Summary: December brings forth a crop of retrospective analysis about the past year and confident forecasts about the next. The FM website has posted almost daily doses of the former, and I lack the confidence to do the latter. Instead let’s ask about questions. What issues might dominate 2014, and influence the years beyond? Finding the right questions can help us open our minds to the unexpected, and perhaps even prepare for it. Post your questions in the comments.
“Uncertainty … is painful, but must be endured if we wish to live without the support of comforting fairy tales.”
— From the introduction to A History of Western Philosophy by Bertrand Russell (1945)
- Effects of the taper?
- Results from Abenomics?
- The War on Terror?
- The global warming campaign?
- For More Information
(1) The taper
What effect will normalizing monetary policy (slowing QE3 being the first step) have on the economy? Will it slow the economy? Will it depress asset prices? Will it boost interest rates, perhaps ruinously? If it ends badly, will it decrease public confidence in the Federal Reserve, perhaps in economists?
Also, how strong are the deflationary forces at work? Inflation has fallen during QE3, despite credit and GDP growth, with little change in the value of the US dollar. That’s an anomaly (much of my forecasting success comes from attention to anomalies ignored by the consensus). What happens to inflation as QE3 ends? Do we get the widely predicted inflationary hangover, or lapse into deflation?
Click here to see posts about the taper.
There were to be three arrows:
- double the money supply in two years,
- boost the fiscal stimulus (borrow and spend even more),
- structural reform.
So far the government has fired the first two arrows, but not the third and most important one. The arrows were to produce:
- increased real wages,
- increased inflation (specifically, core inflation; not just increased cost of imports) with flattish interest rates,
- increased volume of exports (using the lower value of the Yen to gain market share, not just increase profits),
- a more efficient Japan (from the combination of faster growth, more investment, and reform).
The results to date are zero out of four. Wages are falling; real wages are falling even faster. Import prices are rising, but not other prices. Export volumes are not up strongly (+4.4% YoY in October). Reforms so far remain only talk.