The economy, particularly in the U.S., continues to hang in the balance. Unemployment is still high and the official numbers are not all that accurate because they don't include part-time workers and people who stopped looking for work. The stock market has been a bit of a roller coaster ride. Meanwhile, price inflation has stayed relatively low, while interest rates are at or near all-time lows.
The Federal Reserve is walking on a tight rope. On one side, there is inflation. On the other side, there is recession or depression. The problem is, as time goes on, the rope gets thinner and thinner.
If the Fed leans too far to one side, it might fall over. Or perhaps it will try to overcompensate going the other way and fall to the other side. Or maybe the rope will end and a fall into a combination of both pits will occur.
I think the low interest rates and the recently downtrending stock market indicate that another recession is likely. The problem is that there was not a correction allowed to happen from the last recession. The problems are much worse now because of all of the debt and money creation.
I think a likely scenario at this point is for another recession to appear. Then, Helicopter Ben and the Fed will react with more quantitative easing (money creation). The next round of QE will probably not be as generous in terms of results. I think we are likely to see higher price inflation, unless the Fed is timid by its own standards, in which case the next recession will be deep.
I see a scenario similar to the 1970's as more likely than a scenario like the Great Depression. I am not necessarily talking about severity, but the characteristics. I think it is likely that we will eventually hit a point of seeing high price inflation and a weak economy at the same time.
If things became anywhere near the Great Depression, then the Fed would open up the flood gates of money and would trigger severe price inflation. Bernanke has been critical of the Fed during the period of the Great Depression for not being aggressive enough.
Another thing to consider is that there was no FDIC during the Great Depression (at least in the beginning of it). There were a lot of bank failures, which reversed the fractional reserve lending process. This was essentially a deflation of the money supply. So even though the Fed actually did try to create some monetary inflation, it was not enough to offset the bank failures and the average person's desire to spend less.
Hopefully, if we do see a scenario like the 70's, the Fed will act in much the same way. Paul Volcker, as Fed chairman, slammed on the monetary creation brakes. The U.S. had a good hard recession, but it also set the stage for a nice recovery. That was probably the last time in American history that a recession was allowed to play out and a great deal of the malinvestment was able to be corrected and reallocated more in accordance with the free market.
It is still possible that we could have a Japan-like scenario where we see low price inflation and an economy that just kind of sputters along. However, I don't see it happening for a couple of decades like it has happened in Japan. The U.S. central bank is more aggressive than the Bank of Japan and Americans are unlikely to buy U.S. government debt to the same extent that the Japanese have bought Japanese government debt.
Let's just hope that if we hit a 1970's America scenario that the Fed will act in much the same way now as it did then. While it would cause a severe recession, it is better than the alternative of hyperinflation.