As the fear of inflation due to access liquidity caused by austerity measures in US subsides, the fear of spiralling deflation is gaining strength. With each economic data coming out from Federal Reserve, the bleak economic outlook and slow recovery is becoming eminent. Though its still early to conclude, I have another reason to morn at economic mistakes of US. The largest economy, if gets trapped in deflation, may lose its top place sooner than anybody would have thought.
I have taken four economies of the world, 2 most developed and 2 fastest developing, and tried to find the worst case scenario. My worst case scenario: US growing at the rate at which Japan had been growing for past 10 years. Deflation trapped Japan did everything to come out of the recessionary spiral but have failed every time. US is on same path or even worse situation with heavy load of Debt and high rate of unemployment.
Now, for past 10 years Japan has been growing at an average rate of 1.27% annually. If US is stuck into deflation and slowdown then we can assume that US would grow at this rate for next decade or more as was the case with Japan. GDP of US in 2009 was $14.44 Trillion and with a average rate of 1.27% growth for next 8 years, the GDP of US would be $15.97 Trillion. China, with GDP of $7.99 Trillion, would also take around 8 years to reach that figure if it continues to grow at 9% which is very much expected.
Hence, China can become the largest economy as soon as 2017. It is still early to be sure about such prolonged recession but this what is happening with Japan for almost 2 decades now. This arises another question in my mind, what if US too is stuck for 2 decades or more. If that happens then India growing at a rate of 8% would take 23 years to take over US as second largest economy after China. That would be a big phase shift in world as 3 out of 4 largest economies of the world would be Asian.
US definitely would not want this to happen, at least not so early. This is a crucial time for policy makers in US to think something different than what they have been doing till now.
