Andy Xie from Morgan Stanley joins the Stagflation camp

[swag]

http://www.bloomberg.com/apps/news?pid=20601087&sid=aSkNo1.5fZRM&refer=home

Sept. 15 (Bloomberg) -- The U.S. economy may fall into recession in 2008 as ``inflation pressure'' drives up borrowing costs next year, Morgan Stanley's chief Asia economist Andy Xie forecast.

Xie said the U.S. Federal Reserve policy makers have so far persuaded investors that they will contain inflation, helping keep yields on 10-year notes below 5 percent. U.S. consumer prices will increase more than expected, Xie predicts, prompting a bond market selloff.

``We're headed for stagflation because the bond market believes the Fed,'' Xie said in an interview today on the sidelines of the International Monetary Fund annual meeting in Singapore. ``Recession will happen when the bond market sees through the Fed and sells off. People will have nowhere to borrow money anymore.''

Xie's view is darker than the predictions published yesterday by the IMF, which also expects a slowdown in the U.S. He says that inflation will persist because of rising prices in Asia, whose growth will fuel the global expansion next year.

``Inflation is not going away at all,'' said Xie. ``It's coming from land prices in Asia, and that's feeding into production costs.''

. . .