There are prognostications of doom for the US economy, and there are highly specific prognostications of doom for the US economy.
Here is one, from Charles Dumas of Lombard Street Research:
The potentially most violent agent of US boom-bust in 2011-12 is the granting of 100% first-year depreciation of business assets installed this year (as part of December’s fiscal package containing the two-year extension of Bush tax cuts that were about to expire). There is a transition at end-year from 100% deductibility (ie, expensing investment) to 50% first-year depreciation for assets installed in 2012 (a concession that may, on past form, be extended beyond 2012). This 100% first-year write-off is permitted for assets with depreciation lives of up to 20 years.
In chart form:
Wrenching. There’s a bit more to it though.
If we were putting it as an elevator pitch: businesses splurge on capex during the first half of 2011, then flop into a liquidity crunch mid-2011 once cashflow dries up. Just as the Fed stops QE2. Demand is throttled elsewhere at the same time, in federal spending cuts and the removal of social security tax concessions. Stock markets stop dead as deleveraging walks the earth once more.
That sets us up for slow growth, not recession, Dumas says. But then those selfish baby-boomers cling on to their jobs longer and keep the economy underemployed. Global ne’er-do-wells China and Germany kick sand in America’s face by refusing to raise real exchange rates. A deflationary pall descends.
The elevator crashes.
The end.
Loads of moving parts, though. Nevertheless, a few ‘deleveraging in 2012 will flatten markets’ scenarios have been doing rounds already. Thoughts?
Related links:
Credit Suisse on alert for credit cycle turn – FT Alphaville
Oily shadows of 2008 – FT Alphaville
Household deleveraging and consumer-led growth – FT Alphaville