Economics = Uncertainty

Interesting blog post over at Henry Thornton referencing a visiting US guru economist.  Now I don’t tend to reference too many economics articles here but having worked with a number of economists in the past (and I must stress that I am not an economist), I find their forecasts often fascinating, often unreliable but always interesting to talk with and debate.  It’s quite an inexact science – and of course there is the old joke about a US president wanting an economist with only one hand as they always say “On the one hand, this bit on the other hand …”  Economics is also a fascinating topic with the current federal election – it’s the economy stupid, interest rates (we’ll hear more about them), etc.

Now this unnamed visiting guru stated that the US is heading for a recession and their housing bubble will deflate slowly.  He then moved on to trade flows and how China is propping up the US dollar, selling the US cheap goods (I heard a stat a while ago saying that 10% of China’s exports to the US go to Walmart and this makes up 1% of China’s GDP), and China then uses these US dollars to buy assets.  The problem is that the undervalued currency produces asset bubbles leading to inflation.  A particular quote got me interested  – “We must cross our fingers and pray that the US dollar does not plunge and that China’s inflation does not take off.” 

The trade imbalances can make things pretty rocky over time.  What happens if the USD spirals down further, particularly if world oil markets starts to use Euro as the currency rather than the USD?  What happens to China if its currency appreciates faster and how will that affect its manufacturing base?  And Australia caught in the middle – how will we fare even though we might not have as much debt as in the US? 

The record high stockmarket cannot keep increasing forever.  I’d like to be more optimistic but I smell that there could be a fair bit of a shake-out over the next year or two which could have drastic consequences for a Howard/Costello or Rudd incoming government.   Mind you, if my forecasts were accurate, I would quit my day job and take up something that could cash in on all this !!


One Response to Economics = Uncertainty

  1. Brad says:

    Of interest, despite the digitisation of information that would make checking previous economic forecasts easier to find, identify, and check for accuracy, hardly anyone does. And if someone does do the checking and finds (surprise, surprise) the forecasts were wrong, the economist responds by saying “conditions changed” which makes any economic forecast as believable as a non-core promise.
    Brad (economics-trained but not tainted).

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