By Chandrashekar (Chandra) Tamirisa, (On Twitter) @c_tamirisa
We forecast the US economy, given the Federal Reserve’s monetary accommodation through mid-2013 and all other factors including the geopolitical remaining normal, to continue to grow at about 1.5 per cent real growth rate returning unemployment to about 7.5 per cent, close to its level in December 2008. Employment will rise in the agriculture and services sectors and remain steady in manufacturing.
Wage disparity between top-half and bottom-half and job quality concerns which surfaced in 2011, despite employment growth, will continue to persist to hold down wage pressures and hence price pressures on inflation. The purpose of hiring will solely be to keep workers employed at at a living wage.
Moderating growth rates in the emerging markets and a tepid European recovery from its crisis will keep global inflation under control.
The Fed will implicitly tolerate 5% Year-on-Year Consumer Price Index (CPI) inflation, food and energy included, citing lower core (food and energy excluded) inflation.
The primary risk weighing on investor and employer minds in 2012 will be US and EU sanctions on Iran souring the Iranian diplomacy because of deterioration of the Iranian economy.
If the purpose of the escalating sanctions is to undo the 1979 Islamic Revolution, America and the West are seriously miscalculating. If it is to isolate Ahmadinejad from the Islamic clerics in Tehran to create democratic and economic conditions to replace him, using the people of Iran to effect a change in the presidency, the West may not be able to achieve the desired outcome with any Iranian leader because of a diminished sense of affiliation of the Iranian people with the West. Change in Iran must come from within. President Ahmadinejad must be commended for forcing a debate on Global Zero, though Iran must realize that its isolated efforts toward peaceful nuclear power carry high risks similar to Three Mile Island in the United States, Chernobyl and Japan.
Any constriction in global oil flows because of Iranian activity in the Straits of Hormuz in the Persian Gulf, at any point in 2012 in response to US and EU economic sanctions on Iran poses a dramatic negative shock to our forecast of inflation expectations, growth and unemployment, forcing the Fed to reevaluate its decision to remain accommodative through mid-2013 because of the increased risk of US geopolitical isolation by the rest of the world which does not want higher oil prices arising from a crisis in the Middle East. The West would be better off buying Persian oil in exchange for working with Iran to develop safe nuclear power.
Making sustainable global development and integration happen through open markets is the resolution to the 2007-2008 financial crisis.
