Wow, I thought I was getting close to tinfoil hat territory on the whole currency/economy thing, and along comes Morgan Stanley’s chief economist who makes me look like Pollyanna.
Here’s the first few paragraphs, but you’ll want to read the whole thing:
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.'”
Some interesting facts in there include that total US household debt is now 85% of the size of the entire economy (up from 50% twenty years ago), and that’s not even the most shocking thing–you should see what he says about financing the current account deficit.
The folks over at globalpolicy.org have charts showing this, by the way.
In other related news yet another article on the possibility of a run on the US dollar, and fear around the rise of the Yuan has popped up.
“There’s a lot of speculation,” says Michael Schubert, an economist at Commerzbank in Frankfurt. He sees some signs of a “herd instinct” developing.
The dollar is now down 50 percent against the euro since October 2000, and hit a its lowest level since 1995 against a basket of foreign currencies last week.
Yahoo, by the way, can easily provide a chart to illustrate the currency situation for you.
There’s a lovely op-ed piece over at kuro5hin that outlines a lot of what we’ve been talking about, addressing three main points: debt, the US dollar, and the rise of other economies. Here’s a snippet:
Lastly, however, the Euro is now beginning to extend into foreign equity markets, most notably oil. An increasing amount of Middle Eastern oil is being traded in Euros, and while the US Dollar remains dominant, both Iran and Saudi Arabia have flirted with the idea of completely converting to Euros. Equally significantly, Russia, the second largest oil producer in the world, has expressed serious interest in trading their oil in Euros instead of US Dollars, though it has not yet embarked on such an en masse conversion. For now the US dollar comfortably remains the dominant player, but there are enough signs for concern, and as Alan Greenspan pointed out, a transition will have a tipping point, after which it will be carried by its own momentum.
The threat to the US economy is that this transition, if it occurs, may not be slow. Because the strength of the US dollar is currently supported in part by its position as a global currency, a shift toward the Euro could trigger further collapse of a weakening dollar initiating a panic driven feedback cycle resulting in an almost complete collapse of the US dollar from its current point of strength. Ideally such a collapse would be halted by the closing current account deficit as the price of imports skyrockets, and US exports become ever more attractive. The US populace is, however, an habitual consumer, more than willing to spend its way into increasing household debt (as already noted). Worse still, US exports have been on the decline despite the recent weakness of the US dollar.
And finally, just to wrap up, note that Castro is getting rid of the dollar in Cuba.
