Stephen Roach, Morgan Stanley’s resident doom and gloomer argues…

…that the US Senate’s harsh rhetoric against China in recent days is mostly ill-informed and potentially destructive to the US economy and, eventually property values. Given the general ineptness of governments, whether Chinese, US or otherwise, it shouldn’t be surprising to anyone when some politicians eventually reach a consensus and enact a policy that inevitably defies basic economic principles and does nothing but destroy asset values. More simply, I would expect some sort of government stupidity to be the what eventually pricks the housing bubble, after doing much to inflate it in the first place.

“As the drumbeat of protectionism grows louder, financial markets could certainly suffer. The dollar undoubtedly would be first to go. Given the extreme nature of America’s massive trade deficit, the currency correction could well be swift and severe. That, in turn, would probably trigger a sharp back-up in long-term US interest rates -- having a cascading impact on over-valued property markets, asset-dependent consumers, earnings expectations, and US equities. Emerging market debt spreads -- already far too tight for my liking -- look especially vulnerable in a scenario of mounting trade frictions; the fundamental underpinnings of these export-led economies would get turned inside out if global trade flows slacken significantly.”

Link to Roach article.