Our Macroeconomic Future: A Chaos Theory for Investors.

Neel Kashkari, managing director and head of global equities for PIMCO, has recently posited an array of possible scenarios for America and Europe and employs a simplified version of chaos theory to sort through the results. Kashkari was Secretary of Treasury Hank Paulson’s assistant; he worked directly with implementing the Troubled Asset Relief Program (TARP.)  He plays a significant role in Andrew Ross Sorkin’s book Too Big to Fail.  The movie, starring William Hurt, does a nice job reflecting the book.

Western economies (mostly governments and households) have loaded themselves with debt that under most scenarios is not sustainable. Kashkari indicates the following five options policy makers have as well as the potential consequences for investors. Check out his analysis.
1. Austerity and deflation
2. Explicit default
3. Mild inflation
4. Runaway inflation
5. Miraculous growth

Which scenario do you think is most plausible? Least plausible? Do your answers differ for the U.S., Europe, and Japan? Why or why not?