Part I of the article, dealing with the ‘Unusually Uncertain’ economic environment, is here.

It was always difficult to read financial markets or economies, but a few people anyway thought that they could read it like Paul the Octopus did the recently concluded World Cup. So amidst present round of ‘unusually uncertain’ economic environment; economists are divided in few schools of thought, on their opinions and remedial actions. Each of these schools of thought look equally assumptive and predictive deep inside due to the ‘Paul the Octopus’ syndrome (and not having something basic like ‘sense and response’ approach); however their broad line of thinking, in a predictable scenario, is as follows:

  1. EU, IMF, and Raghu Rajan club: Prescribes austerity, reduction of deficit and national debts. EU has started following it. Their latest recommendation is to raise Fed rate by 2%.
  2. US, Japan, with academically brilliant economists like Krugman, Bradford De Long club following Keynesian policies (although Krugman would disassociate himself from Fed or US Govt. policies as he belongs to the ‘extreme follower’ of Keynesian policies): More stimulus, even more stimulus as long as ‘measured’ inflation is low; and get economic recovery & job recovery. Krugman must be wondering how Rajan can be considered as an economist for suggesting Fed. to raise rates – it’s an unthinkable economic blasphemy!

 The differences of these two policies are nicely highlighted by an article titled, ‘Dr. Keynes killed the patient’. The article is about a ‘morbidly obese’ (Uncle Sam) man addicted to high-calorie intake. Dr. Hayek prescribed him to reduce food intake and to do exercise; whereas Dr. Keynes advised the patient to continue ‘high-calorie’ intake to avoid stress till recovery starts. The patient obviously liked 2nd easier option of Dr. Keynes, and died.  

The difficult part of the story is, unlike a human being destined to have a death without any possibilities of revivals, economies don’t have any such ‘deaths’. It rather has up and down turns, some lasting for decades and centuries, some lasting merely years. History teaches us of some of the powerful economies of nation-states of past that had massive downturn within years whereas others had a slow and languishing downturn lasting over decades. It’s like a modern day life-support system which can keep an extremely old or a terminally ill patient alive for years when the patient, in words of nature, is as good as dead. At times, miracle happens as a few such patients revive, however majority succumb, sooner or later.

And majority of those who revive normally go through the same ordeal again within months or years, and barely survive a decade, if not less.

Central bankers did a major bypass and installed pacemakers in these major economies, primarily in the US, back in 2007-8 in the form of bail-outs and stimulus, other than interest-rate cuts or injection of tremendous liquidity in the system. Europe has been trying to take the patient out of the life support system, and asking the patient to take some stress in form of some cost-cuts. America and Japan decline to do that.

And these two patients have been showing signs of getting in-and-out of that coma since then. Life support system has primarily been on in the US and in Japan with newer devices. It’s no longer a ‘free market’ in the US or in Japan; it’s a combination of ‘Fed-Market’ and ‘BOJ Market’ because markets react less to economic fundamentals and theories; but more to likely actions by these two Central Bankers (or their governments). At times one organ shows signs of recovery whereas another few fail in the next period. It’s been like this for over last two years or so.

So what’s likely to happen?

No one knows for sure when Bernanke himself, having the highest knowledge of the arsenals, existing or potential (with his likely new inventions), doesn’t know it. We can however develop likely simplistic scenario.

  1. Scenario I: No double-dip; however the uncertainties persist for some time (can be weeks to months to even years). And then some miracle happens as economy revives under life support system. It’s about unforeseen opportunities that may come-up due to global uncertainties of economics combined with geopolitics.
  2. Scenario II: Double-dip happens. Once it happens, there will be further talk about a triple-dip or back to Scenario I like situation. History tells us that, when the road perpetually is downhill for major economies, one era comes to an end. The world seems to be not yet ready for a China-dominated global economic order. As I noted many times before, it can happen faster than any of the forecasts.
  3. Scenario III: We already are in a New Normal where the present state of ‘unusually uncertain’ environment continues (developed world stagnates) until something rocks the boat, and sinks parts of it faster than anticipated. It’s like amputating certain parts of the global economy in order to make the rest survive and grow.

So, the present new normal continues until a Black Swan event gets triggered, either as an opportunity or as a shock. It can come from China, it can come from Israel-Iran through political disturbances or even from North Korea or somewhere else (global food shartage, etc.). It’s likely to be having strong political implications than purely being of ‘academic interest’. Due to the nature of Black-Swan events, it’s difficult to pinpoint them. The Black Swan event may trigger rapid economic disturbance starting with massive inflation, on the economic downside for the US (and Japan). On the upside, US supremacy may get reaffirmed due to some geo-politically shattering event, as it happened in the 1990s, with the fall of the former USSR; thereby giving the US another few decades time to continue surviving on ‘high-calorie’ food.  

Such a period can also offer the US another chance to get back in ‘economic’ shape following Dr. Hayek. 

I invite you to visit my blog, Wondering Man (or take a look at my book, Wondering Man, Money & Go(l)d at Google Books). You are also invited to join me on Twitter.

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