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Economist: Superb Report On Health Of Global Economy

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If you have time, read the report in full....looks like scenario 2 is looking more and more likely as each day passes. I hate doom-mongering. I dont think it's psychologically healthy. But I also think it is far more important to know what may lay ahead.

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http://www.economist.com/daily/news/displa...tory_id=9747967

Heading for the rocks

Aug 31st 2007

From the Economist Intelligence Unit ViewsWire

A special report on the turmoil in the world's financial markets

The tremors in financial markets have gone far beyond their beginnings in the US subprime mortgage sector, and indeed far beyond the borders of the US. The full impact on the markets, and the repercussions on the global economy, remain unclear, but we can sketch out three broad scenarios:

• Scenario 1. The Economist Intelligence Unit’s central forecast, to which we attach a probability of 60%, sees the impact being contained by timely monetary policy action, with only a modest effect on the global economy.

• Scenario 2. Our main risk scenario, with a 30% probability, envisages the US falling into recession, with substantial fallout in the rest of the world.

• Scenario 3. Should the US enter recession, another, darker scenario arises: that corrective action fails, and severe economic repercussions cascade from the US into the world economy with devastating effect. We attach only a 10% probability to this outcome, but the potential impact is so severe that it warrants careful consideration.

Since scenario 1 informs our regular output and Scenario 3 has a low probability, the bulk of the report focuses on scenario 2.

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Excellent article

"The boom was driven by cheap money and a relaxation of lending standards, sometimes by

the growth of mortgage securitisation. It has left property looking overvalued on

metrics such as rental yields and prices as a multiple of household income.

Japan provides a warning of what can happen when a boom turns to bust and the

leverage effect goes into reverse. Japanese property prices dropped every year from

1991 to 2005, declining by 40% from their peak.

Many countries are vulnerable but the UK, Spain and Australia are among the most

at risk of following the US into a housing slump."

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If you have time, read the report in full....looks like scenario 2 is looking more and more likely as each day passes. I hate doom-mongering. I dont think it's psychologically healthy. But I also think it is far more important to know what may lay ahead.

-------------------------

http://www.economist.com/daily/news/displa...tory_id=9747967

Heading for the rocks

Aug 31st 2007

From the Economist Intelligence Unit ViewsWire

A special report on the turmoil in the world's financial markets

The tremors in financial markets have gone far beyond their beginnings in the US subprime mortgage sector, and indeed far beyond the borders of the US. The full impact on the markets, and the repercussions on the global economy, remain unclear, but we can sketch out three broad scenarios:

• Scenario 1. The Economist Intelligence Unit’s central forecast, to which we attach a probability of 60%, sees the impact being contained by timely monetary policy action, with only a modest effect on the global economy.

• Scenario 2. Our main risk scenario, with a 30% probability, envisages the US falling into recession, with substantial fallout in the rest of the world.

• Scenario 3. Should the US enter recession, another, darker scenario arises: that corrective action fails, and severe economic repercussions cascade from the US into the world economy with devastating effect. We attach only a 10% probability to this outcome, but the potential impact is so severe that it warrants careful consideration.

Since scenario 1 informs our regular output and Scenario 3 has a low probability, the bulk of the report focuses on scenario 2.

Yes, its a very good read... shame they don't go into scenario 3 in greater depth. Forewarned is forearmed and all that....

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And here's a quote from a different article in today's Economist magazine

"On the supply side of the economy the City will be hit hard as deals dry up. That matters because it lies at the heart of Britain's financial business services. This sector, worth just over a quarter of the economy, has recently been contributing about half of GDP growth. The financial crisis is also likely to slow demand. Consumer spending looks particularly vulnerable, since households are already burdened by high debt and disposable incomes have already been sdqueezed. People have been able to carry on spending because rising house prices have increased homeowners' wealth. Even after August however the housing market looked vulnerable, as higher prices and borrowing costs made homes less and less affordable. Now the pressure will intensify as the extra expense of financing loans through the money markets feeds through to mortgage rates."

Looks more and more like the crash has begun.

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If you have time, read the report in full....looks like scenario 2 is looking more and more likely as each day passes. I hate doom-mongering. I dont think it's psychologically healthy. But I also think it is far more important to know what may lay ahead.

-------------------------

http://www.economist.com/daily/news/displa...tory_id=9747967

Heading for the rocks

Aug 31st 2007

From the Economist Intelligence Unit ViewsWire

A special report on the turmoil in the world's financial markets

The tremors in financial markets have gone far beyond their beginnings in the US subprime mortgage sector, and indeed far beyond the borders of the US. The full impact on the markets, and the repercussions on the global economy, remain unclear, but we can sketch out three broad scenarios:

• Scenario 1. The Economist Intelligence Unit’s central forecast, to which we attach a probability of 60%, sees the impact being contained by timely monetary policy action, with only a modest effect on the global economy.

• Scenario 2. Our main risk scenario, with a 30% probability, envisages the US falling into recession, with substantial fallout in the rest of the world.

• Scenario 3. Should the US enter recession, another, darker scenario arises: that corrective action fails, and severe economic repercussions cascade from the US into the world economy with devastating effect. We attach only a 10% probability to this outcome, but the potential impact is so severe that it warrants careful consideration.

Since scenario 1 informs our regular output and Scenario 3 has a low probability, the bulk of the report focuses on scenario 2.

Given that Scenario 2 is already here (does anyone actually believe that the US is not currently in recession?) we now have to assess the probability of scenario 3.

As the credit crunch and HPC have hardly begun I'd say scenario 3 was quite likely.

Deflation it is then.

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Given that Scenario 2 is already here (does anyone actually believe that the US is not currently in recession?) we now have to assess the probability of scenario 3.

As the credit crunch and HPC have hardly begun I'd say scenario 3 was quite likely.

Deflation it is then.

But I think with inflation of food,power, fuel, taxes all the things you can't aviod. Chinese tat will be mega-cheap.

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But I think with inflation of food,power, fuel, taxes all the things you can't aviod. Chinese tat will be mega-cheap.

Unless sterling falls against the renminbi.

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Generally all 3 scenarios predict deflation rather than inflation. Deflation seems more logical, but inflation seems more evident in the real world now.

Damn it's confusing! :blink:

I guess one could safely say that 'stuff' is going to get more difficult to buy, either via inflation or erosion of disposable income.

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Generally all 3 scenarios predict deflation rather than inflation. Deflation seems more logical, but inflation seems more evident in the real world now.

Damn it's confusing! :blink:

I guess one could safely say that 'stuff' is going to get more difficult to buy, either via inflation or erosion of disposable income.

Looks like most people are going to get poorer either way. Convergence with the Far East but just not in the way we had been told would happen with globalisation (ie. Their wages rising fully to our level....).

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If you have time, read the report in full....looks like scenario 2 is looking more and more likely as each day passes. I hate doom-mongering. I dont think it's psychologically healthy. But I also think it is far more important to know what may lay ahead.

-------------------------

http://www.economist.com/daily/news/displa...tory_id=9747967

Heading for the rocks

Aug 31st 2007

From the Economist Intelligence Unit ViewsWire

A special report on the turmoil in the world's financial markets

The tremors in financial markets have gone far beyond their beginnings in the US subprime mortgage sector, and indeed far beyond the borders of the US. The full impact on the markets, and the repercussions on the global economy, remain unclear, but we can sketch out three broad scenarios:

• Scenario 1. The Economist Intelligence Unit’s central forecast, to which we attach a probability of 60%, sees the impact being contained by timely monetary policy action, with only a modest effect on the global economy.

• Scenario 2. Our main risk scenario, with a 30% probability, envisages the US falling into recession, with substantial fallout in the rest of the world.

• Scenario 3. Should the US enter recession, another, darker scenario arises: that corrective action fails, and severe economic repercussions cascade from the US into the world economy with devastating effect. We attach only a 10% probability to this outcome, but the potential impact is so severe that it warrants careful consideration.

Since scenario 1 informs our regular output and Scenario 3 has a low probability, the bulk of the report focuses on scenario 2.

DON'T read this unless you can handle a pessimistic but IMO realistic view point.

Clear article which as is now outdated, everything has moved so quickly . It explains the scenarios well. IMO the report although clinical by it's nature misses (and this is probably based on the publishing date ) 'gut' instinct (it is the Economist afteral) that normally commentators can bring. Clearly we have entered scenario 30% but heading towards 10% for the US, I can't understand why the fed hasn't reacted yet . The hope is Europe will remain in 30% albeit with a HPC certainly in the UK. Trade barriers will also go up particularly if China makes it easy for the US and tries to protect their currency, and what if China dump thier dollars in the next two months. Margin calls in the next month or so will dictate which way we go. Because then we will really see consumerism dry up and the 10% scenario will be global. The big fear for everyone has got to be any test that Iran/ bin laden (et al) puts on the US at a time when they know they may be weak, the reaction in te US will be siege mentality. War will become the money maker for the select few and that might well be where 'they' want it to go. Already in this report it cites the scenario of the Fed not reacting quickly enough would be a grave mistake. I see they have already left it to late. More extreme scenarios may well now come into play. Often it is during extreme periods of uncertainty manufactured wars can materialise. Immmediate history then tends to forget financial incompetence as the focus shifts. The US public are fickle and thats probably the biggest danger for us all. Sorry but i really don't like the way all this is going. On the upside my club won this afternoon!

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Generally all 3 scenarios predict deflation rather than inflation. Deflation seems more logical, but inflation seems more evident in the real world now.

Damn it's confusing! :blink:

I guess one could safely say that 'stuff' is going to get more difficult to buy, either via inflation or erosion of disposable income.

I think we are stuck with price inflation of things we need, food + energy for a long time to come, deflation of assets to a realistic level will be desired outcome for most on this board (if theyeve got savings and a job, that is). Suspect as last comment up from here, the yanks all of a sudden find it neccisary (read convenient) to go to war with Iran/Syria then they can drop the rates back to 1% again and we will follow suit to some degree, that being the case of course we may well keep our high house prices but have mega consumer inflation (how about £2 ltre petrol)

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I don't like the way that the article differentiates the extent of any recession in two as the probability of a recession and its extent ought to be clearly separated. If there is a 10% chance of severe recession, then what is there a 20% chance of? or 5%? It would be more insightful to see a fuller range of outcomes envisioned and their perceived probability.

Otherwise, very good.

Edited by Mikesev

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If you have time, read the report in full....looks like scenario 2 is looking more and more likely as each day passes. I hate doom-mongering. I dont think it's psychologically healthy. But I also think it is far more important to know what may lay ahead.

-------------------------

http://www.economist.com/daily/news/displa...tory_id=9747967

Heading for the rocks

Aug 31st 2007

From the Economist Intelligence Unit ViewsWire

A special report on the turmoil in the world's financial markets

The tremors in financial markets have gone far beyond their beginnings in the US subprime mortgage sector, and indeed far beyond the borders of the US. The full impact on the markets, and the repercussions on the global economy, remain unclear, but we can sketch out three broad scenarios:

• Scenario 1. The Economist Intelligence Unit’s central forecast, to which we attach a probability of 60%, sees the impact being contained by timely monetary policy action, with only a modest effect on the global economy.

• Scenario 2. Our main risk scenario, with a 30% probability, envisages the US falling into recession, with substantial fallout in the rest of the world.

• Scenario 3. Should the US enter recession, another, darker scenario arises: that corrective action fails, and severe economic repercussions cascade from the US into the world economy with devastating effect. We attach only a 10% probability to this outcome, but the potential impact is so severe that it warrants careful consideration.

Since scenario 1 informs our regular output and Scenario 3 has a low probability, the bulk of the report focuses on scenario 2.

Scenario 2 looks likely IMO. 30%? More like 90%. When the principle driver of the economy is crashing (housing) it seems logical that it will impact the economy. In fact, not so much "logical" as obvious.

There are some on here that seem to cheer on the demise of the US economy without regard to the repercusions elsewhere, in the UK in particular. We are not a miracle economy in isolation but part of the global economy and our exports do matter. We are overly dependent on Chinese imports to keep inflation down and we have the world's largest per capita debt and an ongoing tarde deficit in excess of 3 billion. Our currency has been the favourite of speculators by reason of Gordon's miracle and the indications are that we will not escape Great Crash 2 and the fallout that goes along with being in the firing line.

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They missed out Scenario 4: Probability 1% Doom, armeggedon, living on baked beans, shot gun ready, in leather chaps, wearing a red mohican.

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Having read the whole article - it's well worth it btw - what I couldn't find was any reference to how they had calculated those 60/30/10 probabilites. I get the feeling they've just made those numbers up.

Taking them at face value and adding the 30% and 10% probabilities makes for a very good chance that there will be recession in the US and worldwide fallout as a result.

It was also interesting to see just how fast things are moving. I thought the paper looked a bit out of date, but it is dated 30 August. What a difference just a week or so is making at the moment.

Interesting times, indeed.

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