptcies'' is possible. It is undenia ble that America is living in a debt bubble'' of record proportions. But they argue there may be an alternative scenario to Roach's. Gree nspan 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. 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 483 percent.
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