Can we have a soft landing if the housing bubble, trade deficit and low long-term interest rates are corrected

Answer 1

Yes, a soft landing is theoretically possible with a steadily declining trade deficit, absence of a burst housing bubble and steady long term interest rates are the overarching trends.

But don't count on it! The odds for panicky over-correction for any or all these trends are daunting.

Answer 2

The Fed's goal has been to find the level of interest rates that will bring down the economy's growth rate just enough to restrain inflation but not so much as to harm the economy. Economists call this maneuver a soft landing, and the chances of pulling tit off had been looking good. However, there are many signs that this may not. Tighten too little, and the economy and inflation keep soaring. Tighten too much, and the economy crashes into a recession.

As for the housing market--and its prices--which the Fed is watching, is increasing inflation.

The real problem!

The government uses changes in rents, instead of house prices and interest rates, as a proxy for the cost of homeownership. Rents have risen because more people are renting now that it's more difficult to afford a home. This measurement, though, gives the counterintuitive sense that housing costs are rising while the housing market is weakening.

Answer 3

The answer depends upon HOW these economic malaises are corrected.

The housing bubble will probably be corrected slowly and land softly on its own - unlike stocks or tulips, houses retain some value and don't sell quickly. If you are unable to get the desired price, you will probably simply hold. The only realistic scenario I can think of where the housing bubble would 'burst' occurs if there are a number of foreclosures due to excessive speculation.

The trade deficit and long-term interest rates are connected, so we'll have to proceed carefully. In order to bring the trade deficit to par (or more realistically, a smaller percentage of GDP), both the flow of goods and services into the U.S. will have to slow, and the demand for U.S. currency will have to slacken. This means that U.S. currency is 'worth' less than before. This will naturally make it cheaper to borrow U.S. currency (think of it as a commodity with standard supply and demand analysis), and hence put downward pressures on long-term interest rates.

A uniquely upward force can be put on long-term interest rates if exogenously the demand for long-term notes increases significantly. This would occur if the Treasury restructured its debt to borrow at lower long-term rates to pay off short-term bills (which makes little sense, especially since the yield curve, while flat, still rises a bit), or if there was a sudden flight to quality, something which would happen if investor sentiment suddenly turned conservative as follows a stock crash.

As you can see, it won't be easy to grant soft corrections in all areas simultaneously.

The greatest danger is likely to be in long-term energy prices. That will be the single largest dampener on economic progress.