America is on a Collision Course
Morgan Stanley's Stephen Roach warned us 20 years ago!
On September 27, 2004, Morgan Stanly economist Stephen Roach wrote an article titled “Global Collision Course” in which he explained how the US was in the process of destroying itself economically by living beyond its means. Contrary to most Keynesian economists, Roach seemed to understand that printed money is not capital as Bernanke and Yellen apparently believed. Whether individually or as a nation, it’s impossible to consume more than you produce indefinitely and print the money to pay for it without deliterious effects. Unless changes would be made Roach saw that the global dollar centric system would break down. Indeed, that is now happening! The BRICS (Brazil, Russia, India, China and South Africa) now joined by Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates are forming a powerful global economic and monetary system which combined with the dollar system’s own pathology is pointing to an end of dollar hegemony. And quite frankly, the dollar price of gold pictured above, which is the mirror image of the value of the dollar is proof positive that Dr. Roach’s prophetic words are now coming true.
The bottom line for Roach was that America was destined for an economically bleak future if it didn’t stop living beyond its means. The following chart dating from 2002 to April 2024 shows that America has not only failed to mend its ways but has tripled down on its bet that “debt doesn’t matter” since 2004!
Up to a point, with net export countries like China and Japan recycling their dollar earnings into U.S. Treasuries, we Americans could live beyond our means and engage in endless wars and clandestinely overthrow elected and unelected governments as we forcefully expanded global power. But the formation of the BRICS and the rapid decline of the dollar as measured against real money—gold—is evidence that the days of America’s abuse of its privilege of owning the world’s reserve currency is in rapid decline.
Following are some of the prophetic words Dr. Roach spoke nearly 20 years ago on Sept. 27, 2004 in his Morgan Stanley Global Economic Forum essay titled Global Collision Course.
“The world economy is on a collision course. The United States—long the engine of global growth and finance—has squandered its domestic savings and is now drawing freely on the rest of he world’s saving pool. East Asian central banks —especially those in Japan and China —have become America’s financiers o last resort. But in so doing, they are subjecting their own economies to mounting strains and increasingly serious risks. Breaking points are always tough to pinpoint with any precision. Most serious students of international finance know that these trends are unsustainable. But like any trend that has gone to excess, a group of ‘new paradigmers’ has emerged with a compelling argument ass to why these imbalances can persist in perpetuity. That is usually the sign that the denial is about to crack — possibly sooner rather than later.”
“Unfortunately, the case for mounting US imbalances is easy to document. Reflecting an unprecedented shortfall of domestic saving — a net national savings rate that fell to 0.4% in early 2003 and since has rebounded to just 1.9% in mid-2004 — the US has turned to imported savings in order to finance economic growth. And since it must run external deficits to attract that capital, it should not be surprising that the US current account deficit hit a record 5.7% of GDP in 2004. Yes, America has had a current-account problem for quite some time. But there has been a ominous change in the character of these external deficits. For starters, the US current-account deficit is no longer the means by which America funds investment-led growth that drives increases in productive capacity. In 2003, net investment in the business sector — the portion of capital spending left over after allowing the replacement of worn-out capacity — remained an astonishing 60% below levels prevailing in 2000. Meanwhile, the government’s overall savings rate—federal and state and local units, combined — went from a surplus of 2.4% in late 2000 to a deficit of 3.1% in mid-2004. Over the same period, overly-extended US consumers have wiped out any vestiges of saving—taking the personal savings rate down to a rock-bottom 0.6% in July 2004. In short, America is no longer using surplus foreign savings to support ‘good’ growth. Instead, it is currently absorbing about 80% of the world’s surplus saving in order to finance open-ended government budget deficits and the excess spending of American consumers.
“The international financial implications of America’s mounting imbalances are equally astonishing. It wasn’t all that long ago that the US was the world’s largest creditor. In 1980, America’s net international investment position—the broadest measure of the accumulated claims that the US has on the rest of the world less those that the rest of the world has on the US—stood at $360 billion. By the end of 2003, that surplus morphed into a deficit of minus $2.4 trillion, or 24% of US GDP. This transformation from the world’s largest creditor to the world’s largest debtor is, of course, a direct outgrowth of yar after year of ever widening current-account deficits.”
Roach pointed to the work of Roubini and Setser at that time. They calculated that America’s indebtedness to GDP would likely rise to between 40% and 50% which was alarming to them at that time. In fact, America’s debt to GDP is now greater than 125% which guarantees the inevitability of a dollar death spiral! Roach also shared concerns of Roubini and Setser about America’s indebtedness to its exporters which had reached 300% in 2004. I checked the current rate of US Treasury debt to our own exports and as of April of this year. They were around 250% ($7.9 million foreign held treasuries to $3.1 trillion in annual exports) perhaps that was not as bad as anticipated. However, to the extent that foreigners also hold corporate debt, that would increase the ratio of total US indebtedness to exports.
As the debt chart above and below shows, total foreign ownership of US Treasuries has flattened and even declined while the U.S. government has tripled its debt since 2004 from $10 trillion to $33 trillion. So, it should not be surprising that the two largest creditors to the U.S., China and Japan are not increasing their ownership of US Treasuries in line with America’s exploding deficits. Why should China for example buy U.S. Treasuries when lending to Americas is used fund an American military is set to subdue Chinese global power? On top of that as Danielle Di Martino Booth recently pointed out, with the next global economic disaster, which may be very near now that America has likely entered a recession, China will not be able this time to bail out the world as it did in 2008-09 because it has domestic issues related to own debt default caused by money printing induced mal investment. And Japan with its demographics has to preserve its wealth to take care of its aging population.
In his “Global Collision Course” article, Roach drew the conclusion that if America continues to live beyond its means the system will ultimately collapse and that there were three dynamics in play that would break down the existing structure. First, with America continuing to lose jobs to overseas countries, protectionism would emerge in the U.S. That has happened under the Trump Administration and has been largely continued by the Biden Administration. Secondly, Stephen believed that China’s massive money printing policies orchestrated to drive its currency down in order to boost exports would lead to inflationary problems. That has certainly happened in the property markets as a huge number of large apartments were built but never occupied leading to insolvency and the need to print even more money for bailouts. Lastly, Roach thought the status quo in Europe would be threatened by an overvalued Euro resulting from dollar depreciation. Most certainly we are now seeing a growing recession in Germany, Europe’s growth engine. And the Euro is getting much stronger of late vis-à-vis the dollar as the world is beginning to realize that the dollar is heading toward the inevitable dustbin of history.
Roach concluded that “These imbalances can be sustained only if the major nations of the word all march to the same beat.” They are obviously not doing so. With America confiscating Russia’s wealth and that sovereign nations from using the SWIFT—the international payment system, a growing number of nations starting with the current BRICS + 5 are demonstrating growing opposition to US hegemony and are willing now to stand up against America’s bullying tactics. In the Military Industrial Complex’s quest to own the world, we have kicked our “friends” in the shins at exactly the time we need them most to buy more, not fewer Treasuries.
The BRICS have been massively increasingly their gold reserves funded in part by swapping dollars for the yellow metal. By contrast, US policy makers who worship at the altar of Lord Keynes, still think the dollar is as good as gold despite the fact that the market is increasingly labeling the dollar as dross. The refining fires of nature will eventually lead to cognitive dissonance even for our economist who worship at the altar of Lord Keynes. Hopefully a day of “repentance” will come soon, when stubborn Keynesian economists admit that that government can’t create wealth fix all of humanity’s needs by going in debt and printing money to pay for it. Until that day arrives, existing propaganda from the mainstream will likely try to convince Americans that their government is here to help them with just a little more money printing from the Federal Reserve spigots.
It is increasingly clear to all with eyes to see that the inevitable day reckoning that Stephen Roach foresaw in 2004 is rapidly approaching. Again, there is no better evidence of that truth than the dollar price of gold shown at the top of this article. If the Russians, Chinese and a growing number of other nations understand that gold is the ultimate money and prepare for it by trading dollars for gold, shouldn’t we all be following suit at least with some of our wealth before America’s elite are forced that truth and trigger a huge run out of dollars into gold? Those who catch on to the ongoing destruction of the dollar now can still exchange dollars for gold before the price of gold is totally out of reach.
I will conclude with this thought. Perhaps the greatest upside opportunity now is with the gold miners. As recently noted, CNBC’s Chart Master, Carter Worth suggested a week ago that “the technicals point to an important bottom for the gold miners” even as gold hits all-time highs.
You can listen to Carter’s commentary here: Gold miners hit bottom even as gold reaches new all time highs.
Best wishes,
Jay Taylor