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2013 Economic Predictions

As I consider my 2013 Economic Predictions, I have to take a lesson from my “Economic Predictions for 2012.” I was right in all the trends, because economic fundamentals drive the trends, but I was wrong in not seeing how denial of economic reality could maintain itself longer than I thought, slowing the speed and degree to which things would happen. I think that’s a fair analysis.

I have learned in recent years that denial reigns supreme. The leaders of nations live in denial as they continue to believe, against all the evidence that is mounting to the contrary, that their efforts to right the old economy can work. However, these leaders have a lot of force to put behind those misguided efforts and a lot of determination not to be proven fools. So, they will continue to exert all the considerable force they have at their command to make their tired solutions work. That force — measured in trillions of dollars per year in just one economy — has managed only to create an illusionary hope of success. A critical observer, however, can see that the force being applied to keep the old economy alive only works as long as the force is continuously applied. Thus, the last round of quantitative easing was declared to be continuous until the job market recovers because the benefits of three previous rounds of quantitative easing ended within two months of the time Q.E. was stopped. [As an updating note in April, that force is now no longer even stimulating meager job growth.]

Since quantitative easing has never righted the situation for good, it should be evident that is nothing more than a prop … a crutch. When trillions of dollars turn out time and again to have no lasting impact, that says clearly to me the wrong solution is being applied. I have said from the time the first quantitative easing was promised by the Fed, that it would fail to have any lasting result, and each round has failed as soon as it stopped. [Again, adding an updating note in April, it is now not even working when applied. It is symptom-treating medicine to which we have built up a tolerance.] I am not, in the least, surprised at the unprecedented spectacle of so much money accomplishing so little for the common good. Yet, this U.S. policy has been copied around the world.

All of our leaders’ efforts to date have been attempts to prop up the old economy built on debt, not to build a new economy on better fundamentals. So, I predict the dinosaur economy I have written about will continue to breathe awhile longer, but this kind of economy will never again thrive. It was an economy built on enormous debt that is being kept barely alive by opening wide the tap on every source of credit we can imagine. This determination to keep the old dinosaur alive means all of us are consigned to drag its sorry weight around for some time to come. There is clearly no vision for anything new in the White House or on Capital Hill or in other nations. No one is willing to give up the candy of newly minted money.

While some heavyweights in the financial world, such as Marc Faber, Nouriel Roubini, and Jim Rogers have been predicting that 2013 will bring a great crash as the dinosaur dies, I am not as certain as they on the timing. In fact, so great are the powers at the disposal of those who want to resuscitate the dinosaur debt-driven economy, that I think we are more apt to see a long and worsening economic malaise than an imminent crash. Eventually, of course, it is going to end in a heap of rotting flesh and bleached bones. The reasons to predict such a crash are clear, and you can read about those reasons in my recent article “Will the stock market crash in 2012 or 2013?” However, the central banks of this world, have pledged themselves to do all they can to prop up the old economies of their nations because they are locked in a vicious circle of life with those nations. Given the Fed’s ability and determination to create money, doing “all they can” means this could drag on awhile, unless some event triggers a collapse. (I have one such event in mind, which I’ll mention later on.)

First, let me give you an example of how this long-term malaise works: During 2012, the Federal Reserve came to own more U.S. debt than any other entity. If the U.S. fails economically, the Federal Reserve stands to lose on all that debt. So, the banks that constitute the Federal Reserve have great incentive to make sure its debt purchases keep the U.S. propped up until the economy rights itself, which the Fed continues to believe it will. I don’t know the end capacity of the Federal Reserve to continue soaking up that debt. I don’t think anyone does — not even the Ben Bernanke, who runs the contraption.

Nearly all of the nation’s major banks are involved in propping up the old economy they are so heavily invested in and are hoping that capacity doesn’t run out before the “game over” light comes on, and they’re getting rich doing it. The success they are looking for is to see that the job market recovers because that is a fundamentally strong foundation you can build on. So far, their hopes have fallen to the ground everytime they discontinued their monstrous efforts. I have believed and said for years now that Q.E. will always fail to bring us out of this Great Recession, no matter how many times it is tried because it is the wrong solution. So, the Fed will hit its end limit, and it’s repeat failures to accomplish anything that sustains itself are solid evidence that I am right on that … especially when you consider the amount of money they’ve thrown at this recession. Likewise, I predict that all the other national banks of this world will fail in their similar efforts within their nations, because nothing on earth is infinite in capacity.

No one has ever tested that capacity of banks to soak up their nations’ unwanted bonds, so no one knows where that capacity ends. We are traveling down an experimental path. I can only say that I think it will fall apart first in Europe because the economic system there is more fractured in its design. The self-interest of one nation can ultimately cause it to decide to pull itself out from among the others. In the U.S. most people do not regard their own states as more important than the U.S. as a whole. In Europe, many do. The U.S. economy is a single iron casting. The European economy is made up of 17 individual castings bonded together by baked clay. It more likely to fall apart first.

What I am certain of is that governments will not change their misguided course, nor will central banks, partly because their egos will not let them admit their present course is failing and mostly because they have no other ideas because they know no other way to see the world than by what has made them rich in the past. They cannot see outside their own ideology. That course is to…

 

  1. Prop up housing prices by keeping the cost of mortgage debt as low as it can go, which is nothing more than sustaining the old economy that was originally founded on the expansion of housing (and the rise of housing prices) through the expansion of ever easier terms of credit. That is because banks remain heavily invested in housing, and a falling housing market means they have to write their balance sheets down even more … to their own peril. The Federal reserve keeps that long-term interest down by keeping other major long-term interest rates down — namely the interest on U.S. bonds.
  2. That happens to fit perfectly with their other goal — to sustain their bankrupt nations by purchasing national debt that no one wants. Those nations have bailed out their banks, and the banks have returned the failure by buying the debt those nations took out in order to bail out the banks. The dinosaur is staying alive by eating its own tail.

 

The first part describes the dinosaur economy being propped along. The last part is the scary part that describes why it must fail. It is nothing but a vicious and widening circle of rickety finance where nations bail out their failing banks, but they have no money to do that with, so they issue bonds, which the banks, then, buy. The banks are financing their own bailouts, while the nations become more indebted to the banks and the banks more indebted to the nations. If you want to get a clear picture of how extreme the Federal Reserve’s position has become with respect to its holdings of national debt, here is a comparison of the past forty years:

 

Graph of Federal Reserve holdings in U.S. debt.

 

It is only during the Great Recession that U.S. debt for the first time exceeded its GDP. Most of that debt is owed to three entities: The Social Security Trust Fund, The Federal Reserve, and China. This is the real reason Social Security is broke. No one really believes the U.S. will ever repay the Social Security Trust Fund for all of the money our members of congress have borrowed from it to fund government operations. Social Security has been abused as a vehicle for garnering more taxes for the government’s operational budget in that the government has not shown any ability to pay that money back. Congress has, in other words, borrowed an unrepayable debt from our own future retirement. As of the end of 2012, the Federal Reserve owned $1.6 trillion of U.S. debt. That’s more than China, and it puts the Fed, as a source of credit, second only to what is owed to Social Security. In just two years, the Fed has doubled the amount of U.S. debt it owns compared to all the years before.

What does this mean? For starters, the Federal Reserve is not owned by the United States government. It is owned by private banks. (See “The US Federal Reserve for Dummies: What is the Federal Reserve System and What is the Gold Standard?“) So, this is not exactly money tax payers owe to themselves. This means the U.S. government is increasingly at the mercy of the major banks of this world. Is it any surprise, then, that it bails those banks out? If the government stops bailing them out and they crash, who will buy the government debt in this bizarre and incestuous circle of finance? Not China. Not Russia. They’re walking away from U.S. bonds in favor of hoarding gold.

With China at long last backing away from its purchases of U.S. debt, the Fed is trapped into continuing to buy U.S. debt, for the Fed’s massive purchases are the only thing assuring rock-bottom interest on a debt that is spiraling out of control. Normally, interest on the U.S. debt would rise at auctions to whatever level it takes to attract enough buyers to fund the amount of debt the government needs to fund and that China no longer wants to buy. Only in the last two years has the Fed swooped in to buy vast amounts of the new debt in order to keep the bidding from going higher. It has become the United State’s buyer of last resort. If the U.S. interest rate were to rise to what it would take to replace China with other financiers, the government might not be able to pay the interest on the debt right now. If the government moves toward a position of default because it cannot pay its interest, what does that do to the Fed that is holding much of the debt? So, the two are caught in a dance of survival that looks more like a death spiral.

The Federal Reserve System is funding the U.S. government with low-interest purchases of government bonds, and the U.S. government has been bailing out all the major banks that own shares in the Federal Reserve System. This co-dependent relationship sounds like the world’s biggest Ponzi scheme to me, and Europe is playing the same game. I am predicting that this circular financing will spin faster and grow wider in the number of entities it takes in until its own centrifugal force blows it apart. But who knows when that will happen? We’ve never seen something like this in super economies like the U.S. and Europe. So, I can see the trend and tell you where it is headed with near certainly, but I cannot tell you when it will blow apart. Often that takes an unexpected triggering event that happens when the financial system is barely holding itself together. Knowing the timing is guess work, but understanding the trend and where it has to end up is math.

What I can say with certainty in making my 2013 economic predictions is that nothing is going anywhere good for the U.S. in 2013. Its financial system is an almost indecipherable Ponzi scheme. Its low interest on its increasingly MASSIVE debt is only assured by the continuation of that Ponzi scheme. All Ponzi schemes end suddenly. Its low interest is also aided by the fact that Europe has been in such dire straits that some money has fled from euro bonds to U.S. bonds. That means that, even if Europe managed to get its house in order, the U.S. economy may only be worsened by Europe’s success because interest on U.S. debt will go up if money starts to flow back away from U.S. bonds toward euro bonds. The only way to avoid rising interest on the U.S. debt would be for the Fed  to increase its purchases to make up for the retreat of European investment back into Europe. So, the Ponzi scheme spins up to higher RPM in the U.S. if Europe gets its house in order. And it IS a Ponzi scheme because each issue of new bonds is used to pay the investors of the last issue with no hope of the overall enterprise ever making any real profit to pay all its investors. The longer it spins up, the worst the explosion in the end.

2013 economic predictions for Europe

Europe did go in the direction I thought it would last year but not as quickly as I thought it might nor as severely. This was less surprising than it was when the U.S. went the way I said it would. If you remember last year well, you remember that, at the beginning of 2012, most of the world’s economists were talking about the “economic recovery” of the United States as if it were a fact and predicting a better looking picture for the U.S. by the end of the year. Jobs and factory orders and consumer confidence were all showing slow growth from an early thaw during the winter months and early spring. I put forward a contrarian view — that things would be held together because of the presidential election cycle during which all the king’s men would work to make things look good economically with short-term measures, but that overall things would get worse by the end of the year. And that was all we did see all year was short-term measures. The economy has gotten worse if measured by jobs, but that truth is hidden because congress chose to dump millions of people off of extended unemployment benefits last summer, and U.S. statistics only track unemployment in terms of the number of people to whom unemployment benefits are paid. So, if a million people lose their unemployment benefits by an act of congress, it looks immediately like there are one million fewer unemployed people.

As we end the year on a “fiscal cliff,” it’s clear that there is no solid ground under the U.S. economy. Yes, the government’s job statistics started moving in the right direction, but notice that happened exactly as the presidential election moved from the primaries (Republicans against Republicans) into the final showdown against Obama. Furthermore, one third of all the new jobs in 2012 were government positions, which is exactly where the executive branch of the government could be expected to pull levers in order to improve job statistics, and yet the improvement from these government hirings barely nudged the statistics toward indication of a better economy. The sudden appearance of a slight improvement in employment only as we went into the climax of the election season and due largely to government hiring certainly fits the scenario I had in mind. Let’s see what happens to the unemployment rate in December and January now that elections are all over. (December will need to adjusted to remove all seasonal holiday employment for the numbers to mean anything.)

With Europe, on the other hand, everyone (even Europe) was predicting things would get worse in 2012, and they did! So, my predictions there aren’t too notable, since everyone saw that coming, and I overstated the extent to which it would go bad. Europe predicted increasing recession last year, and that is what happened. So, what is Europe predicting for itself this year? Recovery?

 

Chancellor Angela Merkel has warned that the German economic climate in 2013 will be “even more difficult.” In her new year message, she also cautioned that the eurozone debt crisis was far from over. However, she did say that reforms designed to address the roots of the problem were beginning to bear fruit. (BBC)

 

Europe has slowly laid groundwork for stabilizing the euro by improving its fundamentals. It has done so at a turtle’s rate, so it will be another year before those fundamental changes get voted on by European nations and become law. It’s hard to say if Europe has that much time. Merkel knows this is a perilous year at best. If Europe makes it through without national defaults, the euro could end the year on a more solid basis due to banking changes that may take effect in Europe. But no one knows if those changes will be accepted by the individual countries that must adopt them. So, I predict (as does this key leader of Europe) that Europe’s situation will remain perilous throughout 2013. Not a hard prediction, I think, to make; but that is the way it will go.

If the euro finally regains solid ground, that is ironically bad news for the U.S. because money moving back to investment in euro bonds, means money moving away from U.S. bonds, so higher interest on U.S. deb tor an increasing burden on the Fed to soak up even more unbought U.S. debt so the U.S. can continue to avoid high interest. On the other hand, if Europe doesn’t make it, that’s also bad for the U.S. because it means reduced markets for U.S. products. It’s hard to find the silver lining for the U.S. on the euro cloud. Moreover, if things go bad for the U.S., that inevitably bounces back to Europe’s shores by decreasing the world’s largest market for European products.

These kinds of Catch-22 situations come from pouring bad money after good. (Well, bad money after less-bad money … as we pay off old debt by taking even more new debt, mostly financed by the banks that we bail out, which, in itself, creates more U.S. debt that the banks need to finance. Feeling dizzy? And it does not appear anyone at the Fed knows how to get us out of this spin cycle.)

 

2013 Predictions for the Iranium Reaction

A recent article in The New York Times says that Iran is showing signs that it wants to concede in negotiations with the West and give up its nuclear weapons ambition:

 

The action has also led some analysts to conclude that Iran’s leaders are showing signs that they may be more interested in a deal to end the nuclear standoff with the West. Evidence began emerging last summer that the Iranians were diverting a significant portion of their medium-enriched uranium for use in a small research reactor, converting it into a form that cannot easily be used in a weapon. One American official said the move amounted to trying to “put more time on the clock to solve this,” characterizing it as a step “you have to assume was highly calculated, because everything the Iranians do in a negotiation is highly calculated.”

 

While he is right that Iran is doing this to put more time on the clock, I think he is surprisingly naive to think Iran’s calculus is intended to put more time on the clock in order to solve this. Iran wants to put more time on the clock in order to enrich uranium to bomb-grade material and in order to develop a dependable delivery system for the weapon. Iran has calculated that a token gesture now would seem to prove the claim it has made all along that it wants enriched uranium purely for medical purposes. If you calculate that you might be able to give up one month’s bomb material production toward medical uses and with that gesture buy three months of negotiating time, that’s three months of bomb material production time while negotiations continue. That’s a gain of two additional months production for the one lost — a smart calculation if it buys you the time you think it will. I think that’s the Iranian calculus. They know the clock is seriously ticking in 2013, and they need to show some serious sign that negotiations have hope.

As I’ve said all along, you don’t build impenetrable bunkers under mountains in order to conduct nuclear medicine research. That’s an abnormally high price to pay for medical research! Who in Iran could afford nuclear medicine that came with such a high price tag, which is above and beyond the price the entire country is also paying under sanctions for pursuing enriched uranium? That’s an enormous collective price to pay for medicine. The math doesn’t add up. However, the math does add up if you look at a different equation. Iran’s leaders are Muslim clerics, and Islamic prophecy teaches that the 12th Imam will return and set up his global Islamic caliphate when the followers of Islam are engaged in a holy war against the Jews. Naturally, they need that to be a war they can win. For a believer of such prophecies, the religious hope of a global Islamic caliphate clearly outweighs what would be regarded as the righteous suffering of one nation in order to bring that long-aticipated event about. Iranian leaders have stated for decades that the most important thing that could happen in the middle east is the complete erasure of “the zionist entity.” For the religious zealot, victory does not depend on the certainty of your strength, but on the hope that such an act of faith before Allah will bring Allah’s blessing. But a little strength going into the battle certainly doesn’t hurt.

You do the math and tell me in the comment section below which seems more likely: 1) Iran is willing to bankrupt its economy to get nuclear medicine that it could buy at a tenth the cost from the West because it is a matter of pride for Iran to do its own research and not capitulate to the West; or 2) Iran’s leaders, who have consistently shown themselves to be religious zealots for decades and who have promised the destruction of Israel for decades, are pursuing the fulfillment of Islamic prophecies, which they believe is essential groundwork for global Islamic domination? Consider that the ONLY necessary cost for the first option would be for Iran to make its nuclear program totally open to U.N. inspectors, something many nations have done without feeling a dent in their pride, something that could have been done before the U.S. ever had to start pressing Iran to act in a certain safe way.

(If you’re new to the site and want to read more about the prophetic beliefs that guide Iran’s top leaders, read “THE IRANIUM REACTION: Is Jihad Rising?“)

My economic prediction for Iran in 2012 was that there was no way Iran would capitulate with the West in negotiations, and that we were solidly on a track toward war. I was right about the negotiations: they got absolutely nowhere. I stopped short of stating war would happen that year, but I leaned hard toward thinking it would. Obviously it did not, so I leaned a little too hard in the right direction. I should be guided by that not to lean so hard that way this year, but I think 2013 brings reasons to continue to lean hard that way. 2013 is almost certain to be the year when war with Iran does happen because the president of the United States has stated emphatically he will not allow negotiations with Iran to extend beyond 2013. Halfway through 2012, the president also clearly telegraphed his intentions to hold off on war with Iran until midway through 2013. With those statements clearly made before a listening world, the arrival of 2013 naturally provides a good reason for Iran to give token gestures that it hopes will incline the West to believe negotiations are STARTING to work. Iran has to stall for time with something credible until it reaches nuclear war capacity. Giving up some of their enriched uranium is a costly enough gesture in terms of their goal that it could convince people (and apparently has convinced some) that Iran is starting to move in the right direction. This is all a game of nuclear cat and mouse.

No one, of course, can KNOW that the U.S. will go to war with Iran this year. Since I don’t have divine knowledge, I am just stating my opinion. Just as the U.S. seems somewhat willing to believe Iran’s feint to the left with this present move, Iran may come up with other moves that will convince the U.S. and Europe that it is taking “steps” toward full disclosure of its nuclear program … just to stall a little longer; and I do not put it past the West to believe those steps as readily as Neville Chamberlain believed Hitler was a man Great Britain could negotiate with. I think Obama is smarter than that, but time will tell. I also think it is possible for Iran to run a program so clandestine that the West believes it actually has stopped all nuclear enrichment. That would be a mistake in which we might only know we are wrong when Tel Aviv blows up. The cost of assuming the best with Iran’s intention could be unforgivably high.

I mentioned above that economic collapse often takes a trigger. The economic engine gets more rickety, and sooner or later an event comes along that is significant enough at a time of weakness, that it causes the economic engine to blow apart. Some people, then, mistake the trigger for the cause; but the trigger is like throwing a single rock at a gravel cliff that is ready to collapse. When the cliff is ready to collapse, one small rock can move the mountain.

Certainly Iran has the capacity to be such a trigger, and it would love to be a trigger for the collapse of the U.S. and Europe. War with Iran could cause the failure of stock markets that are now nothing but speculative bubbles anyway. It could also increase the price of oil, slowing the U.S. and European economies just as they hit stall speed, and it would certainly increase the costs faced by governments in the U.S. and Europe as they go into battle, governments already overtaxed by previous unfunded wars in Afghanistan and then Iraq. All of that coming at a time when the economy is a shambles could be enough to blow everything apart.

If Iran could hope to do all of that to those it has long considered arch enemies (“Satan”) and could hope to wipe out a major Jewish city and bring on the return of the Twelfth Imam, the Mahdi all at the same time, I imagine that is chemistry that could raise Iran’s internal fires to a fever. I think the longer the president cripples Iran with sanctions, the more the fever grows. Iranian people are less apt on the whole to blame their religious leaders than they are to blame the U.S. and Europe for their economic plight. We like to think we will be seen as liberators of the people, but it often does not turn out that we are seen that way.

 

 2013 economic predictions in conclusion

With the U.S. and most of Europe financing their toppling debts with Ponzi schemes, I predict years of malaise that will not go away until our economies either blow apart from their own centrifugal forces or until leaders break denial and realize they have not laid groundwork for a new sustainable economy but have tried to keep alive a dying dinosaur. That dinosaur has to fail because its principles of building “wealth” out of debt were wrong in the first place. I further predict, that our leaders will not realize this because denial reigns supreme, so that brings us back to the Ponzi schemes of the nations of this world blowing themselves apart and breaking denial for us. The right trigger, of course, could cause failing mechanisms to fall apart before they fly apart from their own flaws … as in fly apart this year. Without a significant triggering event, however, I think out governments will keep us limping along into the next year and maybe the next beyond that.

In the end, this total global collapse will beg for global economic answers. The U.S. and Europe have both sought their answers in gigantism. The U.S. sought to fix failed banks that were “too big to fail” by merging them with other banks that were “too big to fail.”  So, where we had banks too big to fail, we turned them into banks two times too big to fail. Where we had too much national debt, we made our national debt much bigger to buy our way out of our troubles. As people have deleveraged away from personal debt, the government has sought only to entice them back into debt by lowering interest rates to abnormal levels and continuing to allow adjustable-rate mortgages as time bombs. The Great Recession has given us ample proof that our leaders seek only to find solutions by making things bigger and bigger and bigger.

Past decades reveal the same trend toward gigantism between nations: The nations of Europe sought to strengthen themselves against U.S. economic domination by creating a single European economy. The U.S. sought to erect a bulwark against that by creating a more unified market in North America, via the North American Free Trade Agreement (NAFTA). At every step, we have sought to improve ourselves economically — not by reducing the size of institutions but by making them even larger. This diseased thinking is not going to give way because it has its origins in the human lust for power, which seems to only grow as you gain more power — like the spell of the ring in Tolkien’s Lord of the Rings trilogy. So, the ultimate answers will be found (or seem to be found) in global economic solutions.

First, however, comes global collapse. Global collapse seems nearly certain in a situation where you have “Major Economy A” in one part of the world that could fail if “Major Economy B” in the other part succeeds — failure being due to the rising cost that “B’s” success adds to “A’s” debt as it lures investors away from “A” — AND where “A” will also fail if “B” fails due to the further loss of markets to “A’s” economy, which is already nearing recession. In a situation that tipsy, it’s hard to see anything but collapse.

Global collapse will beg for global solutions. How far down the road that will be, I cannot even venture to guess; but I am almost certain that it is the future that will be. The move toward gigantism has been the way of this world for a long time, and no leaders anywhere are showing any indication of turning away from making the dinosaur economy bigger until it fails of its own weight.

While I have no divine knowledge nor any crystal ball to know the way the world will go, I know that trees generally fall in the direction they lean. And the lean of the trees has grown increasingly apparent to me … as has their increasing height.

 

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