Future potential scenarios for US economy

[xi]

My comment: This a first of three messages I plan to write. It
provides a link between the long term crisis (the one that started
around 1973) and the short term crisis that startedto be perceived in
2007-2008. This message will be posted in an American forum too.
Second and third messages will be posted only here and they will be
about global economy and about East Asia economy.

I weighed each scenario. Each weight is based purely on my subjective
likelihood, I cannot prove which scenario is higher or lower, and even
less to quantify its probability accurately.

Scenario 1.- Probability 40%. Hyperinflation.

Scenario 2.- Probability 40%. A new normal.

Scenario 3.- Probability 15%. Double dipp.

Scenario 4.- Probability 5%. US economy has already reached a new
normal. American version of the Japanese lost decade.


I describe them roughly and most in detail on links.

Secenrio 1.- Hyperinflation.

This scenario is mostly supported implicitly by people into markets.
Those who predict strong rise of commodities. As I have described it
in many messages I do not want to add anything now.

Scenario 2.- A new normal. (1) and (2)

This scenario was described by prof. Phelps. He predicts that "The
U.S. economic recovery will probably “run out of gas” as it heads
toward a “new normal” of lower long-term growth and higher
unemployment than over the previous decade" (I would rather say over
the previous decades). "The jobless rate in the medium-term may settle
at between 6 percent and 7.5 percent".

Comparing to both traditional Western schools he says that “Neither of
these schools recognizes the structural changes that the economy is
susceptible to,”.

He based his prediction on “now we are in an equilibrium. We don’t
like it, it’s a bad equilibrium, but now it’s no longer appropriate to
think there is an imbalance between supply and demand.”

Scenario 3.- Double dipp. (3)

Mostly defended by N. Roubini based on " this is a crisis of solvency,
not just liquidity, but true deleveraging has not begun yet because
the losses of financial institutions have been socialised and put on
government balance sheets. This limits the ability of banks to lend,
households to spend and companies to invest."

"there are risks associated with exit strategies from the massive
monetary and fiscal easing: policymakers are damned if they do and
damned if they don’t. If they take large fiscal deficits seriously and
raise taxes, cut spending and mop up excess liquidity soon, they would
undermine recovery and tip the economy back into stag-deflation
(recession and deflation).

But if they maintain large budget deficits, bond market vigilantes
will punish policymakers. Then, inflationary expectations will
increase, long-term government bond yields would rise and borrowing
rates will go up sharply, leading to stagflation."

He uses to predict the first option (recession and deflation)

4.- The American version of the Japanese lost decade. (4)

This is supported mostly in US media, not by many economists although
sometimes some economists cite the Japanese case and compare it to
current US economy.

This prediction concludes that US economy will be an L-shaped crisis.
Somehow it is a mix between double dipp and new normal.

Peace and best wishes.

Xi

(1) Nobel Laureate Phelps Says U.S. Recovery Will ‘Run Out of Gas’
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aEFTPh7c2WrQ

(2) Journal of Economic Perspectives—Volume 23, Number 3—Summer 2009—
Pages 109–124 (background for economists)
http://www.columbia.edu/~esp2/Journal%20of%20Economic%20Perspectives.pdf

(3) The risk of a double-dip recession is rising
http://www.ft.com/cms/s/0/90227fdc-900d-11de-bc59-00144feabdc0.html

(4) Japan's 'lost decade' provides lesson for America
http://www.onlineathens.com/stories/111409/opi_516198896.shtml