Tuesday, January 20, 2009

Scenario Planning: next 3-5 years

My wife and I are thinking about how the next few years could play out politically and economically, and what we might do about it. I think scenario planning helps with this process. Comments are welcome!

Pessimistic case: today's financial turmoil intensifies and we slip into a deflationary depression. Stock markets and property values continue to drop, unemployment increases. Governments print money and push on the fiscal rope to little avail. Those companies that do make money are targeted for tax increases. Government services, already stretched, get worse as the number of people with needs increases, while the tax base erodes. Inflationary forces finally overcome the deflationary trends and currencies lose their value rapidly.

Middle case: Financial volatility remains at its recent high levels, and traditional financial analysis models become ineffective due to heightened emotions in the markets. Deflation is averted but purchasing power of currencies around the world is diminished. Oil, gold, and basic food commodities increase in nominal price and the overall standard of living continues to fall as money is less available for discretionary items. Government services are stretched, but private charities and services fill in the gaps.

Optimistic case: Governments step back, letting the economic cycle run its course despite the short term pain this causes. Enough confidence gets back into the system that activity levels return, and the natural needs of consumers and businesses restore adequate economic performance. Inflation bites for a year or so but is held reasonably in check. Life returns to a more sane and sober form.

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