US economy headed for Perfect Storm

Stephen Roach of Morgan Stanley says the US economy is headed for Armageddon, according to the Boston Herald.

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 echoes similar statements by Paul Krugman this week.

Here are some more facts to mull over:

• To finance its current account deficit with the rest of the world, America has to import $2.6 billion in cash. Every working day.
• 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.
• A source who heard the presentation concluded that a "spectacular wave of bankruptcies" is possible as the dollar slumps against other currencies.

Krugman told Reuters that Bush has set "the country on a dangerous course that will likely end in crisis".

"This is a group of people who don't believe that any of the rules really apply, said Krugman. "They are utterly irresponsible."

The only bright spot in having Bush in power for another four years, said Krugman, is that further economic mismanagement might trigger some sort of popular outcry.

"I do believe at some point there is going to be a popular tidal wave against what has happened," concluded Krugman. "In the meantime, you keep banging on the drum, you keep telling the truth.

"And then eventually we have the great demonstrations, which I think are important to let the government know that many Americans are not happy with what is happening," he said.