WSJ Economic Scenarios: Just, Right, Too Cold or Too Hot

Here is a quaint chart from Wall Street Journal depicting on the possible scenarios for the US economy and its financial markets

Here are some excerpts from the article...

Just Right

``Hefty government stimulus -- easy Federal Reserve monetary policy and $787 billion in government spending, tax breaks and other perks -- encourages consumers to spend and businesses to hire. This bolsters economic growth, keeps a lid on unemployment and finally ends the pain in the housing market.

``At the same time, the massive structural problems facing the economy, including burdensome debt on consumer and government balance sheets, keep just enough of a brake on growth to keep inflation in check.

``Under this scenario, corporate profits and economic growth limp their way back to recovery through the second half of the year, setting up a stronger 2010. Stocks rise, though perhaps not by much. The consensus view among many strategists is that the broad Standard & Poor's 500-stock index will stagger its way to somewhere between 1000 and 1100 by the end of the year, a 17% gain from Friday's close.

Too Hot

``Under the too-hot scenario, surging asset prices trigger worries about inflation, hurting the dollar and causing the interest rate on government debt to rise. That might force the Fed to buy more Treasurys to keep interest rates low -- yields move in the opposite direction of prices -- fueling more worries about higher inflation and a devalued dollar.

Too Cold

``This pessimistic scenario is a recipe for retesting the stock market's March lows. In the longer run, it could also lead to deflation, in which prices tumble as consumers keep delaying purchases. Deflation can be long-lasting and have a chilling effect on stock markets."

Here is how I see it

Just Right is a fantasy premised on the efficacy of the Obama administrations' magical powers to successfully subvert the laws of scarcity and heal the economy.

Too Cold (or deflation)-a scenario where the US is insulated from the world and or that money has no impact on real economic activity.

Too Hot (or inflation)- a scenario presupposing the reemergence of inflation.

Our take: hot, too hot and possibly boiling hot!