The current probability of a recession is expressed as 70% likely by Ed Yardeni. I believe he may be correct. In your financial analysis you give 16 scenarios, most of which discuss Inflation and deflation. Your explanation of both terms is very good. My confusion is, does recession also mean inflation, meaning that products and services generally will cost more. Or is it just the opposite that they will cost less i.e. deflation but our money has less value. Also what effect does a recession have on mortgage interest rates and property values? Interest rates go up and values go down?

-- Jerry B.Ram (J.Ram@Juno.com), September 01, 1998

Answers

Can mean either. The big one in the 1970s and the last one in the early 1990s were both inflationary. In contrast the one that's been running in Japan for the last ten years and the real monster worldwide one of the 1930s were deflationary.

Y2K is without precedent. I can't see any way to predict which way it'll tip any given economy (and that's assuming that things don't go XXX-COMPLETELY pear-shaped).

Interest rates tend to go down in a deflation (but up in real terms; if you are deflating at 5% and interest rates are 0.5%, that's a real rate of 5.5% hitting your wallet, which is about what the Japanese are suffering). Rates go up in an inflation, but real rates may not remain positive. If inflation doesn't tip into a hyperinflationary wipeout and provided they can avoid defaulting in the short term, inflation can be very good to people with mortgages because the house inflates in value whereas the capital owed doesn't.

There was a Russian called Kondratiev who noticed that "capitalist" economies seem to gyrate in a 50-70 year long-term cycle marked most clearly by a deflationary crash. He was sent to the camps by Stalin and died there; his "crime" was suggesting implicitly that capitalism was not doomed to failure as per Marxist dogma, but to rebirth like a phoenix. I mention this because the theory suggests that the next deflation is overdue (and judging by recent world events, may be breaking upon us now).

-- Nigel Arnot (nra@maxwell.ph.kcl.ac.uk), September 01, 1998.