Paul Krugman on "Risks" to the Forecast

He writes:

Debt and Denial - New York Times : Last year America spent 57 percent more than it earned on world markets. That is, our imports were 57 percent larger than our exports... running up debts to Japan, China and Middle Eastern oil producers. We're as addicted to imported money as we are to imported oil. Sometimes large-scale foreign borrowing makes sense. In the 19th century the United States borrowed vast sums from Europe, using the funds to build railroads and other industrial infrastructure. That debt-financed wave of investment left America stronger, not weaker. But this time our overseas borrowing isn't financing an investment boom: adjusted for the size of the economy, business investment is actually low by historical standards. Instead, we're using borrowed money to build houses, buy consumer goods and, of course, finance the federal budget deficit.

In 2005 spending on home construction as a percentage of G.D.P. reached its highest level in more than 50 years. People who already own houses are treating them like A.T.M.'s, converting home equity into spending money: last year the personal savings rate fell below zero for the first time since 1933... the Bush administration actually boasted about a 2005 budget deficit of more than $300 billion, because it was a bit lower than the 2004 deficit. It all sounds unsustainable. And it is.

Some people insist that the U.S. economy has hidden savings that official statistics fail to capture.... [But] the more closely one looks at the facts, the less plausible the "don't worry, be happy" hypothesis looks.

Denial takes a more systematic form within the federal government, where Dick Cheney is doing to budget analysis what he did to intelligence on Iraq.... Sooner or later the trade deficit will have to come down, the housing boom will have to end, and both American consumers and the U.S. government will have to start living within their means.

So how bad will it be? It depends on how the binge ends. If it tapers off gradually, the U.S. economy will be able to shift workers... into sectors that produce exports or replace imports.... In practice, however, a "soft landing" looks unlikely, because too many economic players have unrealistic expectations... international investors... snapping up U.S. bonds... oblivious both to the budget deficit and to the consensus view among trade experts that the dollar will eventually have to fall 30 percent or more... American home buyers... a "bubble zone" along the coasts, where housing prices have risen far more than the economic fundamentals warrant....

So it seems all too likely that America's borrowing binge will end with a bang, not a whimper.... [Greenspan's] successor may be in for a rough ride. Best wishes and good luck, Ben; you may need it.

I would still put the chances of a "soft landing" at 75%--but dropping.