'save The Day' From The New York Times

[jazzbo]

FYI -- posted with no comment on my part. Jazzbo

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September 25, 2007

Op-Ed Contributor

Save the Day

By STEPHEN S. ROACH

Hong Kong

CURRENCIES are first and foremost relative prices — in essence, they are measures of the intrinsic value of one economy versus another. On that basis, the world has had no compunction in writing down the value of the United States over the past several years. The dollar, relative to the currencies of most of America’s trading partners, is off about 20 percent from its early 2002 peak. Recently it has hit new lows against the euro and a high-flying Canadian currency, likely a harbinger of more weakness to come.

Sadly, none of this is surprising. Because Americans haven’t been saving in sufficient amounts, the United States must import surplus savings from abroad in order to grow. And it has to run record balance of payments and trade deficits in order to attract that foreign capital. The United States current account deficit — the broadest gauge of America’s imbalance in relation to the rest of the world — hit a record 6.2 percent of gross domestic product in 2006 before receding slightly this year. America must still attract some $3 billion of foreign capital each business day in order to keep its economy growing.

Economic science is very clear on the implications of such huge imbalances: foreign lenders need to be compensated for sending scarce capital to any country with a deficit. The bigger the deficit, the greater the compensation. The currency of the deficit nation usually bears the brunt of that compensation. As long as the United States fails to address its saving problem, its large balance of payments deficit will persist and the dollar will keep dropping.

The only silver lining so far has been that these adjustments to the currency have been orderly — declines in the broad dollar index averaging a little less than 4 percent per year since early 2002. Now, however, the possibility of a disorderly correction is rising — with potentially grave consequences for the American and global economy.

A key reason is the mounting risk of a recession in America. The bursting of the sub-prime mortgage bubble — strikingly reminiscent of the dot-com excesses of the 1990s — could well be a tipping point. In both cases, financial markets and policy makers were steeped in denial over the risks. But the lessons of post-bubble adjustments are clear. Just ask economically stagnant Japan. And of course, the United States lapsed into its own post-bubble recession in 2000 and ’01.

Sadly, the endgame could be considerably more treacherous for the United States than it was seven years ago. In large part, that’s because the American consumer is now at risk. Consumption expenditures currently account for a record 72 percent of the gross domestic product — a number unmatched in the annals of modern history for any nation.

This buying binge has been increasingly supported by housing and lending bubbles. Yet home prices are now headed lower — probably for years — and the fallout from the subprime crisis has seriously crimped home mortgage refinancing. With weaker employment growth also putting pressure on income, the days of open-ended American consumption are likely to finally come to an end. That will make it hard to avoid a recession.

Fearful of that possibility, foreign investors are becoming increasingly skittish over buying dollar-based assets. The spillover effects of the subprime crisis into other asset markets — especially mortgage-backed securities and asset-backed commercial paper — underscore these concerns. Foreign appetite for United States financial instruments is likely to be sharply reduced for years to come. That would choke off an important avenue of capital inflows, putting more downward pressure on the dollar.

The political winds are also blowing against the dollar. In Washington, China-bashing is the bipartisan sport du jour. New legislation is likely that would impose trade sanctions on China unless it makes a major adjustment in its currency. Not only would this be an egregious policy blunder — attempting to fix a multilateral deficit with more than 40 nations by forcing an exchange rate adjustment with one country — but it would also amount to Washington taxing one of America’s major foreign lenders.

That would undoubtedly reduce China’s desire for United States assets, and unless another foreign buyer stepped up, the dollar would come under even more pressure. Moreover, the more the Fed under Ben Bernanke follows the easy-money Alan Greenspan script, the greater the risk to the dollar.

Why worry about a weaker dollar? The United States imported $2.2 trillion of goods and services in 2006. A sharp drop in the dollar makes those items considerably more expensive — the functional equivalent of a tax hike on consumers. It could also stoke fears of inflation — driving up long-term interest rates and putting more pressure on financial markets and the economy, exacerbating recession risks. Optimists may draw comfort from the vision of an export-led renewal arising from a more competitive dollar. Yet history is clear: no nation has ever devalued its way into prosperity.

So far, the dollar’s weakness has not been a big deal. That may now be about to change. Relative to the rest of the world, the United States looks painfully subprime. So does its currency.

Stephen S. Roach is the chairman of Morgan Stanley Asia.

Copyright 2007 The New York Times Company

[ProThaiExpat]

Interesting, no talk of reduced government spending overseas, ie. Iraq, as a partial solution. As a banker, it is not unexpected he would harp on individual savings weakness, where bankers make their biggest profits, using those savings, which are paid for with low interest rates and then lent out at a fat margin.

[sonicdragon]

Even by this perennial bear's standards, this is pretty bearish !! I quite like to see this from people in positions like his, rather than people with vested interests in a collapse of the US economy/US dollar such as Marc Faber or Jim Rogers.

Edited September 26, 2007 by sonicdragon

[JonnieB]

Morgan Stanley's Steve Roach has been predicting the end of the world for years now (from high US trade imbalance and falling dollar). he is such a Casandra that it's the reason MS kicked his ass upstairs and sent him to manage the HKG office from being their chief economist based at the NYC headquarters

That pair of ex-Deutch Bank economists (names excape me at the moment) did more interesting study that concluded the trade imbalance between LDCs (and especially China and India) and the West/USA could continue for maybe a generation or more...untill all China and India's surplus labour from the countryside was absorbed in manufacturing industries. Until then, China will continue to vendor finance the USA's trade deficits because it's in their interest to do so.

[sonicdragon]

Morgan Stanley's Steve Roach has been predicting the end of the world for years now (from high US trade imbalance and falling dollar). he is such a Casandra that it's the reason MS kicked his ass upstairs and sent him to manage the HKG office from being their chief economist based at the NYC headquarters

That pair of ex-Deutch Bank economists (names excape me at the moment) did more interesting study that concluded the trade imbalance between LDCs (and especially China and India) and the West/USA could continue for maybe a generation or more...untill all China and India's surplus labour from the countryside was absorbed in manufacturing industries. Until then, China will continue to vendor finance the USA's trade deficits because it's in their interest to do so.

And what happens after "all China and India's surplus labour from the countryside was absorbed in manufacturing industries" in their analysis ?

[lannarebirth]

I quite like Strepen Roach. He's a bright and personable man. Though he has been a permabear for at least the past ten years that I've been reading him, he has made some excellent points, using well reasoned arguments. That said, he's been right about 50% of the time. It is also possible that he's right 100% of the time, but always 5 years early. Ialways read him and appreciate his views.

[sonicdragon]

I quite like Strepen Roach. He's a bright and personable man. Though he has been a permabear for at least the past ten years that I've been reading him, he has made some excellent points, using well reasoned arguments. That said, he's been right about 50% of the time. It is also possible that he's right 100% of the time, but always 5 years early. Ialways read him and appreciate his views.

I agree. It's good to read the opinions and analysis of people who don't have vested interests in their opinions being right.

[lannarebirth]

More Doom and Gloom, and maybe rightly so:

http://www.businessweek.com/bwdaily/dnflas..._top+news+index

[thedude]

I quite like Strepen Roach. He's a bright and personable man. Though he has been a permabear for at least the past ten years that I've been reading him, he has made some excellent points, using well reasoned arguments. That said, he's been right about 50% of the time. It is also possible that he's right 100% of the time, but always 5 years early. Ialways read him and appreciate his views.

back in 2004 or 2005 i posted on TV a Roach article which spoke of the emergent "asset bubble" in the US and bemoaning the average american's use of his/her home as an "ATM machine" to further extend the nation's already ballooning debt exposure. on the back of Roachies writings i managed to persuade my friend in SF to forestall his planned housing purchase and he has been thanking me profusely since the start of the year as home prices continued to slide. Roach may sometimes sound alarmist but he has so far been on the money for me.

[JonnieB]

And what happens after "all China and India's surplus labour from the countryside was absorbed in manufacturing industries" in their analysis ?

then it starts to get interesting...in 10-20 years, probably better to have more money in hard assets. but don't forget, in the long run, we're all dead

[sonicdragon]

And what happens after "all China and India's surplus labour from the countryside was absorbed in manufacturing industries" in their analysis ?

then it starts to get interesting...in 10-20 years, probably better to have more money in hard assets. but don't forget, in the long run, we're all dead

So, sometime between then and now they recommend moving into hard assets, but everything is hunky dory for now ?