PC: Double Dip Timeline

This timeline is part of a larger project, and am posting here to have its plausibility get a nice sweep through. Do be warned, many details are still vague at this point, because of complications going on in the background, among other reasons.

2012: Recession double dips, leading to Romney gaining the Presidency.

2016: Economy has only gotten worse, to the point of Great Depression levels all over again. The Euro has drowned all its members and everyone near it into one of the largest economic crashes in world history, with it being unable to remove members, and the stubborn attachment to it. Germany's worst nightmares come true eventually with severe stagflation occurring, with hyperinflation resulting whenever the states attempting to go off the Euro.

Euro crash has resulted in the United Kingdom experiencing a crash worse than the Great Depression, while Russia is plunged into political chaos.

2018: A Constitutional Convention is attempted to fix structural problems with the US government, like with corporate corruption. It ends in failure, resulting in a massive spike in suicide rate as many see the, "end of the US," politically from these events, as the Constitution has become nothing but a scrap of paper with no meaning. The economy continues to be around 25% unemployment, resulting from not only deflation, but also massive debt preventing any sort of traditional statist relief.

Within the same year, a massive riot breaks out in New York City after a protest on Wall Street turns violent. Thousands are killed by police and National Guard units intervening, and violence caused by the rioters. A significant portion of New York City burns from molotov usage, adding to the chaos. It's the largest riot in recent US history, being even larger than the L.A. riots.

Throughout this, China has barely scrapped by, with its own bubble bursting much earlier. Only drastic intervention by the Chinese government has kept the crash under control enough to prevent questions of legitimacy. Ironically, because of the massive currency devaluation occurring to the rest of the world, China now holds the world's reserve currency.
 
...Throughout this, China has barely scrapped by, with its own bubble bursting much earlier. Only drastic intervention by the Chinese government has kept the crash under control enough to prevent questions of legitimacy. Ironically, because of the massive currency devaluation occurring to the rest of the world, China now holds the world's reserve currency.

Your overall scenario of continued economic problems through 2018 is somewhat plausible. It is something of a worst case scenario, but one that can't be ruled out. That said, a couple of comments.

I don't see the RMB becoming the world's reserve currency within 6 years. The Chinese government isn't trusted or transparent enough for this to happen and Chinese currency is tightly controlled by the government. There just aren't a lot of RMB notes floating around in the world outside China. This aspect of your scenario isn't realistic. Even within your scenario, I'd expect the dollar to continue as the world's primary reserve currency. There just isn't an alternative that circulates in sufficient quantities. What you would be likely to see is some measure of diversification as trust in the US dollar shrinks. I'd expect the Swiss franc and the Canadian and Australian dollars to do reasonably well as currencies to hold onto. You may also see a continuation in the strength of commodity prices, i.e. gold and silver.

Moreover, hyperinflation in Europe isn't realistic either, without some deep structural change in economic conditions, such as an oil crisis. And even then I'm not so sure. Difficulties in leaving the Euro notwithstanding, what you've described is a global collapse in demand and, under those conditions, deflation rather than inflation is the danger. You allude to this occurring in the US; I see no particular reason for Europe to be much different.

Deflation, given high levels of private and public debt, is actually an uglier outcome, as it raises debt to GDP ratios even with austerity levels of government spending. Hyperinflation would be ugly, but there would be a silver lining in that debt levels are, in real terms, reduced. High debt plus deflation is a much harder dilemma from which to escape; deflation means that the real debt to GDP ratio is rising, even with static spending in real terms. You get a real danger of sovereign defaults in this scenario, as tax revenues plunge and debt service becomes increasingly difficult. Moreover, with deflation, you also get into the paradox of thrift situation in which individual consumers stop or reduce spending as they expect prices to be lower in the future. Why buy a house or car this year when it will cost less next year? And so you get a spiral of diminishing demand and further falling prices with no clear policy solution using fiscal or monetary tools.

One last point: a failed Romney presidency on the economic front might be the last dying gasp of Reagan/Thatcher economics. I'd expect either a huge Democratic landslide or a viable third party to result.
 
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Okay, thank you.

The China aspect I was unsure on, and the hyperinflation was because I was unsure whether these events would result in stagflation. Thank you, I'll see about editing this up somewhat. However, wouldn't currencies besides the Euro possibly hyper inflate as no one trusts them?

However, quick problem. Would Swizterland, Australia, or Canada being doing okay at all? They've all lost their primary trading partners, especially the third, what the US having severe economic problems. But the Euro utterly drowning its members can't be good for Swizterland.

But yes, the core of this scenario is severe deflation, mixed with high debt right now, causing the traditional solutions to be impossible. Also, yes, countries like the US even may be considering default because they have no cash.

For the third party... kind of, however Keynesian economics haven't been helped by these events. Namely, because of the debt situation, no New Deal style solution can be done.
 
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Okay, thank you.

The China aspect I was unsure on, and the hyperinflation was because I was unsure whether these events would result in stagflation. Thank you, I'll see about editing this up somewhat. However, wouldn't currencies besides the Euro possibly hyper inflate as no one trusts them?

However, quick problem. Would Swizterland, Australia, or Canada being doing okay at all? They've all lost their primary trading partners, especially the third, what the US having severe economic problems. But the Euro utterly drowning its members can't be good for Swizterland.

But yes, the core of this scenario is severe deflation, mixed with high debt right now, causing the traditional solutions to be impossible. Also, yes, countries like the US even may be considering default because they have no cash.

What would matter here is the value of currencies relative to each other. If all currencies are debased by hitting the print button, their relative positions won't really change that much. I'd expect Australia, Canada and Switzerland to do somewhat better than the others (less debt, natural resources, a bit more political stability), but that doesn't mean they aren't badly affected with declining GDP and unemployment. The macro question, though, is whether massive currency printing will cause inflation in a situation in which demand has collapsed. Thus far, since 2008, the answer to this question has been an emphatic "no"; despite large-scale printing by the US Fed, interest rates and inflation have remained low. In fact, US rates are at historic lows now. The reason: we're still stuck in a liquidity trap, much like Japan for many years.

One other thing to note is that you could well see a rise in barter as a medium of exchange as currencies become less trusted and people have no cash to use as payment. You saw this to some degree in the Depression -- things like paying a doctor's bill with a couple of chickens or putting in a day's farm labor in exchange for a meal. Theoretically, this is a taxable transaction, but one hard to police very well, which might matter if tax rates soar. With massive unemployment and a large proportion of the population having no cash, this would seem to be quite possible.
 
Ah, yes. Barter economics are likely to return.

For the inflation, interesting point, however that does raise a question. How did stagflation occur then? Somehow, inflation and deflation were able to happen at the same time.
 
Stagflation 101

The big problem with stagflation is that it became a hamster-wheel.
Lots of folks got COLAs which just kept passing the buck. The value of the dollar shrank. Inputs still were expensive.

Standard Keynesian thought of the gov't spending more to increase consumption and thus keep more people employed ran into a problem when the value of money kept eroding thanks to the oil shocks sending prices up 20% a year.

If say, a commitment of 5 billion could comfortably keep 100,000 people employed, cool. But committing that same amount under 20% inflation means that suddenly only 84,000 can be kept afloat. the next year, 69,400. The next year, 57,870. Same money, just its impact is less and less.

Real economic growth could never outpace inflation, interest rates were kept high to soak up all the cash flying around but also killed investment and big-ticket purchases. Consumption stayed flat or declined in real terms.

At the time, deficit spending was frowned upon, so taxes were increasing as well as interest rates, squeezing the amount of ready cash folks could lay aside. People bought less cars and other goodies even if the prices went up.

What stopped this merry-go-round is that demand for the input (oil) skewing the cost curve dropped enough for prices to stabilize. The Fed dropped interest rates, making it easier for banks to lend.

When prices stabilize, investment becomes more long-term with easier-to assess risks and rewards. Folks don't feel the need to spend everything they've got before its value erodes any further.
 
Stagflation 101

The big problem with stagflation is that it became a hamster-wheel.
Lots of folks got COLAs which just kept passing the buck of cost increases. The value of the dollar shrank. Inputs still were expensive.

Standard postwar Keynesian consnsus of the gov't spending more to increase consumption and thus keep more people employed ran into a problem when the value of money kept eroding thanks to the oil shocks sending prices up 20% a year. Neither government and business had any idea how to effectively deal with it.

If say, a commitment of 5 billion could comfortably keep 100,000 people employed, cool. But committing that same amount under 20% inflation means that suddenly only 84,000 can be kept afloat. the next year, 69,400. The next year, 57,870. Same money, just its impact is less and less.

Real economic growth could never outpace inflation, interest rates were kept high to soak up all the cash flying around but also killed investment and big-ticket purchases. Consumption stayed flat or declined in real terms.

At the time, deficit spending was frowned upon, so taxes were increasing as well as interest rates, squeezing the amount of ready cash folks could lay aside. People bought less cars and other goodies even if the prices went up.

What stopped this merry-go-round is that demand for the input (oil) skewing the cost curve dropped enough for prices to stabilize. The Fed dropped interest rates, making it easier for banks to lend. Banks then being much more worried about lending to make money actually did so, vs being state-backed casinos gambling on commodities and securities markets as they are today. Some of those bad bets came home to roost in the S&L crisis a ways down the pike.

The problem with that was that American heavy industries were heavily unionized and suffered wave after wave of layoffs during the stagflation era.
A mixture of poor market research, increased foreign competition, corporate complacency and short-sightedness savaged the middle class. The Reagan defense buildup helped some to get re-employed, but the change from guaranteed employment to at-will contract employment for many was a permanent change that has beggared the average working family.

When prices stabilize, investment becomes more long-term with easier-to assess risks and rewards. Folks don't feel the need to spend everything they've got before its value erodes any further.

That was the 1970's.

As to the current economic mess we're enduring, it could certainly get worse if the eurozone implodes or tries cutting the PIIGS loose or the Norks lose it and nuke the ROK and East Asia goes tilt for a decade. Japan hitting its doldrums was bad in 1995.
Korean War part II would be a humanitarian and economic disaster that made the tsunami last year look like a picnic.
Everyone has so much to lose in that scenario.
China would have a titanic mess on its doorstep, and depending on Western perception of how much China backed North Korea's play, could suffer economic retaliation that completely turns the current system of trade on its ear. What made the Great Depression so horrible for the US was the shutdown in international trade with the passage of Smoot-Hawley tariffs.
Something similar aimed at China would completely bugger the global economy.
 
Okay, interesting on that. Well... okay, I can say there won't be stagflation, but rather epic deflation of a type not seen since the Great Depression.
 
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