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What is the Worst Case Scenario if the Consumer Becomes a Saver?

Name: Larry Melby
City & State: Boulder Creek, Calif.

Money; AP photo

Question/Comment: What is the worst case scenario if the consumer becomes a saver? Or if nations, including United States, raise trade barriers? Or if the financial bailout fails?

Paul Solman: Hmmm. Well, the first is happening as we speak: Consumers ARE becoming savers. Fast.

As to your second item, there's rumbling about trade barriers, as with the "buy American" aspects of the stimulus bill. Finally, it's not clear what success or failure would mean with regard to the financial markets. Would the "bailout" fail if the economy isn't growing in a year? Three years? Suppose what we've done thus far has prevented an even greater calamity? How would we ever know?

But if you mean, "What's the worst case scenario if all THREE of your hypotheticals unambiguously occur?" my answer is: Don't ask.

MIT's Simon Johnson, our guest vetter, elaborates on the combinations:
Taking these scary points in turn...

If it's just #1: we have a severe recession (2-3 years).

If it's #1 + #2: then we have a lost half decade. (remember: Japan "lost" the whole 1990s, in the sense of having virtually no growth, and that was without trade barriers.)

If it's #1 + #3: we lose a whole decade, i.e., not much growth until 2020. (Japan lost that whole decade because they didn't fix the financial system.)

If it's #1 + #2 + #3: I fear this will be known as The Greatest Depression. Make sure your elected representative is aware that you would not be happy about this.

-- Posted February 12, 2009 | Comments ( ) | Permalink