My own gut feeling is that protectionist pressures in Europe will rise dramatically when the euro’s exchange rate hits $1.40
The question is: will the cynics get lucky in 2007?
The past 10 years have proved the economic optimists right. I would expect the pessimists to fare better in the next 10 years.
The three scenarios are: a soft landing; a hard landing with growth of between 0 and 1 per cent; or recession.
The soft landing is the mainstream prediction. This is the scenario on which the world’s central banks and governments have based their current policies.
Scenario two would have important implications for monetary policy. The Fed would start to ease monetary policy in 2007, but may remain constrained by the persistently robust core inflation rates.
Under scenario three, US economic activity would decline for a sustained period, usually defined in America as two consecutive quarters or more. It takes a brave forecaster to make such a call. One of the few is Nouriel Roubini, chairman of RGE Monitor, the economics information website, who has been sticking his neck out since July.
There is no way that the eurozone and Japan could withstand such a shock and manage to grow by 2 per cent under such circumstances. The real problem with scenario three is not the short-term economic effect, undesirable as it may be, but the political fallout. The bigger the downturn, the bigger the anti-globalisation backlash.
My own gut feeling is that protectionist pressures in Europe will rise dramatically when the euro’s exchange rate hits $1.40. The trouble is that under scenario three, an exchange rate of $1.40 is highly probable.
The more persuasive is this “liquidity” story, the more plausible it becomes that the correction is going to be more painful than conventional wisdom believes.
If consumer spending declines and interest rates fall or appear likely to fall, there is the real possibility that the foreign lending to the US that has financed imports far in excess of exports will start to dry up,