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Economic Predictions for the Great Recession in 2012

In making 2012 predictions, I cannot do worse than Harold Camping did in 2011. He missed the end of the world entirely — THREE times — yet he still kept his followers and collects millions! He may head a non-prophet organization, but he sure knows how to turn a profit.

Let me start by predicting 2012 will not be the year that earth — or civilization — comes to an end. If I am wrong in this prediction, no one will be around to know it. If I am right, I suppose there are not a lot of bragging rights to predicting that the world will not quite end. In predicting the economy, on the other hand, I move on to more challenging forecasts, but first…

Some backstory for these economic predictions

At the beginning of U.S. President Barak Obama’s term, I wrote,

Right now, the U.S. is facing the prospect of trillion-dollar deficits for the next few years, which could double the total U.S. debt in one presidential term. (“DOWNTIME: Tsunami Warnings“)

U.S. deficits continued as large as ever — just as expected — doubling in months the U.S. debt that had, until recently, accumulated over decades. Still, that was a fairly easy prediction to make. The harder prediction to make now is that I think we have accumulated so much debt and are continuing to pile it on so fast with such diminishing returns, that I do not believe we will ever be able to pay it off. While I think we have passed the point of no return over the last two years on ever repaying our debt, that is a long-term forecast, so it will be hard for anyone to assess its accuracy for some time.

It’s a grim conclusion, but I come to it with apalling ease. 🙂  I am not saying that it is numerically impossible for the U.S. to pay off its debt, though that, too, is nearly so. I am speaking of political reality. After decades of watching irresponsible management of U.S. debt, I’ve seen that deficits are more addictive to our nation’s leaders than meth. Congress is full of debtheads who cannot stop themselves from plunging into financial holes even during times of abundance. Giving congress a budget is like giving lemmings a cliff. It’s an invitation to jump off.

Congress does its spending in the short-term and its cutting in the long. That way the constituents of each congress member will not react against him or her for the pain that spending cuts create. Furthermore, it is the first order of business for every congress to undo the spending cuts of the previous congress. The future cuts never actually happen.

Thus, I see no way congress will avoid deficit spending for years to come now that the nation needs to ramp up the economy. Even if congress passed a balanced-budget amendment, they’d craft it with with as many holes as Swiss cheese, and it would smell like limburger. Just look at how they crafted campaign finance reform over the years. Decades of campaign finance reform resulted in presidential campaigns that now cost a billion dollars and drag on for two years.

Currently, the facts reveal that our two dominant parties in the U.S. can no longer work together in a bipartisan manner for a solution, even to save their own country, as it is simply more important to each of them to be politically victorious. They have shown their readiness to roll dice with an entire nation’s fortune in games of brinksmanship. I also see plainly that they really have no solutions to these problems anyway — no new ideas, no willingness to think outside their own ideologies. There is no creativity or vision among the many players.

Further, I see that the trillions of dollars of debt spent by congress and the Fed to save the U.S. so far have done nothing but soften the fall. Apparently the highest value use for American dollars is to pile them like dry leaves to land on. Congress has preferred creating money piles for the rich over infrastructure and employment.

We have no more capacity to soften the next blow or to right our economy because we have now neared our effective credit limit.  I say that because we are finally at the point where more heavy borrowing will from this point on always result in further credit-rating downgrades, which has never been the case until now. I predicted the certainty of the United State’s first downgrade, and it happened exactly with the timing predicted and for the reasons I said it would. I had prognosticated that the U.S WOULD DEFINITELY receive a credit downgrade but that the downgrade would NOT be due to congress failing to extend the debt ceiling. I said I was certain a deal would be reached on extending the nation’s debt ceiling, but that I was equally certain that the brinkmanship over that deal would, in and of itself, cause a credit downgrade. I said, before the fact of the downgrade, that the turk Republicans were blind to the repercussions their extreme behavior would cause because of how unsettling it would be to the financial world, or they simply didn’t care.

In 2011 we entered the dire scenario I predicted three years ago in the article quoted above about a financial tsunami that would overtake the U.S.:

This rogue [wave] is the inability of the U.S. government to finance its debt. Many of us have seen this coming for a long time, but the present scenario makes it almost inevitable that the time is soon upon us…. Countries have been talking for the past year or more about moving away from investing in U.S. dollars (i.e., U.S. Treasury notes) because they do not see the U.S. as a secure investment any more. The U.S. has probably permanently lost its financial reputation.

While we still have no problem financing our debt, the predicted circumstances in which we operate have come about slowly but with relentless certainty. As the Great Recession continued to develop during the first two quarters of last year, precious metals rapidly doubled in value to heights they’d never seen. Before any articles came out about what was driving up the price of precious metals, I speculated that the only buyers big enough to push the price up so quickly would be China and other nations who would be transitioning to precious metals as a way of moving away from investments in US dollars. A few months later, articles began to appear establishing that tidal change in sovereign investments as a fact. China, Russia and a number of other nations had reduced their U.S. bond holdings and significantly moved toward purchasing precious metals. At that point, I expounded that it was no wonder the Fed was now incestuously buying hoards of US bonds. The US no longer had enough bond buyers to finance its own debt without raising interest rates, so the Fed was having to (inderectly) buy many more than in any time prior.

The only reason we have not experienced the debt financing crisis I had predicted would come with this international movement away form US dollars is that the euro developed even worse problems than the dollar, throwing much euro traffic our way to make up for the loss of Chinese and Russian investment. Because of the eurocrisis that mushroomed at exactly the same time as the Chinese move away from US securities, the U.S has been able to resume selling its dollar-based securities and has not yet sunken into the sea, but the wave I predicted still curls over our heads. We are enjoying a fortuitously ironic situation in which the shock wave the U.S. sent to European shores is actually helping to buoy the U.S. by triggering problems so bad in Europe that the U.S. now looks like a safe haven by comparison. That is the only reason investors are flocking to US securities after the US credit-rating downgrade. If you put the euro and a dollar side-by-side in a pond, the dollar would be climbing on the euro’s shoulders and drowning it.

Therein lies the greatest reason for predictions of deeper trouble for the world in 2012. In that early 2009 article quoted above, I wrote that the 2008 financial collapse in America had created tsunami waves, which …

…would do what tsunamis are well known for doing: they would bounce off [our shores] and head over to European shores. The failure of U.S. financial institutions would certainly cause the failure of some European banks.

Today, some of Europe’s largest banks are on the verge of collapse. They are so afraid of each other that they will not even give each other loans. When European bankers meet, they shake with one hand but clench their bankroll deep in their pocket with the other. Meanwhile, European leaders have proven as incapable of coming together to find solutions to their problems as U.S. leaders. German Chancellor Merkel tries to be Frank with Sarkozy, and the French president tries to be cozy and says, “godzundheit.” To compound the fact that they are not speaking the same political language, they also lack the political structures for moving as quickly as the U.S. did. As multi-billionaire, currency-speculator George Soros said Monday,

We now have a crisis, which in my opinion is even more serious than the crash of 2008. You had the institutions that were necessary to control the situation (in 2008), a functioning central bank, the Federal Reserve system, and a functioning Treasury. In the case of the euro … you don’t have an European treasury. That institution is missing. (The Economic Times)

The scenario we face in year 2012 of the Great Recession

Before you think that the U.S. is in the clear because it can continue to finance its debt as the safest bet against other failing nations, consider how the Great Depression played out: After the infamous U.S. stock market crash of 1929, it took two years for the damage in the U.S. to flood Europe to a level where European banks began to fail just as U.S. banks had. The repercussion of European bank failure proved even more damaging to the global economy than the first dip of the Great Depression in America because the whole global system had been weakened by the first dip. The global economy no longer had any resiliency to absorb a second hit. ( “The Tipping Point of Economic Collapse“)

As Bloomberg wrote at the beginning of the year 2012,

It is the interplay between sovereign-debt issues and financial-sector weakness that makes the new uncertainty about country debt so toxic. In the summer of 1931, a series of bank panics emanated from Central Europe and spread financial contagion to the U.K., then to the U.S. and France, and then to the whole world. This financial turmoil was decisive in turning a bad recession (from which the U.S. was already recovering in the spring of 1931) into the Great Depression. (Bloomberg)

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. The present situation is almost a mirror image to how a great recession that ended the roaring twenties turned into The Great Depression for nearly the entire world, which would then last more than a decade.

So, while it may be tempting to see the new year’s first economic reports about U.S. factory production and employment gains as a sign that the snow that has overspread our economy is melting, this is not a melt at the end of winter that means spring is here. The present economic news of rising employment is but a small snowmelt just as winter begins. Serious arctic winds howl in other parts of the world as we in the U.S. warm ourselves to sparks of good news.

A second article published by Bloomberg at the beginning of the year laid out the following stark reality:

Stuart Thomson, a money manager in Glasgow at Ignis Asset Management Ltd., which oversees $121 billion, said in a Dec. 28 telephone interview, “Rather than the start of the year being the problem, it’s the middle part of the year that becomes the problem. That’s when we see the slowdown in the global economy having its biggest impact.”

…The amount [of sovereign debt] needing to be refinanced rises to more than $8 trillion when interest payments are included. Coming after a year in which Standard & Poor’s cut the U.S.’s rating … and put 15 European nations on notice for possible downgrades, the competition to find buyers is heating up…. While most of the world’s biggest debtors had little trouble financing their debt load in 2011, with … that may change.

Borrowing costs for G-7 nations will rise as much as 39 percent. (Bloomberg)

With so much competition to find financing for such heavy debts at such high costs, and 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.

That, however, doesn’t necessarily mean an economic crash will wait that long to happen. It is not just the inability of nations to finance debts in an increasingly furious bond market that is the problem, but the likelihood of European bank failures in the midst of all that. As noted in the “Tipping Point” article referenced above, it did not take a major bank failure in 1931 to bring the Great Depression fully on. Credit Anstalt was a smaller bank in central Europe’s economy. Failure of another small European bank like Credit Anstalt could happen anytime. And, such a small trigger, could release an avalanche of bone-chilling problems, just as it did in 1931.

Other 2012 economic 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. Greece has yet to even know the full extent of austerity measures that may be required of it, much less to implement those impoverished restrictions on its people. As the ineffectiveness of politicians grows more evident, we will likely see more rioting in the streets of Europe and turnovers of governments than we saw in 2011.

The U.S. stock market and jobs market have remained essentially flat over the past two years, never recovering from the fall of 2008. The small employment gains crowed about so much in November and December of the year just past are likely to unravel as holiday-season employees are laid off now that the holidays are over.

And, as everyone knows, the Fed has no tools left that it has not already employed to little effect. So far, its strongest efforts have only kept things from getting worse. While accomplishing that much was a titanic challenge, it has not lifted our economy out of trouble. Having reached our effective credit limit, a repetition of quantitative easing could actually make things worse this year, rather than marginally better as it did in the past. The Fed’s tools — whichever are used — will work less effectively, not better, now that they are old and worn.

Inflation is still lurking, though it may be late in coming. For some time I have noted that the Federal Reserve’s creation of trillions of dollars out of nothing did not create any inflation for the simple and obvious reason that nearly all of that funny money is being hoarded on bank balance sheets, as many major banks remain cash-starved. I’ve pointed out that this created money cannot cause inflation when it is not in circulation. Once it enters circulation, however, there may not be any effective mechanisms for taking it back out of the monetary system if this gargantuan creation of money creates hyper-inflation. (I suppose the government could tax it out, so inflation may still be manageable, but the U.S. has no experience in dealing with hyper-inflation, and world history shows it is not easy to turn around once it starts steam-rolling through the economy.)

The 2012 economic forecast for Iranium

Finally, there is Iran. Iran promises to block the Persian Gulf if sanctions on it grow worse, and is threatening U.S. carriers that will very likely re-enter gulf waters to keep the gulf open. While Iran is always saber rattling, their present statement that they will retaliate against the arrival of U.S. carriers entering the gulf puts their reputation of strength in the Middle East on the line. A test of that ultimatum was avoided yesterday by sending a British destroyer in to keep the gulf open for the passage of oil. An uptick in the Iranium reaction  would shoot up the cost of oil either by choking supply or using more of it in war or simply triggering speculation. That would make nearly everything produced by man more expensive at at time when near-record numbers remain unemployed.

Here is the catch that many are not seeing: I firmly believe sanctions have no hope of dissuade Iran from its nuclear weapon’s 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. To Christians, this one would appear as the anti-Christ. The Mahdi is predicted to come during jihad, so the risk of war does not deter Ahmadinejad as it fits the framework for the events he hopes for. In his ideological framework, the greater the risks he takes and the greater the cost to his country, the greater his reward from the Twelfth Imam.

Therefore, the only way sanctions will work is if they stir up enough civil unrest to bring about Ahmadinejad’s overthrow.

As Israel, with Tel Aviv at risk, understands the religious dynamics in the Iranium equation, one has to wonder how much longer it will wait to attack Iran’s nuclear reactors, which the United Nations now says are creating nuclear-weapons-grade material. (Iran no longer argues with the higher level of enrichment but now maintains that higher enrichment is necessary for cancer research. Hmmm. they built an under-mountain bomb-protected facility just for cancer research? That bespeaks a pretty intense desire to help cure cancer.)

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. [Just after this article was finished, the Bulletin of Atomic Scientists moved the infamous “Doomsday Clock” forward by one minute — the first time it has moved since 2007 — citing Iranian tensions as the reason.]

 

Books on the Iran/Israel Nuclear Reaction:

 

Books of economic predictions for 2012: