Morgan Stanley's chief economist Wednesday painted a doom and gloom picture of the U.S. economy, predicting there were "still a few more bubbles to be popped."
Speaking at the Morgan Stanley Asia-Pacific Summit in Singapore, Stephen Roach said, "America is in trouble. We are in the midst of a post-bubble business cycle. Many of the imbalances built during the last bubble are still with us."
"My view is that the U.S. economy will be very sluggish for the next two years at a minimum, which means that if any shock comes along, the economy will dip back into recession. Whether we have a double dip, or even a triple dip, who knows?" Roach said.
Roach warned that there were at least three possible shocks that could hit the economy over the next few months: a potential war in Iraq and the impact it will have on oil prices; a pop of the property bubble, "which would be tough for U.S. consumers"; and an increase in white-collar employee layoffs.
All those shocks could burst the consumer-spending bubble, he noted.
Savings-short U.S. consumers may face the toughest adjustments to post-bubble realities, Roach said, while acknowledging that his gloomy views were not shared by the majority, not even among his own colleagues at Morgan Stanley.
Roach argued that there was a real housing bubble alert, pointing that housing prices have surged while rental rates have moved up far more moderately.
"We have the biggest disparity between house price and rental rate we've ever had, so I do think we have a housing bubble," Roach said.
Roach also pointed to the 27 percent increase in inflation-adjusted house prices since 1997, the sharpest five-year increase since 1945.
Roach argued that there was a real risk the United States, as well as the global economy, will fall into deflation "within the next 12 to 18 months," and suggested that the Federal Reserve should cut interest rates aggressively, by as much as 75 basis points.
Deflation is already evident in goods and structures, a products grouping that collectively accounts for 47 percent of real gross domestic product, he said. "The cushion we get from services is getting thinner and thinner and in the context of the most intense deflationary cycle we have seen in tradable goods. This is why I worry about deflation."
"As globalization spreads from goods to services, there is a case for the low inflation U.S. economy being hit with a post-bubble recession," he said, adding, "The case for U.S. deflation is high and rising."
