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September 17, 2004 at 08:00 PM
NEW YORK (HedgeWorld.com)-Stephen Roach, Morgan Stanley’s chief economist, warned that the out-of-whack world economy sooner or later will move into a correction, in part through the inability of U.S. consumers to maintain current spending levels with their heavy dependence on borrowing.
Speaking at a forum organized by Drake Management LLC, a fixed-income hedge fund and traditional portfolio manager, Mr. Roach presented a darkening picture of economic imbalance in line with arguments he has made for a couple of years. Also at the forum, former National Security Adviser Zbigniew Brzezinski described a potential geopolitical disaster due to American policy mistakes.
There was little to reassure the many investors in the audience, as Mr. Roach’s analysis suggested interest rates will rise uncontrollably when Asian creditors finally reduce their U.S. dollar-denominated assets, and equity markets will weaken as demand slumps.
In his scenario, even commodities offer no haven-their prices are likely to soften as Chinese growth slows. Only oil emerged as a possible good bet, due to severe energy shortages in China that may keep up demand despite the slowdown.
Steroids
As Mr. Roach sees it, the American consumer and the Chinese producer have been the two pillars of global economic growth, but both have now reached their limits. China acted as an engine of growth in Asia, while the United States accounted for most of the world’s gross domestic product growth.
He depicted the Federal Reserve’s low interest-rate policy and the federal budget deficit as extraordinary stimuli that have kept the U.S. economy on “steroids.” But these nostrums already have been used to the maximum and consumers have taken on unprecedented levels of debt, he said.
