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Generational Dynamics Web Log for 18-Mar-05
Stephen Roach says we've past the economic "tipping point"

Web Log - March, 2005

Stephen Roach says we've past the economic "tipping point"

Early in 1929, even the most astute analyst could not have predicted the precise day of the big crash, and frequent readers will note that I have never named the date of the start of the financial crisis we're rapidly approaching.

But Morgan Stanley's chief economist, Stephen Roach says in his weekly commentary today that,

"March 16, 2005, could end up in the running as a possible tipping point for America. Suddenly, the US has taken on a very different aura in an increasingly unbalanced world: The confluence of a record current account deficit, a disaster from General Motors, and yet another new high for oil prices all speak of an increasingly precarious role for the global hegemon. World financial markets have barely begun to sniff that out."

Read his column for yourself if you want the details, but I agree with Roach that we're past the time when anything can be done.

Total credit market debt <font size=-2>(Source: PIMCO)</font>

Total credit market debt (Source: PIMCO)

American public debt has been growing exponentially since 1950, as the adjoining graph shows, and has recently accelerated so much that it can't be stopped.

It's like a ball rolling downhill. At first it rolls slowly, and someone could easily stop it and even push it back up the hill. But after a while the ball gains so much energy, speed and momentum that it can no longer be stopped, and we've reached that point.

I had to laugh earlier this week when the Senate defeated a proposal to reduce the Medicare budget by 1% in order to reduce the deficit. The proposal was defeated because some Senators said that poor people wouldn't get medical care.

So if America doesn't have the will to cut 1% out of one spending program, then you can be sure that America doesn't have the will to make the 20%, 40% or 60% cuts in various programs that have to be made -- and will be made once the financial crisis begins, because at that time there will be no choice.

This is all happening in the shadow of an increasingly stormy situation in the Northern Pacific, as China, North Korea and even South Korea are talking more and more in terms of war, with a new escalation in the rhetoric almost every day.

I've always said that China and North Korea are planning preemptive wars of reunification (with Taiwan and South Korea, respectively), but I've always been vague about the date -- it might happen tomorrow, next month or next year. I've said the same thing about the financial crisis.

That's why Stephen Roach is extraordinarily gutsy to name an actual date. On some date soon, there will be a financial tsunami and a war explosion, and there is no way now to stop either of those from happening, and in that sense we're past the tipping point already for both events.

Stephen Roach makes one more point in his column that's worth repeating:

"[H]istory is replete with examples of leadership tests that pit a nation’s military prowess against its economic base.... Yale historian Paul Kennedy has long argued that great powers typically fail when military reach outstrips a nation’s economic strength. In that vein, there’s little doubt that America is extending its reach in this post-9/11 world. Wars in Afghanistan and Iraq were the opening salvos. The Bush Administration ... is upping the ante on its “transformational” projection of global power. In Paul Kennedy’s historical framework, America is extending its reach at precisely the moment when its economic power base is weakening -- a classic warning sign of the fall of a Great Power."

As usual, I completely disagree with the political interpretations of these things. America has been the "policemen of the world" since 1945, and has been taking on more and more responsibility since then. Just as it's too late now to reverse the economic overreaching, it's also too late now to reverse our military overreaching. These disasters have been in the cards for decades, and there's nothing that Bush administration could do to stop them even if it wanted to. Just as we can't pass a 1% reduction in Medicare, we can't also can't reduce our national arrogance about our military power.

I gave a startling example of American arrogance earlier this week, referring to Fed Governor Ben Bernanke's statement blaming America's astronomic credit imbalance on other countries for spending so little that they've created a "global savings glut." A lot of eyes should be rolling over that one.

I see so many people on television who talk blithely about America's massive power and massive wealth. And this has nothing to do with politics - it's the same for both Republicans and Democrats. Like a teenager who believes that he's invulnerable and invincible, even when he drinks and drives and takes drugs, so the American public, led by the arrogant generation of Baby Boomers born after World War II, are convinced that we're invincible and invulnerable.

But there are 6.5 billion people in the world, and only 280 million of them are Americans. The coming "clash of civilizations" world war is going to inflict the wrath of several billions of those people on America, and those who believe that we'll have an easy victory, including most of our journalists, politicians and pundits, are living totally in a fantasy.

I must caution all my readers that Stephen Roach may well be right, and that you should be taking steps to protect yourself, your family and your nation. As I've said before, the world today is much worse than it was a year ago, and things are getting worse every day. The public debt situation and the level of world conflict grow, and more and more commentators are noticing it. We must come together as a nation to protect one another, because we are going to have no choice. (18-Mar-05) Permanent Link
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Generational Dynamics Web Log for 18-Mar-05 Stephen Roach says we've past the economic "tipping point"

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Generational Dynamics Web Log for 18-Mar-05
Stephen Roach says we've past the economic "tipping point"