OldVet – The Future of the US Economy

This post is on OldVet…

No, I don’t really think we are going to have to beg entrance to the Thunderdome with Mad Max. There may, or may not, be a dramatic moment in economic history arriving in the next year. Super-charged with cheap Japanese “carry trade” funds that have been used for all kinds of global financial investments, and under the influence of dynamic growth of emerging market economies, the US economy and investment markets have held their own in recent years. This has perplexed many of us who are more pessimistic observers. How can you argue with apparent success? Yet now the US “real” economy is turning down along with credit markets and financial markets.
We may not have a clear path ahead according to Martin Wolf at the Financial Times. Instead Mr. Wolf foresees, as do many other commentators and analysts, a period of years in which the US economy grows at a slower pace. The pressures for this will be the financial unwinding of the house price bubble and the credit markets returning to some version of sanity. He suggests there are two ways this “great unwinding” can go:

1. Non-US economies can increase investment and consumption, to meet the increased ability of emerging market economies to supply the world, or
2. Non-US economies, especially emerging market economies, will decrease supply to meet falling demand from the US.

His thesis is that the first option is better than the second. “Pick up the slack, or slow down the world merry-go-round,” so to speak.

Here are some worthwhile points to think about (and discuss):

1. Of those US policy options and programs which we discuss every day, which will be affected most by a slowdown of the US economy?
2. Will the governments of the emerging economies move their policies more toward domestic investment and consumption, or maintain their foreign currency reserves and allow exports to fall?
3. What will happen to relative currency rates in the short-, medium-, and longer terms?
4. What are the bright spots in the world’s economic landscape, if Mr. Wolf’s prognosis is correct?

This post was by OldVet.