Posted by: Michael Mandel on June 09
Today’s WSJ summarizes the conventional wisdom about how the U.S. housing bubble and current account deficit will play out:
The debate is over how, not whether, the global economy rebalances: Will it be smooth, through some combination of declining dollar and accelerating foreign demand? Or will it be chaotic, with a dollar collapse, much higher U.S. interest rates and perhaps a global recession?
Just two possibilities? That’s two-dimensional thinking in a three-dimensional world.
Here’s two other scenarios which could follow today’s housing bubble/current account deficit:
1. The “China Meltdown” Scenario—China’s financial system is shaky, and nobody knows the extent of bad loans. A financial crisis in China is a real possibility. If that happens, the U.S. could look like a safe haven, just as it did during the Asian financial crisis.
2. The “Son of Tech Boom” Scenario—There are signs that Intel and other tech companies are seeing higher sales (Intel is giving its mid-quarter report this afternoon). A rebound in tech spending could shift the load from housing, and make a smooth transition much more likely.
Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.