Paul Krugman, a New York Times economics columnist, warned recently that the Bush administration’s policies are making a deep economic crisis more likely.
Now the chief economist of one of the world’s most prestigious banks says much the same. Stephen Roach, chief economist for Morgan Stanley, one of the 50 largest companies in the world, says we are on the “economic brink.”

Mountains of debt

Writing in Foreign Policy, Roach says that when Alan Greenspan steps down as chair of the U.S. Federal Reserve, he will leave a record foreign deficit and a generation of Americans with little savings and mountains of debt. Americans, he says, depend on the value of their assets, especially their homes, rather than on income-based savings. They are running a huge current-account deficit. Much of the resulting debt is now held by foreign countries, especially in Asia, which permits low interest rates and entices Americans into more debt.

“This is no way to run the global economy,” Roach says. After the Asian financial storm of the late 1990s, he points to “increasingly dangerous waters in the years that followed,” noting that “global economic imbalances have intensified dramatically since 1999.”

What does he mean? “Asian countries holding enormous stocks of U.S. dollars recycle this cash back in to the United States by buying U.S. Treasury bills. This process effectively subsidizes U.S. interest rates, thus propping up U.S. asset markets and enticing American consumers into even more debt. Awash in newfound purchasing power, Americans then turn around and buy everything from Chinese-made DVD players to Japanese cars. … Asia and Europe are increasingly dependent on overly indebted U.S. consumers, while those consumers are increasingly dependent on Asia’s interest-rate subsidy. The longer these imbalances persist, the greater the likelihood of a sharp adjustment. A safer world? Not on your life.”

Policies such as tax cuts, Roach warns, “could make the endgame all the more treacherous.”

When this bubble of debt bursts, consumers in the U.S. will no longer be able to continue increasing their credit-based purchases. Companies selling products and services will have to cut back. Then, suppliers of those companies will have to cut back. The newly laid-off workers will reduce their spending, sales will fall, and more stores and factories will close.

Hardship in the midst of plenty

The resulting tragedy of hardship in the midst of plenty was described by Karl Marx and Frederick Engels 157 years ago. “Modern bourgeois [capitalist] society, with its relations of production, of exchange and of property, a society that has conjured up such gigantic means of production and of exchange, is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells. … It is enough to mention the commercial crises that, by their periodical return, put the existence of the entire bourgeois society on its trial, each time more threateningly. In these crises, a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed. In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity — the epidemic of over-production. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation, had cut off the supply of every means of subsistence, industry and commerce seem to be destroyed. And why? Because there is too much civilization, too much means of subsistence, too much industry, too much commerce.”

Better hang on — we could be in for a rough ride. Maybe it’s time to think about changing to a socialist economy, one that doesn’t go through devastating crises once every few years!

— Excerpted from People’s Voice, “Working Class Economics” column.
Art Perlo contributed to this column.