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Economic Predictions for 2012 – My end-of-year audit

It’s time to assess my own 2012 economic predictions. In looking honestly at the shortcomings in my predictions, I see something interesting. The picture of events formed a ghost image to my own forecast. It shaped up weaker than I had predicted, and yet has taken the exact form I envisioned, albeit in paler colors

 

Mayan predictions of the end of the world in 2012

It’s not quite 12/21/2012 yet, but I will stay firmly with one prediction I made for this ominous year. I began the year with a safe guess that the world will not end this year. It’s safe because, if I’m wrong, you won’t be around to tell me. If I’m right, I may well be around to tell you.

With the countdown to winter solstice only a few days from over, I’m willing to stay with that prediction. Ancient Mayans, after all, never said the world would end in 2012. They simply ended their calendar there. Don’t all calendars have to end somewhere? I mean calendar-makers are not immortal. At some point, the guy making the calendar has to stop making his calendar because he dies. I’m sure the Mayans felt that going several hundred years into the future was enough for them at that time. They probably decided to let some future people make the next calendar for the next cycle.

If the Mayans had any prescience at all (and we have little reason to think they did, given that they never predicted their own doom at the coming of the Spaniards), perhaps they saw this cycle we are now ending would be their last — not everyone’s last, just their own.

 

My early 2012 economic predictions

I staked out ground at the beginning of this year that very few economists agreed with. Given how the year went and where it is ending up, you may have forgotten already how rosy everyone’s view of the economy was at the beginning of the year. While nearly everyone was talking of recovery because jobs were trickling up and factory orders were perking up a little, I took a cooler view and said the early winter warming meant nothing. And on that general outlook, it’s pretty clear I was right on. There is almost no one where we stand right now who is as rosy in economic optimism as many were at the beginning of 2012 when most of the economic gurus of this world believed recovery was underway.

When it comes to the particulars of what would go wrong, I was not as accurate. My first prediction of 2012 was that European bank failures would have a major impact on the global economy:

 

Again, it looks as if bank problems will begin in a German-dominated central Europe, then spread to the U.K., which is outside the European Union’s eurozone, and finally to the U.S. A failed European econony will crash on U.S. shores later in the year in the form of diminished markets and further bank stresses.

 

To be sure, European banking problems pressed down on the entire global economy, including here in the U.S., but I overstated the case in saying an economic tsunami from Europe would crash upon U.S. shores.

For example, I confidently proclaimed,

 

With credit ratings being lowered heltar-skelter around the world weekly if not daily, some national economies are almost certain to crumble under their own torpid weight. The timing of these sovereign debt rollovers places the crisis toward the middle of the year.

…The euro crisis will emerge on the horizon again but with problems that make the Greeks look like a minor tragedy…. [Europe’s] recession will certainly force heavier financial problems on nations like Spain that are already maxed out. Some nations are going to find their debt load impossible to finance as their interest rates go up while their need to borrow also rises sharply because of rising unemployment.

 

Spain, Italy and Greece certainly have gone through most of the year in the danger zone and are far from out of trouble yet, and Ireland has re-entered the danger zone, after some thought its troubles were over; but no nation collapsed. Nevertheless, their situation at the end of the year does not look any better than it did at the end of last year. It worsened in the beginning half of the year, and has backed off a little toward the end. All of those nations are finishing the year a little worse off than they were at the end of 2011, so all of Europe’s political wrangling over the euro have sustained these nations but not saved them by any means.

I noted in my first set of predictions,

 

Political tension between nations and between citizens and their governments is certain to increase in the coming year as a result of these great strains.

 

And on that I was right. Even Herman Van Rompuy, European Council President, said this month that the dream of a united Europe — a Europe no longer strangling itself with internal wars — had been tested by a severe strain on national relations created by Europe’s euro troubles.

 

We are hit by the worst economic crisis in two generations, causing great hardship among our people, and putting the political bonds of our Union to the test….When prosperity and employment, the bedrock of our societies, appear threatened, it is natural to see a hardening of hearts, the narrowing of interests, even the return of long-forgotten fault-lines and stereotypes. For some, not only joint decisions, but the very fact of deciding jointly, may come into doubt. And while we must keep a sense of proportion … the test Europe is currently facing is real.

If I can borrow the words of Abraham Lincoln at the time of another continental test, what is being assessed today is “whether that Union, or any Union so conceived and so dedicated, can long endure”.

Strong words about the tensions Europe is facing and the divisions that are trying to resurface because of Europe’s present strain from one who is receiving an award for Europe’s success.

Europe still has no final solution in place, though it is always working on a solution … always talking about one … always optimistic that it has more time to talk. So, Europe unleashed no great economic tsunami upon the world, but it is still crumbling and sliding slowly into the sea and is as likely to collapse in 2013 as it was in 2012. There is no reason to say that its situation has turned around.

Of course, the only reason Europe did not collapse was that its leaders went long on their own form of quantitative easing. Europe started printing money out of thin air — especially the U.K. — to save itself from collapse. As with the U.S. quantitative easing, once it begins, seems to have no end-game. The economy becomes completely dependent upon the infusion of free money. The greatest volumes of money printing the world has ever seen have not turned the Great Recession around. They have merely leveled off its decline. No nation has yet come to the point where it can end the quantitative easing without going immediately into decline again.

So, that I did get right:

 

Q.E. seems to be all the world’s politicians know, and once markets get a snort of this crack, they demand more the second the economic high wears off. (“Are My 2012 Economic Predictions for the Great Recession in Recess?“)

 

Quantitative easing has proven as addicting to stock markets as Meth.

In predicting the effects of the European economy on the U.S., I was, again, wrong in the details:

 

A feeling of malaise [will develope] toward any hope of Europe getting out of its mess once larger nations start to fall. As Spain and probably Italy teeter, consumer confidence even in the U.S. will be hit worse than last year. Much more so, stock-market confidence.

I add to my previous predictions that this will be happening during the second major round of home foreclosures that will be passing through the U.S. economy in the next few months. This confluence of bad news will certainly undermine consumer confidence further than we saw last summer with more certainty of a second dip in the ongoing Great Recession.

 

The housing crisis did not unfold, and to be fair to myself I did soften that prediction clear back then (as shown below). There has been some decline in consumer confidence with Black Friday not looking as good as last year, and fears of a second dip in the ongoing Great Recession have resurfaced — particularly in talks about the fiscal cliff. So, I was right on the overall trend, but wrong in the scale and speed at which it is unfolding.

 

My predictions regarding the Iranium Reaction and its impact on the economy

One of my biggest predictions for the year was the likelihood of war with Iran. I predicted that Iran would cause the price of oil to rise, and it has not. I said that, if the economy became an argument that turned against the president in an election year, then his campaign reasons for avoiding a war with Iran would diminish. In fact, a war could get the topic off of the failing economy, and the U.S. rarely changes presidents in the middle of a war. While I said he would not choose war just for those reasons, the point I made was that the reasons holding him back from war would diminish.

However, the economy did not turn against the president. Rather, it began showing signs of improvement just as election time neared, and so no incentive arose for President Obama to change his stance regarding Iran. He held to his guns in insisting on diplomacy, and Israel’s Prime Minister Netanyahu backed away.

While, again, things did not take the cataclysmic turn that I said COULD happen if the economy decayed toward election time, the whole situation with Iran has continued to move in the direction I said it would. So, here, too, the overall path has gone in the direction I predicted but not at the speed I thought might happen:

 

I firmly believe sanctions have no hope of dissuading Iran from its nuclear weapons program. Ahmadinejad has said numerous times all over the world that Israel must be and will be destroyed. Unless Ahmadinejad falls from power, he and the United States and Israel are on a head-on course. I say that because it is clear to me that Iran’s president is not driven by political realities in his country but by radical religious ideology that, in his mind and in the minds of many others in Iran, trumps all other concerns. Several of his speeches have made it clear that he believes he is called to prepare the way for the Mahdi — the twelfth imam who will come in apocalyptic times.

 

Iran has not been intimidated in the slightest by the heaviest sanctions the U.N. has ever laid on another nation. It remains defiant and resolute in its pursuit of enriched uranium, and the most recent news has been that President Obama will attack Iran if diplomacy fails over the course of the next four or five months. As with the economy, things look as bad, if not a little worse, at the end of 2012 as they did at the end of 2011; but things have not slid as quickly as I thought they might.

Israel, too, has not moved as quickly toward war as I indicated:

 

I doubt Israel will wait until January 2013, unless a November change in U.S. leadership leads them to believe the U.S. will act shortly after a new president is installed. Even that may be too long to wait in Israel’s eyes as a new president is unlikely to launch straight into war. The Obama administration seems more likely to continue pressing Israel toward diplomatic efforts … perhaps until it is too late for Israel.

 

It is not, however, that it has not tried or wanted to. Netanyahu did all he could throughout the year to press Obama hard toward war, but Obama proved to have the upper hand and managed to quell him. He also managed to assure Israel by increasing his promise of U.S. military action if necessary and increasing shipment of arms to Israel to improve its ability to defend itself when and if war does happen. For Israel, the red line was that Iran would bury its nuclear materials so deep that Israel could not get to them. The president managed to assure Israel that the U.S. has the capability of getting to those weapons and will deliver that capability to Israel if the time comes.

The important thing is, again, the overall trend. Nothing here has turned around. Netanyahu still believes that Iran must be stopped militarily, and the president has not won the slightest concession from Iran with his diplomatic efforts. My predictions as to how those diplomatic efforts would unfold have proven accurate, but I think many others could and did predict the same thing:

 

Iran may give incremental teases to make it appear talks are going somewhere at the moment of crisis, but … Iran is not going to give up its secret nuclear program. You’ll see the pope carrying a scimitar and wearing a crescent moon before you see that happen. (“Are My 2012 Economic Predictions for the Great Recession in Recess?“)

 

I predicted the Iranium Reaction would end in war, and it is still too early to know if that will be the case; but I hold to believing that it will. Iran’s government is driven by  religious political ideology that is more important to it than the well-being of its people. If the people suffer in order to bring on the second coming of the Mahdi, then they will be rewarded for their suffering by the Mahdi when he returns. So goes the thinking:

 

I maintain that we cannot understand the situation we are now marching straight into or the risks we are allowing if we do not understand Islamic Fundamentalism and its prophecies, especially if we just assume Western ways of thinking apply in this situation. These prophecies are the forces that drive Ayatollah Khamenei, who was a key mover in the Islamic Fundamentalist revolution in Iran, and Mahmoud Ahmadinejad

 

I hold to that view. I said Iran would enter talks in order to buy time for its nuclear enrichment program, and it did. I said the talks would fail, and so far they have failed to find any room for compromise. But I was wrong in estimating the Iranium Reaction’s impact in 2012:

 

The Iran nuclear crisis is becoming the single greatest force that will be acting on the global economy in the months ahead. In the very least, Iran will do what it can to make sure the West suffers any pain that it [Iran] has to endure because of Western sanctions.

 

Predictions about the Federal Reserve’s economic activities

One thing that has been completely predictable has been the Fed. While others pondered whether the Federal Reserve would engage Q.E.3, I stated without any doubt that I believed the Fed could not resist money printing … and also that it would be even less effective than all previous rounds of quantitative easing:

 

The Fed’s tools — whichever are used — will work less effectively, not better, now that they are old and worn…. That does not mean that the Fed will not try more quantitative easing at the end of the day as it feels more and more pressure to try and do something; but if it does (and I think it will), it will find that Q.E. almost completely effete. As I noted earlier, the stock market has become addicted to quantitative easing. The Fed has created a bubble that it finds itself pressed to keep supporting:

Stocks entered a temporary dead zone. Don’t worry about that either. They’re likely to go back up soon, as the Fed will do whatever it needs to in order to pump the market back up … such as promising Quantitative Easing III … if necessary.

 

And on that, I was right, too. In my next article, I will look at how the stock market has now become completely decoupled from economic reality and is now just a rigged casino that bets on what the Fed will do and then responds to what the Fed actually does. The stock market may now be in the most dangerous bubble we have ever seen. Its float is completely artificial, requiring the impossible endless support of quantitative easing to keep the bubble pumped up.

I noted in July what others are now writing about in December:

 

Stock markets of the world now go up when economic indicators look bad because speculators believe the bad economic news means that central banks will engage in more quantitative easing. If that isn’t solid evidence that the stock market is riding on an enormous speculative bubble funded by the fiat money of central banks, I don’t know what is.

 

I was not the only one writing that back then, but it is now becoming increasingly apparent that the market has become unhitched from economic reality and does exactly the opposite of what a healthy market does when it faces economic reality.

It was because I recognized the co-dependency markets now have to the largess of central banks, that I predicted more Q.E. in 2012 with certainty — lots more:

 

The political leaders of this world — U.S. and European both — will continue to run the presses at full velocity because the cost of admitting they are money-printing and that they are on a bad course is too high politically. They will stay with their present plan, hoping they are buying enough time for an exit to emerge. All of this means the second dip not only happens, but that the next “dip” is to dips what Grand Canyon is to ditches.

 

And that, to me, appears to be where we stand now that we are at the fiscal cliff the U.S. congress has created. We have become utterly dependent upon free money in enormous quantities (the “quantitative” part of the “easing”). The terminology Gentle Ben Bernanke coined here is correct because this huge quantity of money creation has definitely “eased” the pain of the Great Recession. It has “eased” it, but it has not cured it. Q.E. has proven to be, as I have always indicated, nothing but an anesthetic. If the Fed stops this life support, here at the brink of the fiscal cliff, the economy will plunge because it is all kept aloft on a bubble of hot air.

I was careful on this one not to put the timing indicators on it that I did for the economic predictions mentioned above:

 

How soon this will play out, I didn’t say and still don’t; but the Fed continues to hold out the carrot of more Q.E. if necessary while showing reluctance because it knows that game is over once the third round of Q.E. accomplishes nothing but a blip of a few days. No one wants to see “game over” with victory still so far away.

 

Again, I overstated the severity. No one among the economic elite is saying or seeing that it is game over. Q.E.3 came with very little effect and has essentially slid right into a now endless game of Q.E.4. So diminishing are the returns, that the Fed at this point has just said, “We’ll keep doing it and doing it for as long as it takes until jobs begin to rise,” and those stubborn jobs have agains stopped rising.

Suspiciously, jobs rose right up until the federal elections were over and then slumped.

 

QE3′s failure to accomplish much of anything will increase consumer malaise. While the first rounds of Q.E. brought months of stock-market inflation, this last round may be lucky to bring days of relief.

 

We have seen a hint of consumer malaise as the holiday buying season has unfolded in a rather slouched manner. And the failure of Q.E.3 to deliver more than a blip explains why Q.E.3 morphed into a now indefinite Q.E.4 in which the money presses have been promised to run night and day until we see recovery; but they are bringing no recovery.

 

Economic predictions related to the U.S. housing market

What quantitative easing has brought is the lowest mortgage interest rates in my lifetime (53 years). That has eased the perils of the housing market so that it has not gone back into free-fall. Here I got the scale of movement right as I indicated that a market, which still has great reasons for further deflation, would be buoyed along by all this money printing through 2012:

 

To know what the housing market is going to do, the fundamentals are best shown in this week’s news: ”Wreckage of the Foreclosure Crisis Far from Over.” That story tells you about the log jam that is just up-river from us. And THAT single fact [of the log jam of foreclosed houses], not the stock market this week (or last), is going to affect what comes down river next week and the weeks after that. (From my “Economic News Article Archive for the Week of 03/25/2012.”)

…I have indicated along the way this year that foreclosures would depress housing prices more. That log jam has been slow to make its way downstream, and it is now natural to wonder if it will ever get here. The housing market has seesawed back and forth all year. Every gain seems to be retracted by some other loss in the next week or even the same week. Currently, the housing market looks a little better than it did when I wrote the above because banks are doing everything they can to avoid creating a flood of foreclosures. Such a flood of their own creation would force them into an endless spiral of writing down their balance sheets even more because of the suppressing effect that foreclosures have on housing prices.

Housing has also been buoyed a little by record low mortgage rates that have come about from the Fed’s Operation Twist, yet only a little. Considering that this is a time in which prospective buyers can lock in the lowest interest rates they will see in their lifetime, sales are astonishingly flat. I have also noted that there is a time-bomb in these low interest rates because, even with record low fixed rates, banks are still being allowed to entice buyers with adjustable rate mortgages that offer even lower rates.

Those, however, are not something that is going to cause harm in 2012, as they typically have five-year fuses. But, it’s important to note, that we are doing all the same things all over again to try to drive the economy up with housing purchases. We’ve learned nothing.

 

I rightly noted that banks would do all they could to delay and minimize the release of their foreclosure backlog so that they do not undermine the prices of houses further and create their own demise:

 

Banks will do all they can to soften the blow of these foreclosures because it is finally becoming clear to them that solutions other than foreclosure are in their best interest when there are far more houses in foreclosure than there are potential buyers.

 

As I said in my mid-year audit of my economic predictions, I think I got the dynamics of how opposing forces in the housing market would play out about right.

It is this kind of dynamic that explains why I was wrong in the scale of decline for each of the items reported above, though exactly right in the direction they would take. Where decline becomes evident, immediately strong forces in government and industry rise to resist it. Sometimes, they may be more effective and strong (at least temporarily) than I think they will be, so the fall is arrested somewhat. In the same way, my predictions — if they were really listened to by anybody — could actually accelerate the decline because people would start acting in smarter ways if they realized the stock market was floating on a bubble of hot air. In the short term, this would mean the stock market would collapse because it has no reason for doing what it is doing. In the longer term, seeing economic reality means you will make choices that improve the outcome, rather than mask over it.

 

Economic predictions of a deteriorating job market

At the beginning of the year, all of the most highly regarded economists were crowing about the job recovery. The job market had seen months of gradual improvement, and most economists thought this would hold. I did not, and it didn’t. I speculated that all the president’s men would do all they could to improve job figures because the president would not get elected if jobs declined. Jobs grew until the end of the election season.

How can the government create jobs temporarily so as to prop up election hopes? About three-quarters of all the jobs created last year were government jobs. That’s how. As soon as the election was over, the job market began to decline because this mid-year growth was propped up by intensive short-term efforts that relaxed as soon as the election was won.

 

Economic predictions that are as good as gold for 2012

Even in the middle of the year I noted that my faith in my prediction for gold values at the start of the year was wavering. Yet, I did not predict a meteoric rise in gold, and it has certainly done better than just hold its value:

 

I will say … that things look good for gold. I think it will be a rough ride for gold [to test the $2,000 barrier again], but there is no reason for gold on average to go lower than it is now and many forces on the horizon to push it up. I think it is bottoming out right now.

 

As of the writing of this article, gold is up about 8% over what it was at the start of the year. So, no one who invested based on my predictions (not something I advocate) would have lost money if they held to their position. Depending on when they bought, they may have staid about even or made a modest gain.

Midyear, I said,

 

My prediction only said that things look good for gold, and things do still look good for it. It didn’t go much lower than where it was when I made that statement and has returned back above where it was when I made the statement. So, it turned out to be roughly near what appears to be a bottom.

 

Gold, in fact, has been hard to predict because of the Fed’s unusual economic tampering. When there is bad economic news, the stock market now defies the gravity of our economic situation and goes up solely because speculators think the bad news will assure more quantitative easing by the Fed. A rising stock tends to pull people away from gold. Usually, when times look bad, people pull out of the stock market and invest in gold as a security. Usually when the Fed prints more money, gold goes up because the value of the dollar drops; but 2012 has stood all the normal economic principles on their heads. Still, gold has not done bad, especially considering how high its price is compared to prior years. Gold has remained … as good as gold.

 

Other economic predictions for 2012

I did accurately predict the major countervaling force that would be working against the rise of gold and against any further drop in the housing market:

 

U.S. interest rates will probably not go up much this year because the U.S. will still be the safer haven of choice for many … but only because Europe looks worse and worse as time goes by.

The U.S. will not see its interest rates rise on the national debt in any significant way this year, even when its credit rating gets downgraded by one or two of the big-three credit-rating agencies.

 

As I noted midyear:

 

For right now, the U.S. is outshining even gold as a safe haven, but this is a temporary illusion. Once things stabilize in Europe, U.S. debt will no longer garner the cheapest interest rates in the world. An interest rate change on the national debt is the biggest time bomb on the horizon. I cannot say when it will change (though I have said it will not be this year), but when it does, it will create a devastating drain vortex on the U.S. economy.

 

That’s as true now as it was in July. Things, however, are far from stable in Europe, so expect the U.S. to enjoy cheap interest for some time to come. The reality of the U.S. debt will eventually hit home, but for the immediate future, the U.S. looks better than most alternatives, as Europe’s troubles are nowhere near over. For right now, the U.S. is buying most of its own debt via the Fed. Banks buy U.S. bonds under the assurance that the Fed will buy the bonds from the banks. The Fed’s willingness to keep buying up as many U.S. treasuries as it needs to, assures a large number of banks will buy those securities, keeping the interest the government has to pay to attract buyers low. Sooner or later, however, the charade of the U.S. financing its own debt by printing money has to end; but we’ve not been down this road before, so it’s hard to say how long the Fed is capable of sustaining the artificially low interest rates on the U.S. debt (artificial in that they would be much higher if the U.S. had to finance all of its enormous debt on the open market). This, after all, is not a third-world country unraveling by printing money, but the world’s largest economy, which mans it has a lot more capacity to hold on.

 

In predicting that the U.S. would continue to have good interest rates this year, I also said it will see another downgrade of its credit rating. I have been right on the interest rates so far, and I didn’t anticipate the credit-rating downgrade would happen any sooner than it did last year, so there is nothing wrong with that prediction either. The downgrade simply remains to be seen.

 

I think it would be a bit much to declare victory on that prediction. While the U.S. credit rating was downgraded by the same small bellwether agency that first downgraded its credit last year (ahead of S&P), it was not downgraded by any of the big-three credit-rating agencies that bond buyers listen to. So, technically a downgrade did happen, but there is a difference between technicalities and things that impact the economy. Again, it is a case of things moving in the direction I said they would, but at a slower pace.

Another thing I predicted for 2012 was the popping of several European housing bubbles:

 

Some of these European nations barely burped when the Great Recession hit and the U.S. went into housing anaphylaxis. In all cases their acceleration of housing markets has hugely outpaced wages. Clearly that is not sustainable. Most of these nations intentionally fueled this rise with the lowest interest rates in history, learning absolutely nothing from the U.S. debacle. Europe thought it would power right through the Great Recession. If last year proved this to be unlikely when housing prices in some areas began to recede, 2012 with its pan-European recession will be Europe’s 2008.

 

Didn’t happen. Well, it kind of has in Ireland, but most of the housing bubbles in Europe remain unpopped. Europe did not in 2012 see the same kind of housing crisis the U.S. saw in 2008. Spain, of course, had already seen its housing crash, so I cannot count Spain.

 

I mentioned many other bubbles that are due to pop, but I did not say they would happen in 2012. They represent a lot of additional bad economic news for the years ahead, lest we think we’re nearing any conclusion, but not necessarily for 2012.

 

On that I was right. The stock market bubble has not popped. The student loan bubble has not popped; but they are still economic bad news that lingers as likely on our horizon.

 

The China Syndrome

I couldn’t have been more right than in my economic predictions for China. Most economists at the beginning of the year were speculating that the Chinese economy was coming in for a hard landing that would hurt us all. I considered that all much adieu about nothing and predicted,

 

China will have a softer landing than the rest of the world’s major nations.

…I’ve repeatedly had to point out that China intended to bring its economy down as a way of getting its escalating housing prices back in check. That said, “no hard landing for China” does not mean the settling of the Chinese economy will not make things worse for everyone else. It’s one more factor pulling down the U.S. now. Chinese manufacturing buys a lot of raw material from the U.S. and everywhere else it can. Even a smooth slowdown means other nations are not likely to see any growth in those resource export industries, such as logging and mining.

 

China has brought its big bird down on the runway for a controlled landing … just as it announced it would a year and a half ago. In a world full of declining economies, clearly China cannot export at anywhere near the level it did during the past two decades. So, it had to scale down quickly to match the world’s buying capacity. It also wanted to curb inflation. That caused the world’s top economists to worry over China like moths around a lightbulb. While they worried, I pointed out the obvious that they should easily have seen — that China with its enormous accumulated budget surpluses could easily switch to internal infrastructure building to gas its economy whenever it wanted to, and that’s what it did. Like a heavy cargo plane coming down on a runway, it opened the throttle a little to ease its descent and landed smoothly in a way that has not diminished its prospects of becoming one of the world’s leading nations economically.

Talk has recently grown of factories moving from China back to the U.S. because Chinese laborers are making more now, but the number of companies that have followed through with that talk has been miniscule. China continues to grow faster than the U.S. and faster than Europe, who have both flat-lined. Europe, in fact, is still slowly sinking, and the U.S. may fall over its fiscal cliff if it doesn’t get smart.

 

Economic predictions of the fiscal cliff

I am not, by the way, predicting the fiscal cliff will look anything like a cliff or be much of a fall. I have never climbed aboard the fiscal-cliff bandwagon. I think the elements in play there hold some bad news for us, but I know that countervailing forces will rise to mitigate the damage that could happen. Falling off the fiscal cliff might be exactly what has to happen before Republicans will get off their “do not tax the rich as much as the rest of us” campaign.

One thing is certain, this year will end the tax breaks for the rich. Once we run over that part of the “fiscal cliff,” Obama can re-institute the tax breaks for the middle class only. It will be hard for Republicans to vote against a tax break to the middle class. They will insist that needs to be coupled with another gift to the rich, but they will lose that argument in the long run. Many are already seeing that reality and trying to find ways to shift on their tax pledges. The end of the year will force that change, and that’s already causing some sell-off in the market. So, we have been feeling some rumblings in the stock market as we approach the fiscal cliff now.

On the fiscal cliff, as in most things, I don’t run where the majority runs. Here, they predict calamity in the one place where I see hope. I do think this shift right at the end of 2012 into the beginning of 2013 will do us some small harm, but it will also force us to do what we’ve needed to do for a long time — start taxing the rich on par with the poor. The small harm will come as some of the props that have held the economy artificially up give way a little, but there will be a lot of rushing by congress to shore things up so it doesn’t all fall apart on the new congress’s watch. The fiscal cliff may bite a little harder than the Y2K bug, but some of what happens will be a good dose of reality for us.

As I said midyear…

 

I don’t change my predictions to go with the wind. An economic depression has many ups and downs along its rough bottom. I base my own predictions on economic fundamentals, not on the indicators of the moment. Remember: “Focus on the Fundamentals.”

 

In other words, I’m not going to run with the pack that says the fiscal cliff will be a disaster, but I do think it will begin our descent from la-la land into reality. That descent is inevitable because the fundamentals of our economy have not been corrected. As I said midyear…

 

I see that the fundamentals have deteriorated, not gotten better. Nations are far deeper in debt with little improvement to show for the vast debt they’ve added to the balance sheets. Many nations are fully back in recession, which effects all other nations that market to them. Conflict within nations and between nations is growing. Iran’s position is based on prophetic religious beliefs, so we are almost destined for conflict with them, as their leaders believe they will bring on the prophesied end of the world (actually, the end of the present age) if they fight a defensive jihad and, particularly, if they destroy Israel. They are “hell-bent” on destroying Israel.

 

None of the fundamentals has changed for the better. We are going to see reality a little more clearly in the year ahead, and that’s going to be disconcerting for those who have refused to look at it; but it is long overdue. You cannot correct your problems until you become honest about them. Denial dies hard, though, so I don’t look for any big acceptance of reality … more like a little fear over having to face it again after many thought we had pushed it out of sight.

 

Conclusions about my economic predictions for 2012

To give myself a fair grade, I would say I was wrong in the severity of what I predicted, such as…

 

The heat of summer will look like the heat of hell for Europe. Money will flee Europe over the course of this year, including European money. (“More 2012 Economic Predictions

 

Nevertheless, almost everything went in the direction I said it would, just not as quickly or severely. I should have allowed more for the mitigating forces that inevitably rise to hold back unwanted changes.

To see that my predictions for the overall trends was right on, look at where we are as we end the year: the stock market has become all wobbly again. Jobs are going back down again. Consumer confidence is weaker than this time last year. And we are going into 2013 looking every bit as bad as we were going into 2012 and into 2011 and into 2010. We have, in other words, gotten nowhere. This next year will have no election-year props to mask that reality, so it will become more plain to us that we have not solved our problems and are not on a road to recovery.

Why am I CERTAIN of further decline? Because we have done so little to fix the fundamentals. We have not jailed the bad guys who helped create this mess. Instead, Obama administration bailed them out (just as the Bush administration did) and helped them recover their wealth. The Obama administration turned a blind eye to their many injustices. We have only somewhat regulated banks. We still stupidly offer adjustable-rate mortgages to entice people into loans that will rise to interest rates down the road that they cannot currently afford. These are time bombs. (The lowest interest rates in a lifetime will not last forever.) We still encourage economic growth by expanding debt spending, rather than encouraging savings and investment. The government is doing more debt spending than it ever has with no idea of how it will ever balance its budget. At best, they are planning for long-term deficits as far as the eye can see.

 

So, what are my economic predictions for 2013?

I’m not quite ready to make them yet. Clearly things did not happen on the scale I predicted for 2012, even though everything moved in the direction I thought it would:

 

2012 has the markings of an economic apocalypse that will create a new world for us to live in by 2013. With so many massive cracks in the landscape, my last prediction in this post is a little shy of an economic apocalypse in 2012: Some combination of the above predictions will give way in a landslide by year end to make the beginning of 2013 look a lot worse than the beginning of 2012….  This is the year when all hope for reviving the old economy begins to crack and fall away. The next president of the United States, be he the same one we already have or another, walks onto a stage much different than we’ve seen in a very long time. (from “More 2012 Economic Predictions“)

 

In reality, the cracking away of false hope has happened in that quantitative easing has not restored the economy, but that reality still has not taken hold in the minds of most people where hope exists. We have seen the returns of Q.E. diminish to almost nothing. After all of this Q.E., we see a market that is trembling again. We have seen a decade of the Bush Tax Cuts yield no job growth. We have seen a temporary boost in jobs, which I predicted the president would try to create in an election year, give way after the elections. (Unemployment looks to be doing much better than it really is because most people just fell off the roles this summer when their extended benefits were finally forced by congress to expire, putting them off the official unemployment roll. That timing was an inadvertent gift from Republicans to the President for his campaign. They couldn’t stop themselves from giving it because they so badly wanted to end those benefits.)

But we have not yet seen people recognize that these tired ideas of stimulating the economy through enormous debt have reached their end. Most people are still dedicated to keeping the debt-driven dinosaur economy alive. People are not yet looking at solutions to the economic crisis from the standpoint of will they work, but from the standpoint of whether or not they meet each person’s litmus tests of political philosophy. We just spent an entire election year during the middle of calamity in which Republicans tried to keep anything from working just so they could defeat Obama with a bad economy. They would sell the country down the river just to win the elections. Congress remains as divided as ever because the U.S. electorate remains sharply divided. We’ve had more than a decade of the Bush Tax Cuts, yet Republicans are still clinging to them as the answer to the fallen economy those tax cuts helped create.

The election did nothing to turn us away from the divisions that keep us in limbo. Many are still trying to save the rich so they will save us. In my mind, we’ve seen the old debt-driven, trickle-down economy reach its end; but many people are refusing to see that. As a result, nothing is fundamentally better, and the efforts to pump up the old debt-driven economy at ANY COST continue. In terms of making predictions about when that effort will expire, however, I have no history from which to gauge how long such artificial respiration can go on. I have never before seen mouth-to-mouth resuscitation given to a dinosaur. It is a case of the poor and middle class all breathing into the rich to keep them alive, hoping they will use their great strength to save us all.

It is certainly possible that the fiscal cliff that comes on the very last day of 2012 will jar us into the abyss at the end of 2012 — making those Mayan’s look like they might have been on to something, but that will only if there is a sell-off triggered by people wanting to take their profits while taxes are low. I’m hesitant to predict calamity on that kind of scale, however, when I got the scale wrong in 2012. If 2012 taught me anything, it taught me that we can drag this out.

So, I’m sitting out my predictions for 2013 until I see whether or not there is a run on the market at the end of the year from people trying to capture the gains of rampant speculation in the stock market just ahead of a capital gains tax increase. If we avoid that, as I think we will, then I don’t believe the fiscal cliff — even if it all happens as it has been laid out — will be a calamity. I am, however, certain the decline will be faster in 2013 than it was in 2012 because the one thing I said repeatedly in 2012 was…

 

We’re moving quickly toward the final run-up of a presidential election in the U.S., so all the president’s men throughout the administration and congress will pull out all the stops they can to create a crescendo of economic performance that will assure his re-election. Those in control of the government levers will do things that even they know are only short-term stop-gaps and will avoid at all costs painful long-term corrections. As a result, some of what I am about to say may be delayed by short-term tactics that even the government hasn’t thought of yet. (“Are My 2012 Economic Predictions for the Great Recession in Recess?“)

 

And that, I believe, is why I was off in predicting the scale of things, though right in predicting the direction all things would move. The government’s mightiest countervailing forces came into play to do all they could to float the economy through election season. With elections now past, efforts to do anything to temporarily shore up the economy are not likely in either party. So, 2013 will be more “real” than 2012 when there was a concerted effort  to inflate the economy with money printing and government jobs and by avoiding anything that might shake the economy. Even the potential for a market crash due to a capital gains cash-in at the end of the year can easily be avoided if congress and the president agree to only allow capital gains taxes to increase in stages over the next few years. That would seriously curb the tendency toward a quick sell-off to capture the profits of speculation while taxes are still low.

Of this much, I am certain, 2013 is a year of fiscal decline, not improved economic growth, because we have not moved away form the old dinosaur economy, and that economy is kept alive only by the artificial respiration of money printing on a colossal scale. Until we make sweeping economic reforms, we will not see true economic recovery or a road toward enduring economic prosperity. For now, we live in a world built on patches of the old debt-driven system.

 

(If you liked this article, please use the email button to pass it along to as many friends as you think might be interested. If you want to see other articles as they’re posted, please click the RSS feed link in the left sidebar to subscribe. I do not write as often now as I used to because I have taken on other endeavors, but I do still write occasional articles on the economy. Finally, I’d love to read your comments below.)

An earlier article that offers additional insights into how my economic predictions were stacking up can be read in the Economic News Articles in the Great Recession — Archive for the week of 04/01/2012. You can also read how I stuck to my economic predictions even when all things seemed to be pointing against them in this article: “Are My Economic Prediction for the Great Recession in Recess?
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