Where is the Global Economy Likely to Go?

As with anything in economic forecasting, what I am about to say is at best an educated guess.  Given the present environment, where is the global economy likely to go?

Any analysis like this has to contend with political factors that drive the major imbalances of the global economy.  Here are the imbalances as I see them:

• China insists on keeping its currency cheap in order to promote employment at home.
• The US does not care about deficits or currency debasement, as it seeks Keynesian remedies to its economic crises.  (Little realizing that they are making things worse…)
• The Eurozone protects profligate euro-fringe nations, at the possible cost of destroying the Eurozone as a whole.

If China will not allow its currency to strengthen, well then, the path of least resistance is for the US to debase its currency, leading the world in a cycle of competitive debasement/inflation.  Since many nations want to be net exporters, US Dollar weakness is responded to through debasement, or purchase of US Dollar assets.

Putting it simply, the path of least resistance is inflation.  Reduce the value of nominal debts in real terms.  Eliminate underwater debts by raising the nominal prices of the collateral.

Now, surplus nations like China and Germany will resist this, but I suspect they will be dragged to this, kicking and screaming.

We are in the process of trying the alternative approach to solving the Great Depression via inflation, which will have a different set of problems than the foolishness of FDR.  The problem is too much debt, which needs to be changed into equity, but government tinkering discourages compromises.

Rather than the deflation that characterized the Great Depression, inflation may be what drives the future.  The question could be “how much?”

But all that said, there are other possibilities.  We could raise taxes and pay off the debt.  We could default on the debt.  Neither of these are favored by current politics, but they could happen.

So as you invest, consider an inflationary bias.  I think it is the likely wave of the future.

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