by Calculated Risk on 10/21/2005 05:47:00 PM

Foreign Policy asks Morgan Stanley Chief Economist Stephen S. Roach: What Awaits the Next Alan Greenspan?

FP: If you had to give the current U.S. economy a grade, what would it be?

SR: I’d give it a gentleman’s C. On the surface, GDP is good, inflation is low, and so is the unemployment rate. Beneath the surface, we have unprecedented imbalances in terms of low national savings. Two of the three pieces of national savings—the consumer piece and the government piece—are in the red. We have a record balance-of-payments deficit. We have record levels of household-sector indebtedness, and [a record number] of consumers living beyond their means. Superficially, it looks ok. Beneath the surface, it looks disconcerting.

Roach is too generous. The biggest problem is that the US is not seriously addressing the 'unprecedented imbalances', and there appears to be no leadership even arguing to take the first step towards more fiscal discipline. For the consumer, they have been using their homes as ATMs, and even if prices just stabilize, the ATM will dry up.

FP: What’s the likelihood of a U.S. recession?

SR: I put a 40 percent chance on a recession next year, which is high.

[Rising energy prices] are a big concern because they are hitting a consumer that has been stretched in an unprecedented fashion. The consumer savings rate right now is negative 1 percent, the lowest it’s been since 1933, which was not a terrific year. [During] the last 3 energy shocks—mid 70s, late 70s and early 90s—the same savings rate averaged 8 percent. We had a cushion that we could use to fund higher energy expenses. There is no cushion today. Consumption is going to get hit hard unless there’s immediate relief on energy product prices such as natural gas and gasoline, and home heating oil.

See the interview for more.