Misc. Ramblings

The Boston Herald is reporting that the Chief Economist at Morgan Stanley Bank is predicting that the US economy has no better than a one in 10 chance of avoiding an economic Armageddon. By that he means:

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...

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.

But they argue there may be an alternative scenario...Greenspan might instead deliberately allow the dollar to slump and inflation to rise, whittling away at the value of today's consumer debts in real terms.

In any case, the economy appears boxed into a situation that will result in either much higher interest rates, higher inflation, or possibly both.