Alternative Ends to the Bubbleby
Today's WSJ summarizes the conventional wisdom about how the U.S. housing bubble and current account deficit will play out:
The debate is over how, not whether, the global economy rebalances: Will it be smooth, through some combination of declining dollar and accelerating foreign demand? Or will it be chaotic, with a dollar collapse, much higher U.S. interest rates and perhaps a global recession?
Just two possibilities? That's two-dimensional thinking in a three-dimensional world.
Here's two other scenarios which could follow today's housing bubble/current account deficit:
1. The "China Meltdown" Scenario--China's financial system is shaky, and nobody knows the extent of bad loans. A financial crisis in China is a real possibility. If that happens, the U.S. could look like a safe haven, just as it did during the Asian financial crisis.
2. The "Son of Tech Boom" Scenario--There are signs that Intel and other tech companies are seeing higher sales (Intel is giving its mid-quarter report this afternoon). A rebound in tech spending could shift the load from housing, and make a smooth transition much more likely.