Here at TechSector, we maintain a track record of predicting bubbles, busts, and recessions long before they happen. For example, the housing bubble was identified in April 2006, back when a person could be socially excommunicated for claiming that houses may not rise in value forever. After that, I have identified when the current recession started, months before most economists, and have even predicted when the present recession will end, and at what level job losses would end at. This track record will now lead me to set my sights on the next two troubles on the horizon, which will be the causes of the next two potential recessions.
1) 2011 : The tax cuts enacted by President Bush are set to expire at the end of 2010, returning tax brackets to what they were in 2000. Most middle class brackets will rise by 3%, and the top bracket will rise 4.6% from 35% to 39.6%. This is effectively a tax increase that will be upon us in 14 months. At the same time, the Fed Funds rate is at a record low near 0%, and has been for several months. This low interest rate has ended the current recession, but virtually guarantees future inflation. As the Federal Reserve is forced to raise interest rates, liquidity contracts again, the housing prices continue on the correction that was not allowed to complete itself in 2009. A mere rise in the rate back up to 3% could push housing prices down another leg, battering household wealth yet again, and driving yet more people into negative net worth. The housing correction is not fully complete until we have sustained a Fed Funds rate over 3% for at least a year. The timing of this could combine with the tax increase, which would create a joint burden too heavy for the economy to bear, causing a new recession in 2011.
This situation could be avoided easily, by reducing the budget deficit through the quaint notion of spending cuts instead of tax increases that stifle incentives and encumber small businesses. However, barring a seismic shift in the 2010 congressional elections that dispose of many Democrats and replace them with fiscally conservative Republicans (themselves an endangered group within the Republican Party), I do not see the government taking prudent preventive action.
2) ~2017 : For all the uninformed talk about a 'weak dollar', the damage of this will affect nations that export to the US more than the US itself. However, when the PPP per capita GDP of China begins to exceed the world average (by about 2017), then Chinese currency will have to rise to achieve convergence with nominal GDP, effectively adding several trillion dollars to nominal World GDP. This will lead to massive tectonic shifts in the global economy, none of which are destructive, but will result in confusion, for which the immediate reaction will be a US and EU recession (even amidst a rise in World GDP) until all of the following effects are sorted out :
a) The US will see a bout of inflation as prices of Chinese imports rise. At the same time, US exports will surge.
b) Oil prices will spike above $120 as Chinese purchasing power of oil rises, effectively creating greater demand. This will cause short-term pain, followed by longer-term good as described here. Part of the good from an oil spike will be the collapse of many tyrannical petro-regimes, due to burning the candle at both ends, as detailed in the link.
c) Many of the developing countries that neighbor China (which are populated by an additional 2 billion people) will experience the gravitational pull of China's now huge economy, and see a forced currency appreciation long before they are ready. This will cause an unexpected set of changes in India, Pakistan, Bangladesh, VietNam, the Philipines, and Indonesia (these 6 countries containing 2 billion people) as a massive adjustment process will have to occur in a very short time, toppling many industries and creating new ones within these countries.
d) After everything is sorted out, the US and EU will be significantly smaller percentages of World GDP, but the US would see higher GDP growth rates due to a near-elimination of the trade-deficit. Asia, as a region, would have a much larger economy than the EU or North America.
So these are the two possible recessions that the US faces, the first in 2011 and the second in the latter half of the next decade. Prudent fiscal management could sidestep the first, while the second is an inevitable byproduct of the adjustments borne of poverty reduction.
In any event, investment opportunities, and, more importantly, bullet-dodging opportunities abound. In the immediate term, however, if you are considering buying a home in an expensive US area such as New York or California, do not buy one.
Related :
The Housing Bubble - 20-Year Gains May Never be Repeated
A Future Timeline for Economics
Why I Want Oil to Hit $120/Barrel
