Where Is The U.S. Economy Going?

In a column today in the Washington Post, Robert J. Samuelson mulls the medium-term prospects of the US economy. He is rather pessimistic. A burst of inflation and declining consumer confidence may overwhelm the "wealth effect" of high home values, which has been the foundation for our debt-driven consumer spending. Indeed, his somewhat longer-term forecast anticipates a downturn in property values (something that many analysts have been expecting for some time now), making it impossible to spend our way out of any emerging recession. The closing lines of his analysis raises a troublesome question:

...adverse forces are now converging: higher energy prices, higher interest rates and debt payments, higher inflation, falling wealth gains. None matters much alone, but "their combination is creating more consumer risk," writes Susan Sterne of Economic Analysis Associates. For two decades free-spending American consumers have anchored the U.S. and world economies. If they no longer play that role, it's an open and worrisome question who will.

Of course, one brighter possibility is that Chinese consumers will become the driving force of the world economy. But all of this forecasting is custom built for the grand-daddy of all forecasters: the I Ching. I asked the question: where is the US economy headed. And the answer I received was bearish in the short term, but rather bullish for the longer-term.

The response was Hexagram 6, "Conflict," with a pure yin line in the first position and a pure yang line in the fourth position, thus moving in the direction of Hexagram 61, "Inner Truth."

The oracle, on my reading, is telling us that the current state of the economy is poor. It is rent by "conflict," with certain forces that should be working together instead moving apart. If I were to take a bit of an interpretive leap here, I would guess we are entering a period of "stagflation," where inflation increases but growth stagnates. Ususally inflation fuels growth, the two work together (think of the US in the 1960s); in stagflation, they move apart (think of the US in the 1970s), the image given to us by Hexagram 6.

It also appears to be a time of declining investment and the continuing importance of Allen Greenspan at the Federal Reserve. As to investment, Hexagram 6 says: "It does not further one to cross the great water;" and, later, "Thus in all his transactions the superior may carefully considers the beginning." "Crossing the great water" suggests undertaking a big project. From an investment point of view, it would imply taking the risk of putting money down to start a new business or expand an existing venture. The I Ching is urging caution - perhaps because of the generally bad macroeconomic environment - in any such decision.

The hexagram also has the line "It furthers on to see the great man." And who might be the "great man" able to maintain some semblence of economic balance through the hard times of stagflation? Given his prominence in managing the US economy, my guess is Alan Greenspan. Of course, his term as Fed chief ends on January 31, 2006; so, maybe the I Ching is telling us that the next Fed leader should continue to consult with Greenspan and follow his lead.

But however bad the near-term economic forecast of the I Ching may be, it sees a brighter future. The most notable attribute of Hexagram 61, "Inner Truth," at least in terms of this question, is its physical shape:


You can see how nicely balanced the lines are: two solid below, two broken in the middle, two solid above. The image suggests the "equilibrium" that economists are always talking about. And, as if to directly speak to investors, the Judgment of this hexagram reads: "It furthers one to cross the great water."

Taken together, these two hexagrams tell us that the economy in the near term will be bad, riven by stagflation, and investors should be cautious and hold bad. In the longer-term (and, of course, we do not know exactly how long the longer-term may be: next year? Two years?) economic forces will be more balanced, inflation and growth will not be pulling apart from one another, and investors can safely get back in the water.