05-25-2020, 09:46 AM
My baseline scenario is as follows:
Steep decline in economic growth in the first half of 2020, followed by a partial recovery in the second half (with unemployment in the 10 - 15% range by year end). The next decade is likely to be a Japan-style "lost decade" with slow growth as two conflicting forces compete: the federal government tries to decrease spending and increase taxes to get a balanced budget and the fed starts winding down asset purchases, which causes a big slowdown in growth and markets "tantrum" on the other. We will see weak growth (~1% over the decade, with occasional small recessions as there is variation about that average).
About that baseline, there is a downside scenario of a weaker partial recovery complicated by second order effects (as more businesses go bankrupt) causing a double dip, and then affecting banks, leading to a financial crisis and a consequent decade of stagflation (inflation rising above 5% coupled with continued weakness in growth and/or continuing recessions). While I think Roubini is on the pessimistic side, his predictions are plausible.
Let's put it this way, I think his scenario is less unlikely than the optimistic case (a V-shaped recovery in the second half of the year, with fewer residual effects), unemployment getting back to 8% by year end, followed by a return to 2+% growth and 200,000 new jobs a month which over the ensuing decade brings us back to full employment without inflation.
Then there is the "glass isn't half full or half empty; it's about to break" scenario, which is that the economic crisis leads to a political or international crisis: either our political system falls apart and morphs into a dictatorship or we get into a war with China. These are tail-type events, but I think it is a fat tail.
BC
Steep decline in economic growth in the first half of 2020, followed by a partial recovery in the second half (with unemployment in the 10 - 15% range by year end). The next decade is likely to be a Japan-style "lost decade" with slow growth as two conflicting forces compete: the federal government tries to decrease spending and increase taxes to get a balanced budget and the fed starts winding down asset purchases, which causes a big slowdown in growth and markets "tantrum" on the other. We will see weak growth (~1% over the decade, with occasional small recessions as there is variation about that average).
About that baseline, there is a downside scenario of a weaker partial recovery complicated by second order effects (as more businesses go bankrupt) causing a double dip, and then affecting banks, leading to a financial crisis and a consequent decade of stagflation (inflation rising above 5% coupled with continued weakness in growth and/or continuing recessions). While I think Roubini is on the pessimistic side, his predictions are plausible.
Let's put it this way, I think his scenario is less unlikely than the optimistic case (a V-shaped recovery in the second half of the year, with fewer residual effects), unemployment getting back to 8% by year end, followed by a return to 2+% growth and 200,000 new jobs a month which over the ensuing decade brings us back to full employment without inflation.
Then there is the "glass isn't half full or half empty; it's about to break" scenario, which is that the economic crisis leads to a political or international crisis: either our political system falls apart and morphs into a dictatorship or we get into a war with China. These are tail-type events, but I think it is a fat tail.
BC