Roach's private forecast scares Boston money guys, who root for inflation
- On State Street: Economic 'Armageddon' predicted
By Brett Arends
Tuesday, November 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 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
Roach marshalled alarming facts to support his
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
Meanwhile, he notes that household debt is at
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
euro. Its parachute failed to open over the weekend,
when a meeting of the world's top finance ministers
produced no promise of concerted intervention.
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 Friday.
Roach could not be reached for comment yesterday.
A source who heard the presentation concluded that
a "spectacular wave of bankruptcies" is possible.
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
You wouldn't want to hold 30-year Treasuries, which
today yield just 4.83 percent.
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