What if US go to recession?

I always Admired USA because of its intellect and great home to all the knowledgeable Institutions Like MIT, Harvard, Wharton, etc ( in fact out of top 100 education institutions more than 50 belong to USA) . I always believe their superior intellectual power due to the above-mentioned reason.

So I wanted to take opportunity to discuss some notions about USA Recession floating around us. Some are comparing it to 1920s situation that I beg to differ.

May be in short term yen may appreciate, Fed may cut interest rate and dollar depreciates, May gold and crude rise on Hedging. But in longer term Everything will get Reversed (may be 6 month from now)

Now lets take case by case,

If dollar depreciates than US exports will Benefit and it will rise as it will become more competitive. Companies Like Microsoft, GE, Boeing and other companies in Technology space, Heavy Engineering , Defense , agro processing will benefit . Thus more income from exports will stimulate the economy. Mind it USA economy stands on many pillar and one breaks (housing) other will hold.

But as you know Imports will be expensive …like crude

Now unlike India where higher energy cost are not passed to the consumers due to the political pressure, In US its gets adjusted every day… so if Fuel cost will rise than it will pinch people there more and they will become more efficient user . They might shift to efficient cars, (so new cars sales may actually rise) or they will take mass transit system (again it will be good as under capacity will be used optimally). Thus reducing the demand of over all crude. As prices goes up demand comes down simple. And if demand comes down than crude prices will come down I feel it will come down as USA consumes 50% of total crude supplies , so impact on prices will be visible) or atleast they wont rise. (but

Now lets talk about non-crude imports. As we know USA major trade partner is China, and China has a fix dollar policy (currency is fixed /pegged) the impact in value of import will be Nil. Thus exports will rise and import value will be stagnant thus reducing the trade deficit. Once the trade deficit will start reducing dollar will stop depreciating and infact it may start appreciate. Thus people will again shift from gold (as gold bear no interest and have no economic value if its stagnant or declining ) to dollar .

Now lets see what will happen to China

China in last decade used appreciating dollar to its advantage . It pegged its currency with Dollar . So its export value was rising with the appreciation of dollar and at the same time Imports were getting cheaper (like crude and steel) thus it was able to amass 1 trillion dollar of reserves in last 10 years. Hence the growth rate and low inflation.

But now when dollar depreciates its export value is coming down for the same volumes but import is getting more expensive hence high inflation and low growth …

It will be just matter of time that China will be forced to break the peg with the dollar sooner than later. If it does so than its export will become expensive and countries like India and other ASEAN countries will become more competitive. Thus its will be good news for India.

What will happen to Japan ??

As we know that's yen has rallied from 125 to sub 100 levels in matter of 4 months .

And we also know that Japan have 1.5 trillion dollar worth of US treasuries.

So if yen appreciates by 20% than US will make 20 % on 1.5 trillion dollar or 300 billion of notional profits ( which is almost the amount of US subprime losses) because Japan has invested into a depreciating asset (which get depreciated by 20%)

Secondly Japan's economy is 4 trillion USD and major portion is export. Again USA and china are the major partners . So if its currency appreciates by 20 % than one can imagine what will happen to exporters . ( just imagine what will happen to Infosys if rupee appreciates from 40 to 32 levels) . So Japan cannot afford this double whammy both from investment loss and demise of exporters . So in all probability it will cut rates from .5% to 0% thus depreciation of yen and start of carry trade … thus inflating asset classes like equities

Now again back to USA

If Fed cuts rate than housing will again starts and will help economy .

Secondly , even in 2003 companies like ENRON and Worldcom went bust but USA expansion did not stopped . In capitalist economy companies goes bust and new companies takes place . If u see the original companies in Dow jones index only 2-3 companies has survived . All are new entrants. It happens everywhere ..

So trust Fed as Ben Barnake is very respected academician and is author of many vital economic theories paper even Nobel economists admires

So we are lesser Mortals in passing outright judgments on him and US government