Back on November 5th I blogged about the likely consequences of the “perfect storm” of the trade deficit, budget deficit, and oil prices, particularly the collapse of the dollar. Others have the same idea. In today’s Boston Herald, Stephen Roach, the chief economist at investment banking giant Morgan Stanley, waxed apocalyptic: “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.” Roach predicts a major slump, with a massive wave of bankruptcies.
Interestingly, the article concludes: “But […] there may be an alternative scenario to Roach’s. 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. Inflation of 7 percent a year halves “real” values in a decade. It may be the only way out of the trap. Higher interest rates, or higher inflation: Either way, the biggest losers will be long-term lenders at fixed interest rates.”. And this is exactly the “stagflationary” scenario that I predicted.
(Via Boing Boing.)