On Tuesday I have agreed to talk to a brain storming session on what might happen next to the UK and global economies.
I am now planning my talk. The ideas appear to be based on scenario planning. We all accept that single forecasts of the future are prone to error. Instead we set out a range of possible outcomes, and then try to ascribe a probability to each. Here are four that I am thinking through, reflecting different investor perceptions in today's markets.
Scenario One: “We all live happily ever after”. This is the best case for the authorities. In it the US and the UK are miraculously transformed into nations of savers and exporters, whilst the Chinese, Germans and Japanese develop a passion for consuming and importing. The US and UK withdraw their monetary stimulus in perfect time, leaving quantitative easing behind them and then putting up interest rates sufficiently to prevent inflation but not so high that they choke off recovery. The benign forces of globalisation and digital technology resume their reign. The world grows again in a sustainable way. This could be an extreme version of a normal boom/bust/boom cycle.
Scenario Two: “One bubble more”. As investors pile into gold and index linked securities, this is a popular view. In it the monetary excess evident today in China and India as well as in the US and UK spills over from asset prices and commodities into shop prices and wages. We have another flurry of fun, before the whole edifice comes crashing down again when the authorities lurch back to tight money and tougher attitudes to debt and spending.
The problem with this view is the broken western banks currently are not able to pass on the high powered money to private sector lenders. Private sector wages are under tight control on both sides of the Atlantic. The probability of this happening soon seems low.
Scenario Three: “The US and the UK are the new Japans”. There are still gloomsters about arguing that we are in for a long period of deflation. After 1990 Japan had an industry of broken banks. It took them years to sort them out. The government attempted money printing and huge fiscal deficits, but nothing made much difference to no growth or low growth. No amount of quantitative easing could lift the price level. Persistent zero interest rates failed to solve the banking and credit crunch. Could the US and the UK find the same happened to them? After all they have had a similar over extended property boom, a similar collapse in banking credit, and are now following similar monetary policies? I suspect not. The Anglo Saxons do not have the same ageing population and the same drive to save as the Japanese. The US and UK are better at inflation than Japan, and both countries have a vested interest in devaluation, to inflate away some of the debt burden.
Scenario Four: “Markets force adjustments”. The remorseless rise of Asia, led by China continues. The Anglo Saxon economies find there are limits to how much they print and borrow. They enter a period of painful adjustment, with higher interest rates than they would like as they seek to sell their debt. They grow more slowly than their old trends, and are forced to divert more money from private and public spending into exporting and debt service. The world grows, but at a slower pace than prior to 2007. There are occasional country crises, marked by currency and or banking collapses. The shift of power and profit to Asia continues apace.
Number four seems the most likely to us, but exponents of other views are shifting the gold price.