Calculated Risk's recent post, Looking Forward: 2006 Top Economic Stories, lists four stories "that I don't think will be big in 2006": energy prices, Bush Economic proposals, the trade deficit/current account deficit, and the Budget deficit. And there are "five possible candidates for the top economic stories of 2006", counting down:
5) The End of the Greenspan Era
4) Housing Slowdown
3) Pension Blowup / Major Bankruptcy
2) Slowing Economy
1) Interest Rates
The post explains what wil happen and why. It ends on a tantalising note concerning new Fed Governor Bernanke:
And like many observers, I expect the Fed to start lowering rates later next year as the economy slows. But here is the surprise, I think long rates will start to rise when the Fed starts cutting the Fed Funds rate.
This will be Bernanke's "conundrum"! As the economy slows, this will reduce the trade deficit and also lower the amount of foreign dollars willing to invest in the US - the start of a possible vicious cycle.
This is a plausible scenario, and might just be the trigger for the long-awaited USD slide (though I expect it will happen closer to the end of the tightening cycle; markets won't wait for the first Fed cut).
Also worth a look is Arnold Kling's Economic News for the New Year - despite the name, his focus is "long-term stories, which won't be resolved in 2006 alone".
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