Three Possible Futures for the US Economy: Fairytale Ending, Thunder and Lightning, and Persistent Inflation

Investing in Differing Inflationary Climates

“If price stability is squandered, financial stability is put at risk. If financial stability is lost, the economy is imperilled and the social contract is threatened.”

Kevin Warsh, WSJ, 12 December 2021

The US economy is at a critical juncture, with various factors shaping its future trajectory. In this analysis, we explore three potential scenarios for the US economic outlook: a "fairytale ending," "thunder and lightning," and "persistent inflation." Each scenario represents a different set of economic conditions and consequences, with both short and long-term implications.

Fairytale ending

The “fairytale ending” scenario suggests an optimistic outcome for the US economy, where multiple positive factors come together to create a stable and prosperous situation. In this scenario, inflation is expected to subside, a recession is averted, and any credit default cycle remains mild. Additionally, the budget deficit would be controlled through a combination of economic growth and fiscal adjustments, and the independence of the central bank would be restored, allowing it to implement effective monetary policies.

  • Inflation subsides and recession is averted
  • Credit default cycle remains mild
  • Budget deficit controlled through growth and fiscal adjustments
  • Central bank independence restored

Thunder and lightning

The “thunder and lightning” scenario envisions a more turbulent and challenging situation for the US economy. This scenario is characterized by a sudden collapse in consumer and business demand, leading to a short, sharp recession. The resulting weakened pricing power causes unemployment to rise, and there is a threat of a serious credit default cycle. The budget deficit climbs due to the economic downturn, and the central bank is forced to ease monetary policy in response to the adverse conditions.

  • Collapse of consumer and business demand
  • Short, sharp recession
  • Unemployment rises, threat of serious credit default cycle
  • Budget deficit climbs, monetary policy eases

Persistent inflation

In the “persistent inflation” scenario, the US economy struggles with ongoing inflationary pressures, preventing the central bank from implementing the desired monetary tightening. The government would have to intervene to avoid the abrupt destruction of consumer demand, potentially reintroducing income subsidies and support measures. The budget deficit expands as a result, and monetary growth rebounds. Inflation may briefly recede in 2023 but takes off again, remaining volatile and keeping the economy struggling to grow. Unemployment is expected to rise to 5-6% in this scenario.

  • Inflationary pressures disrupt monetary tightening plans
  • Government intervention to prevent destruction of consumer demand
  • Budget deficit expands, monetary growth rebounds
  • Volatile inflation, economy struggles to grow, unemployment rises to 5-6%

Conclusion: The future of the US economy is uncertain and depends on various factors, including inflation, fiscal policy, and central bank actions. By understanding these three potential scenarios, policymakers and investors can better prepare for the challenges and opportunities that lie ahead. The path forward will require careful navigation to ensure the continued stability and prosperity of the US economy.

Conclusion

The future of the US economy is uncertain and depends on various factors, including inflation, fiscal policy, and central bank actions. By understanding these three potential scenarios, policymakers and investors can better prepare for the challenges and opportunities that lie ahead. The path forward will require careful navigation to ensure the continued stability and prosperity of the US economy.

“If price stability is squandered, financial stability is put at risk. If financial stability is lost, the economy is imperilled and the social contract is threatened.”

Kevin Warsh, WSJ, 12 December 2021

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