Economic predictions
April 11th, 2008I was reading the Freakonomics blog on the New York Times, which asked for a predictions: “How bad will the 2008 recession be?”. The measure uses a scale of 1-10, with the 2001 recession as a 4 and the Great Depression as an 8. Here’s my reply:
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I’m more of a betting man than an informed authority, so I’ll go “all in” and say 8-10. But that’s just a sort of Richter scale magnitude of economic changes: I don’t think what we’re about to see will look anything like the Great Depression.
The key is international economics. Foreign investment in the U.S., and in U.S. dollars, is increasingly looking like a house of cards. A bunch of things are happening all at once:
- China’s domestic consumer market is growing fast enough that soon they won’t need to rely on US consumers, at which point keeping their currency cheap compared to the dollar will be unnecessary and counterproductive.
- The Euro is becoming a viable alternative to the dollar as a global currency.
- Unprecedented US deficit spending, and rock-bottom Fed interest rates, are tending to devalue the dollar. The only thing holding it up is massive investment in dollars by foreign investors.
- The war in Iraq has caused foreign trust and confidence in the U.S. to reach an all-time low.
So here’s my prediction. The “housing bust recession” is small — call it 3-4 on your scale — but it causes foreign investors to decide divest their dollars and dollar-valued assets. A classic “bank run” panic begins, everyone sells their dollars, and the dollar drops into the toilet.
The rest of the world begins to rely on the Euro as a stable currency. Foreign manufacturers can no longer sell their goods in the U.S., but they switch over to selling to the burgeoning Asian consumer market, and life outside the U.S. goes on.
The U.S. experiences massive inflation, as foreign goods become priced out of reach. But exports become extremely profitable. The value of goods relative to services increases, and the U.S. makes a gradual transition back to an industrial / agricultural economy. Farms, mines, and manufacturing plants reopen after decades of stagnation, while shopping malls shrivel and die.
Is this a bad thing? In the short term, definitely. But the fundamental problem with the U.S. economy is its massive amounts of government and consumer debt, and an economy focused on selling things rather than making them. A period of heavy inflation and currency revaluation will render those debts negligible, and revamp our balance of trade.