November 23rd, 2004

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Politics
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(Economic) Armageddon Cometh

Via BoingBoing, here’s a piece about the predictions of Stephen Roach, the chief economist at investment banking giant Morgan Stanley. He says that America has no better than a 10 percent chance of avoiding economic ‘armageddon’.

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’.

I’m tremendously ignorant about economics, but this kind of talk is vaguely alarming. The facts in the article are hard to ignore. Given that Canada is the US’s largest trading partner, this can’t be good news for those of us north of the 49th.

Ask MetaFilter has an interesting debate about the accuracy of these predictions, and how one might indemnify oneself against bad times.

Comments: 2 Responses so far

davin
November 23rd, 2004
9:06 pm

yes and no.. note that our dollar value continues to rise specifically because of this..

[Reply]

Doug
November 24th, 2004
2:30 pm

Imo, the problem is the profound gap in productivity between first and third world labour, which is being compounded by our modern world’s capital liquidity and superb transportation of goods.

The final stage in the gradual ending of protection for textiles in the usa has just ended, the last factories have shut down, and china is expected to make some 80% of the socks the world buys within a few years. The benefit for us is that we get cheaper socks.

This is an old story. It’s been happening for so long, in so many industries, it’s barely news, and ultimately it’s beneficial to the world in general to have third world labour supported by the sock wearers of the world.

The usa has given up on textiles and is preparing to give up on agriculture. It is allowing these market changes in order to preserve access to third world countries for multinational (largely American) corporations to third world natural resources and to third world markets for cultural products and financial services – sophisticated industries and products requiring highly skilled labour.

At this point, we buy at lot more socks than they buy movie tickets, so they put the money back into our system by buying government securities, and the cash is used to keep the economy here going – by supporting credit card debt for instance. This cycle now requires 80 cents of every dollar saved worldwide.

Long term this is not sustainable, but short term it’s in everyone’s best interest – nobody wants to see the giant sock factories closed 6 months after they open, so the major consumer markets have to be supported until a new balance can be achieved – even if the value of the money sent to the usa is gradually eroded by inflation (which is generally expected as American interest rates rise).

The “armegedon” scenarios come about if something goes wrong with a gradual slide. Suppose the rest of the world stops accepting American cultural values and design leadership. The American dollar suddenly loses a lot of value – and everybody stops. We have to start knitting socks. They have to figure out what to do with all the unusable production capacity and labour – this is when wars happen.

Unfortunately, the usa government doesn’t seem to have much of a policy in this regard other than hoping to slide through. Certainly, it was not an election issue, because, I believe, neither party wanted to be the bearer of bad news, and neither party has any real idea of a policy solution which could be stated with any clarity much less embraced by the voters. To me, the last election had some analogies to the roman circuses – a lot of very serious, life and death, high drama in the ring, as the empire was succumbing to outside forces it could not resist.

I hope I’m wrong, and that this very simplistic analysis (if it even qualifies as analysis) is destroyed by another reader, but it’s the way I see things just now.

[Reply]

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