Here come the 2009 predictions

Look out… It’s raining predictions as year-end approaches.

Not that it’s any surprise. But some predictions are more eyebrow-raising than others. Like that of Harvard’s historian of empire, Niall Ferguson.

He got big space in the Financial Times over the weekend for that most bold of prediction pieces — the one written as a review of the year gone by.

The point of such pieces is not in the particulars. Whether the S&P falls to 624 by June, or whether the new treasury secretary engineers a merger of all three U.S. automakers, or whether all private mortgage debt is converted into 50-year “Obamabonds” is not what this sort of thought exercise is about. Rather, it’s about the bigger trends. Those are in fact the boldest calls. And so, Ferguson takes sides in the inflation-versus-deflation argument.

Despite the fears of the still-influential former Treasury secretary Robert Rubin, investors around the world were more than happy to buy new issues of US Treasuries, no matter how voluminous. Contrary to conventional wisdom, the quadrupling of the deficit did not lead to falling bond prices and rising yields. Instead, the flight to quality and the deflationary pressures unleashed by the crisis around the world drove long-term yields downwards. They remained at close to 3 per cent all year.

Nor was there a dollar rout, as many had feared. The foreign appetite for the US currency withstood the Fed’s money-printing antics, and the trade weighted exchange rate actually appreciated during 2009…

The Fed’s achievement was to keep inflation in positive territory – just. Those who had feared galloping inflation and the end of the dollar as a reserve currency were confounded.

In Ferguson’s big picture, the rest of the world gets it even worse than America.

But what else should we expect from him? For this student of empire, Ferguson is always a frustrating read. He’s forever warning about the fates of empires gone by (particularly how Britain was finished off in the 30 years after World War I), but likewise insists the United States must forever pick up the “white man’s burden” because if we don’t do it, who will?

So Ferguson’s “Great Repression” scenario (so called because so many people remain in denial about the severity of the crisis) comes to a close with the Mother of All Soft Landings: America retains world leadership, because of the “enormous boost to America’s international reputation that followed Obama’s inauguration” and the aforementioned scenario that Europe and Asia get an even worse economic kick in the teeth than the States. No Demise of the Dollar in Ferguson’s world.

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