Provocatively titled “Could the Economy Tank in 2016?”:
My take is on page 2:
Emerging market economies in 2016 will experience marked financial stress. This will be a shock after many years of buoyant growth propelled by a global commodity boom and expansionary monetary policies in the United States, the euro area and Japan. In fact, we may be in for a replay of the crisis-ridden 1990s in the emerging world. Back then, after the Federal Reserve began to tighten in early 1994, capital flows to emerging markets reversed. By December of that year, this had caused a balance-of-payments crisis in Mexico, with the peso devaluing by 50 percent. Argentina came under pressure in the next year, as the Fed funds peaked some 3 percentage points higher than when the tightening began. A flurry of currency crises erupted in East Asia and Latin America in 1997-98, culminating with the Russian default in 1998. Now, the Fed funds rate is again on the rise, perhaps with a slower gradient than in 1994. However, even if the rate rise is only 1 percentage point over the next year, taking into account the “shadow” Fed funds rate was as low as negative-3 percent in May 2014, this suggests an increase of nearly 4 percentage points over the course of a year and a half. Perhaps equally important, the resulting elevated value of the dollar will put stress on countries with large amounts of dollar-denominated debt. Just as in the mid-1990s cycle of tightening, some emerging market economies are likely to experience considerable turmoil in the coming years.
Jeffry Frieden, coauthor with me of Lost Decades, writes:
The American recovery is relatively robust. Job growth is strong, and inflation remains virtually nonexistent. Yet the benefits of the recovery have not gone much beyond the richest third of the country’s families. Median household income is still well below where it was before the Great Recession of 2007-08. So long as the average American family struggles just to return to pre-crisis conditions, there will continue to be frustration and anger at the nature of the recovery. The political ramifications of this frustration and anger could affect economic policy and economic developments.
Recovery in the United States might also be threatened by trends overseas. Europe remains mired in stagnation, largely due to the inability of European governments to come to a fair and sustainable resolution of the eurozone debt crisis. In many emerging markets, the end of a borrowing and commodity boom has caused substantial economic distress. Economic troubles in Europe and the emerging markets could spread enough to slow America’s recovery. Nonetheless, the principal obstacle to sustained economic expansion in the United States remains unsettled political and social conditions, born largely of the very unequal distribution of the benefits of current economic growth.
Additional contributions by University of Wisconsin’s Chancellor, Becky Blank, as well as Jeffrey Frankel, Jared Bernstein, Dean Baker, Justin Fox, among otheres.