Some Simple Analytics for a “Hard Landing”
J. Bradford DeLong
April 20, 2005
Letâ€™s start with a situation in which the real exchange rate–the dollar price of foreign currency–is being artificially depressed because of large-scale exchange rate intervention by foreign central banks.
[10 pages of formulas and charts outlining three scenarios that DeLong calls “soft,” “medium,” and “hard” landing]
Which of these scenarios are we in? Are we in the “soft landing” scenario, in which the pace of sectoral shifts and structural changes that are going to be caused by the forthcoming rise in the value of foreign currency will not be large enough to materially depress potential output? Are we in the “medium landing” scenario in which the shock and the consequent rapidly-required sectoral shifts will be large enough to cause a significant but not catastrophic recession? Or are we in the “hard landing” scenario in which the financial fragility and vulnerability of many New York institutions is such that all hell will break loose whenever foreign central banks stop purchasing dollars?
I don’t know. My guesses are still 70% soft, 20% medium, 10% hard. I do know that the longer the U.S. continues to run its massive twin deficits on the current scale, the greater the “medium” and “hard landing” probabilities will become.
Full text: hard_landing.pdf