Part I deals with the ‘Unusually Uncertain’ economic environment 

In economics, it’s all about opinions and hypothesis. ‘A hypothesis can never be proven true, it can sometimes be verified beyond reasonable doubt in the context of a particular theoretical approach’, explains free online dictionary while differentiating among hypothesis, law and theory. They all arise from statements, however in economics – it can never get to be a ‘law’ as in science.

So we can have extremely opposite opinions, more so in times of uncertainties, coming from eminent economists.  

Only time has the answer, however the prediction that comes to be right isn’t purely because of its brilliance alone. It’s also because of turn of events that favor one prediction more than others, much of which are always uncertain. It’s something like getting ten heads in ten tosses – out of many, someone will get it right! 

And with uncertainty, here comes Ben Bernanke. 

Greenspan was known for his trademark ‘Irrational Exuberance’. His successor, Bernanke, was initially known as ‘Helicopter Ben’, and later for his trademark comment of  ‘(Finding) Green Shoots’ in the economy.  

Then we saw a degree of honesty and frankness in Bernanke, in spite of holding the high office of the Chairman of the Board of Governors of the Federal Reserve System. It came with his latest comment that the future of economic environment in the US looked to be ‘Unusually Uncertain’.  He also sensed that ‘economic forecasting is a bit like reading entrails’. 

That has not prevented economist and financial market analysts from making a forecast or a likely scenario for the intermediate future, focusing as usual, more on the shorter term. The unique situation of the economies of the two of the largest economies, when EU is taken as one, indeed makes the global economic recovery uncertain. On top of that there’s Japan, now 3rd largest economy, and suffering from an in-and-out-of-recession-syndrome since mid 1990s, where the discussion revolves around another possible round and form of stimulus; and effectiveness of it, when the stimulus comes. 

Central bankers of the US, EU & Japan are left with very little arsenals, which have not been previously tried with, to steer their economies in case they face future uncertainties on the downside. Interest rates happen to be close to zero. Inflation is non-existing in these three economies, although signs of its ghost have started appearing in Britain, and in the form of hidden inflation in the US.  One isn’t considering developing block of nations where it’s already a threat.

On the other hand, the governments of these three economies are already burdened with huge existing debt, from 60% of GDP for EU collectively to nearly 200% of GDP for Japan, leaving little elbow room for further piling up of additional spending. Yearly addition of fiscal deficit, normally in the range of sub-3% as was the benchmark for developed nation, has now shot up to 11% for the US, 7% for Japan and 6% for the EU. In spite of around 6% deficit for EU, problems remain within parts of EU as nations like Greece, Portugal or even larger economies like Spain have much higher deficit compared to Germany, the growth engine of EU.  

So the governments have used their arsenals, Central Bankers have used their part; and economies of all these three regions still languish. It’s something like a doctor using all available tools on a patient, and the patient continues to show signs of ‘unusually uncertain’ recovery. 

If all of above were not enough, add often appearing articles in western media about ‘a possible bubble’ in China, now the 2nd largest global economy. These articles talk about possible signs of bubbles in China’s real estate or in banking or in certain other commodity industries. At the same time, there are likely negative implications if the Chinese growth engine slows down.

Part II of this article, which deals with the economic opinions and likely scenarios arising from this ‘Unusually Uncertain’ economic environment is here.

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