I'm a believer in scenario planning, wherein one refrains from locking into any one future. Instead of using planning to build "plans," as most bureaucracies do, scenario planners use planning to do two simple things: to rehash the past, and to rehearse the future.
The trick with scenario planning is to lay out several plausible scenarios and use them in the rehashing and rehearsing. Here are four scenarios, laid out tentatively so that we can play with them (and add to them or abandon some) in this blog.
Continuity: Soft-Landing Escape from the USA-China "Dance of Death"
"In the continuity view, the recent experience of longer expansions, more volatile financial markets, and possible increases in the growth rate of underlying productivity are seen, for the most part, as simply reflecting the specific configuration of exogenous shocks hitting economies against the background of a broadly unchanged set of structural relationships." http://www.csfb.com/home/research_and_commentary/html/docs/34705687.pdf
Hard-Crash Replay of the 1920s-1940s
The hard-crash view relies on theories of continued long-wave cycles of optimism followed by irrational exuberance, followed by irrational pessimism, followed by pessimism, followed by optimism, and so on. Human psychology, human politics, and human economics go hand in glove: cycles will continue. There will be differences in each wave to be sure, but don't bet on “new economy" thinking. Consider writings of the great economists, and don't leave out Joseph Schumpeter, John Kenneth Galbraith, and Hyman Minsky.
See: Doug Noland's Conundrums, 5/20/2005 – Scroll Down two-thirds of the way to subheader, Marshall Auerback's 'Bretton Woods II' is not a Monetary System, it's an Excuse, 5/24/2005, and Marshall Auerback's Debt Trap Dynamics: Time To Think The Unthinkable, 2/15/2005.
Snippet from "Debt Trap Dynamics":
So the problem is likely to get worse, which could ultimately lead to "solutions" that prove highly disruptive to the existing system of multilateral trade and cooperation which has developed over the past several generations. A resort to out and out military force cannot ultimately be ruled out.
New-Environment: Frothy Replay of the late 1800s
"The new-environment view emphasizes endogenous forces in the system rather than external shocks, and it stresses the conjunction of three factors taking shape over the last decade or so: liberalized financial markets, low and stable inflation – underpinned by higher credibility of central banks' anti-inflation commitment – and positive supply-side developments." http://www.csfb.com/home/research_and_commentary/html/docs/34705687.pdf
Stagflation Replay of the 1960s – 1970s
"1960s and early 1970s: excessively easy US monetary and fiscal policy leading ultimately to a global liquidity overhang, substantial spikes in commodity prices and inflation, followed by stagflation." http://www.csfb.com/home/research_and_commentary/html/docs/34705687.pdf
My dream is for some form of continuity, some magic to pull us through and beyond "Bretton Woods II." My nightmare is that we are not set up well politically to deal with the type imbalances that existed just before both World War One and World War Two. Things could get wild indeed.