Is an Economic Catastrophe on the Way?

First, a prominent economist predicts an economiccatastrophe. Then, an OPEC announcement states that the oilconsortium anticipates a massive decline in oil consumptionin the second quarter of this year.

Morgan Stanley?s chief economist, Stephen Roach, is a wellknown economic pessimist, but even he doesn?t usuallypredict anything close to what he?s predicting now. In aprivate meeting to which the press was not invited, Roachstated that he felt that the US had a less than 10% chanceof avoiding economic Armageddon.

Roach argues that the US is, essentially, bankrupt becauseforeigners are dumping the dollar and refusing to by newAmerican debt. He feels that the dollar is about to go intofree fall because of this, and that Americans are going tobe hit with staggering across the board price and interestincreases as a result. Similar disasters have befallen manyother countries whenever their national debt has beenallowed to run out of control, as has happened over the pastfew years in the US.

The statistics are alarming. Every day, the US needs toimport $2.6 billion dollars from sources abroad to serviceits debt. There is serious question about whether or notworld liquidity can sustain this level of cash consumptionby the US. In addition, US consumers are heavily in debt andindebtedness now represents 85% of the national economy, upfrom 50% just a quarter century ago.

The popular idea in Washington is that debt ?doesn?t matter?because increasing debt didn?t affect the economy during theReagan administration. But the government?s foreign cashdemands at that time were tiny compared to what they arenow. US borrowing for the current fiscal year will consume80% of the world?s savings. During the height of the Reaganborrowing boom, US borrowing consumed under 10% of theworld?s savings.

OPEC apparently agrees that an economic catastrophe is onthe way, because OPEC President Purnomo Yusgiantoro hasrecently announced that OPEC expects demand to plummet inthe second quarter of 2005. In an statement last week, hesaid that there have been ?developments? that suggest thatdemand for oil will crash soon. He did not explain what OPECbelieves those developments are, but the organizationmaintains one of the world?s best systems of economicmeasurement, and is usually far ahead of banks and nationaleconomic forecasting units in its assessment of future worldeconomic activity.

To read Mr. Yusgiantoro’s comments,clickhere.

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