Tuesday, November 23, 2004

Pay off those credit cards NOW!

The following article was linked on Eschaton and I thought it bore repeating here. I'll focus on some stuff that Atrios didn't quote, though. The person making the predictions is Stephen Roach, chief economist at Morgan Stanley.
Economic 'Armageddon' predicted
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.
Of course no body wants to believe it when Chicken Little says the sky is falling, but Roach backs up his claim. The article continues:
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.

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 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.
Personally, I'd love to blow a couple thousand bucks on a new computer system right now. But maybe I'll put that off for the time being.

[update] The article does mention a possible alternative--if the rate of inflation were allowed to rise, that would reduce our debt in real terms. There's a side effect of this that the article doesn't mention, though: any money we had saved would be devalued as well. So my question is, would my 401k plan be devalued too? Or would this result in such a market boom that my 401k would grow faster than the rate of inflation whittled it away? Of course, I'd be a fool to count on something like that happening.


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