Optimistic: The American recession touched bottom in the April-June quarter and the recovery is starting. Germany cuts its interest rates this summer and Europe enters an upswing by late fall. (30 percent probability).
Pessimistic: The U.S. recession is far more durable than the consensus of economists expects, because taxes are too high, debt keeps consumers and businesses from buying durable goods and the Federal Reserve is too slow and provides inadequate stimulus to turn the economy around. Germany's inflation proves a hard nut to crack. There's a serious chance of world recession by fall and nk turnaround before the middle of next year. (20 percent probability).
Central scenario: The U.S. recovery is about ready to start. Germany, preoccupied with inflation, lets Europe slip to the edge of recession. The disparity between a recovering U.S. economy and a declining Europe puts upward pressure on the dollar, complicating Europe's inflation problem and slowing American growth down the road. (50 percent probability). These three add up to 100 percent, implying that no other outcome is possible. For different combinations of U.S. recession and recovery, Dornbusch sets up a grid of four probabilities:
Deep recession-weak recovery, 5 percent.
Shallow recession-weak recovery, 50 percent.
Deep recession-strong recovery, 15 percent.
Shallow recession-strong recovery, 30 percent. …