From economic prospective we live in a very interesting moment. It happens every 2-3 years when everyone wonders what will happen next. There are basically two choices – goldilocks (soft landing) or recession. Each of those scenarios may come in different flavors.
- Status quo. We slightly decrease imports and increase exports due a slight decline of dollar. Dollar continues to be petrodollar. China and Japan continue to buy dollars to finance our account deficits. GDP grows slowly
- Weak dollar. Dramatic decline of dollar helps keeping the nominal asset prices sound. Real estate prices and stock market are more or less at the current level. Increase of availability of domestic and foreign cheap labor keeps inflation reasonable. China and Japan are forced to drop export prices and accept a much weaker dollar
- Strong dollar. The major military cuccess in Iraq and Iran increased the dollar acceptance as the only currency that can buy oil. Petrodollar prevails. Current account deficit remains big but the huge profits of multinational corporations abroad offset any domestic problems. Citibank opens new branches all around the world
- Slight decline of a dollar. Bernanke keeps the rates high. Current account deficit remains high, treasury bonds are attractive to foreigners. Inflation is low, but the money supply is high. Real estate drops, consumers are spending less on foreign goods but invest more in pension accounts. Stock market declines at least 30% over next two years. It will be only slightly painful in 2007, but suddenly becomes very bad in 2008. In 2008 real estate suddenly becomes a curse and everybody envy renters. Suddenly the economists start talking about deflation
- Huge decline of a dollar. Dramatic reduction of import, some increase of export. Big pain of Chinese exporters, social unrest and blood in China. GM and Ford prevail over Honda and Nissan. Decline of stock market and real estate are big, but not so big as in the previous scenario. There is no deflation talks
Those are, in short, the scenarios of our economy. Let keep watching.
Thank you Mr. Greenspan for all this mess!