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Are My 2012 Economic Predictions for the Great Recession in Recess … or are they just about to mature?

I started the following update on my predictions a few weeks ago, but didn’t have time to finish it. It is interesting now to see how the update is already being fulfilled in the news this week. I finished it today, realizing I’d better get it posted before everything it says looks like hindsight.

(I’ve kept the wording in the article the same as it was when I began it in March, not updating it further — other than proof reading — in light of the apparent turn of tide last week that is bringing events in line with what the article predicts. I have, however, added a clearly marked addition at the end.)

Economic recovery is the talk of the town

Following a string of job improvements and many other glistening bits of news this week, the economy appears stronger now than at any time during the Great Recession. President Obama certainly diminished the threat of immediate conflict with Iran that would drive up oil prices and stall the economy. Moreover, “Europe has (finally) solved the problem of the Greeks.” The stock market is still roaring along on a growing wave of consumer confidence.

Yet, this whole scene could shatter any given week because it is a house built of sugar glass in a world full of stones.

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.

For example, the good news of the week [about Obama getting Israel to take a back seat on the Iranium Reaction and about Greece getting its bond deal] no doubt means my earlier predictions for 2012 are likely to be slowed down in their arrival, since the euro crisis and the Iranium Reaction were the driving forces that would bring about the events of those predictions.

The delay in timing over what I indicated is not too surprising. First, it wouldn’t be surprising because I am no more immune to being wrong than anyone. Second, while one person predicts what they envision coming over the horizon, others are already making moves to forestall those events as long as possible. The U.S. president with the backing of the senate has a lot of power to forestall bad news on the horizon during an election year. Even the Republicans can only do so much to prevent short-term measures that are of no long-term value, lest they look too obstructionist. They might appear as if they are putting the whole nation at risk, trying to make the economy falter, just so the president will lose … which, of course, they are! (But they have to walk a careful line, lest the failure be blamed on them and not the president.)

I still believe the year is going to end up as the kind of year I described, though it may be at a delayed pace. So, like a weatherman, I revise my forecast for timing but stay with the prediction of rain. Of course, false prophets like Harold Camping — who predicted the end of the world … three times last year — also like to revise the timing of their predictions. The thing they predict always moves just a little further over the horizon whenever they are proven wrong. So, let me give you the basis for my thinking 2012 will turn out much like I described and see if you agree. (And you can reply below with your opinions of where the year will go.)

The reasons I predict doom and gloom for the economy in 2012

I think further economic collapse is inevitable for a few very large reasons. The ground that underlies all of the economic indicators mentioned above is faulty, though the indicators are good at present. The foundation of the economy remains a complete shambles. It floats on great chasms of hot air. Nothing has been done to restore the nation’s (or the world’s) economic fundamentals. Therefore, whatever you see on the surface is actually fairly meaningless — a lovely emerging house of glass built on an earthquake fault.

Please let me explain the U.S. debt laundering scheme as one notable example:

In February, the U.S. posted the highest monthly deficit in its history … even after almost a year of intense wrangling over budget reductions. Looking forward, it has planned — yes deliberately designed — to accumulate trillion-dollar annual debts for the next decade. Many of the nation’s economic experts believe this is necessary for saving the economy. I believe it helps the economy now by creating a future problem larger than any economy can handle. We are now stacking up trillions in debt each year like we used to stack up hundreds of billions with no known way out because we want to put the cost of correction on the backs of a future generation to avoid the pain ourselves. There is no exit plan here. Let me know in the reply section below if you hear of one. The fact is everyone in favor of this way out is simply hoping it will buy time to figure out a way out.

At the same time, the U.S. continues to “print money” at an exponentially faster rate than than the nation has ever known. It’s money that isn’t even worth laundering because China and other countries have made major moves as they warned they would away from financing U.S. debt. So, we have for the first time in our history begun to “monetize” our own debt. In other words, we have become our own source of financing for our debt … where we just declare the existence of money and use that computer money to buy our own U.S. bonds.

We do that by having the Fed create money out of thin air by creating credits in the reserve accounts of major banks in exchange for U.S. bonds that the banks bought from the U.S. Treasury. (I’ll talk about this in a future article on quantitative easing — a subject drier than last year’s red ink that will take a little libation to do down.) That assures the banks will buy more U.S. bonds because they know the Federal Reserve will buy all of them back. For the banks, it’s guaranteed massive income because they get the money that is created out of thin air to the extent that they first buy bonds with money they don’t have. It’s a bizarre financial circle that is working for the moment to obscure the fact that the Chinese and Russians have made a huge move away from financing U.S. debt.

Yet, the only end in site for this mess assumes that the economy does recover and that the U.S. continues to pay the cheapest interest rates on the planet for its debt. In other words, the only positive end for this massive debt spiral we are now in depends on a best-case scenario where the U.S. economy revives to such vibrancy that it has a surplus and can start to reverse these massive new debts. Anything less than that, and the U.S. economy gets flushed down the vortex. No one has suggested any clear path to get out of this yawning debt spiral because stopping the debt spending will certainly collapse an economy that is still being entirely founded on debt spending.

That is why I say, no matter how things might appear to be getting better in any given month, everything we see economically is built on a tiny raft in the middle of an enormous whirlpool. It doesn’t matter how rosy things look on the raft, the whirlpool is the greater phenomenon. It, not the raft, tells you where the economy is going.

To put it another way, the United State’s major creditors have turned to gold. Therefore, what’s the long-term exit strategy for our train-wreck of a debt pileup? Who is going to finance U.S. debt when the Fed stops creating money out of thin air to buy it (now buying about 60% of it)? I have yet to hear an exit strategy articulated that is not all based on best-case scenarios. Solid planning, on the other hand, is based on worst-case scenarios.

Economic predictions regarding the Iranium Reaction

Israel knows the president is not going to budge on war until after the election. Until this week [back in mid-March], uncertainty about whether the U.S. will strike Iran has kept Israel’s finger hot on the button of war. However, they now know, at last, that the U.S. WILL attack Iran if sanctions fail. Obama has strongly and publicly assured Israel of this, and Netanyahu has taken that back home where he appears to be ready to bank on it for the time being.

Israel’s timeline for attacking Iran was always based on Israel’s strike capabilities, and Iran was rapidly moving its nuclear material deeper than Israel could penetrate. So long as delaying war depended on Israel’s ability strike effectively, war had to happen in the first half of this year. The U.S., however, has much heavier “bunker busters” that, apparently, can penetrate Iran’s new deeper nuclear facilities.

Knowing, at last, that Obama is willing to use those capabilities on Israel’s behalf if sanctions fail, Israel can sit tight a littler longer … and will. It cannot wait past the point where Iran has enough nuclear material to build a bomb, but it does not have to worry as much about the material being dug deeper in. [Note added now in April: This delay also gives Israel more time to improve its missile shield. The president clearly has just offered Israel help with this shield. Now that Israel is certain the U.S. will strike after the election if sanctions fail, waiting means Israel’s populace will be safer from any retaliation than if Israel acted this spring.]

There is still no guarantee Israel will sit it out until the end of the year, of course, though it now has more reason to show itself willing to let sanctions work. Waiting will only improve world opinion over any action Israel eventually takes. So, there are now a number of reasons for Israel to wait a short time longer. The biggest reason, however, is that waiting means the U.S. will HAVE to do the job to make good on the president’s assurances. So, what has changed from my start-of-the-year predictions is that Israel is now much less likely to strike Iran this spring, but the U.S. is virtually assured of having to do it next winter.

That said, new information that Iran has more nuclear material (or is further in developing a delivery device) than thought could cause Israel to convulse and act on its own. An unexpected window of opportunity for a strike could also cause Israel to seize the moment, but there is a lot more likelihood after the past week’s summit between Netanyahu and Obama that war with Iran will not happen until after the November elections. [Added note: The U.S. will either have to conduct that war or supply Israel with its best bunker-busting bombs in order to wage that war. Either way, waiting now strengthens Israel’s hand.]

If sanctions have not worked by then, it should be clear to all that they have not. Iran may give incremental teases to make it appear talks are going somewhere at the moment of crisis, but all this stalling ultimately has to come to an end that will be a strike on Iran’s nuclear facilities and perhaps all of its military apparatus in order to reduce its ability to retaliate, as 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.

The reason Iran is not going to stop its nuclear pursuit is that its nuclear program has never been for energy reasons. The goal of destroying Israel is ideological, not rational, and has often been spoken of by both of Iran’s tops leaders for years. Iran’s ideology is based on Islamic prophecies and religious zeal. Many people in the modern world think prophecies are nuts and ignore them, but their preferred ignorance of these prophecies is short-sighted because of the capacity such beliefs have to drive the minds of those who hold to them with far greater fervor than rational thought can ever hold.

Anyone can know what I say about the irrationality and intensity of that zeal is true because we see it all the time in suicide bombers who are willing to sacrifice their lives or even their children’s lives in the belief that they will see a better existence soon. We need to understand what these prophecies predict in order to understand the thinking of Iranian leaders who hold to them and to understand the force of that thinking. It would be a grave mistake to think these leaders are merely manipulating poor believers for the sake of gaining power. They, themselves, show every evidence of being believers as surely as Hitler believed in the idea of the Third Reich.

It is my rudimentary understanding of those fanatical religious beliefs that causes me to say that Iran  — without need of any supernatural force bringing about these prophecies —  is going to be the cause of a major conflict in the Middle East soon. Iran aches for conflict in the Middle East because it believes God will hand it glorious victory. Likely, that will happen at the end of 2012 or the beginning of 2013. For those interested in exploring the basis for this line of thought, which takes a lot more explanation than I have room for here, I’ve created a reading list on The Twelfth Imam (the Mahdi), Islamic Fundamentalism, Ahmadinejad and a Nuclear Iran.

Update of my 2012 economic predictions

[Everything below this line is written on April 9, 2012, as I put a wrap on this article that I began in March.]

The euro crisis will emerge on the horizon again but with problems that make the Greeks look like a minor tragedy. Europe’s deepening recession, which was predicted by many last year, is now happening. That 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 and, therefore, lower tax revenues. The perfect storm is brewing.

The stalled European economy will crash again on U.S. shores in the summer (maybe even earlier) just as it did last year. The very fact that we’ve been this way before with the Irish, the Portuguese and then worse with the Greeks will cause a feeling of malaise 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 one hedge against this is that it is impossible to guess what measures the Obama administration might find to hold the worst of this off until after the elections. They will certainly apply a hundred-percent of their energy to short-term stalls of the inevitable at any long-term cost.

I think that so much bad news will be enough of a hit that worries about 2012 predictions or Mayan prophecies, etc. will also gang up to take a toll on American and European consumer confidence in the latter part of the year as the great date of December 20th looms closer amid a cloud of worsening news. That could mean a terrible Christmas retail season, setting the stage for a 2013 that makes the previous years of the Great Recession look rosy. In other words, those prophecies may take on a self-fulfilling aspect economically in the last quarter of the year as a psychological multiplier if that “prophetic” date arrives shrouded in dark economic clouds with the dust of war encroaching.

(I’m not talking about the accuracy of the Mayan calendar, but about how perception of those prophecies can exacerbate consumer concerns into panic when bad news happens around such an ominous, long-anticipated date. These “prophecies” do not matter in the minds of many, but they matter in the minds of enough to have an impact.)

I believe in the face of so much trouble Ben Bernanke will strain and manage to pass another round of quantitative easing this summer, but it won’t pass easily this time, as he will find more resistance in the FOMC. It will pass like a wooden block through the bowels of credit only because the alternative looks so much grimmer and because of intense election-year pressure for a short-term laxative. That means it is also likely to be Ben’s last deposit of that kind. Furthermore, this Q.E. will have far less effect than the already ineffectual previous periods when money was given a massive diarrhetic to try to loosen up the nation’s credit. No one will be impressed for long with all the extra cash that comes out of it. In fact, 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.

At the beginning of this year, I predicted further credit downgrades for the U.S. in 2012, and the U.S. just got one this week. While it was from a minor agency, not one of the big three, it is the same agency that gave the U.S. its first downgrade in history, which preceded the newsmaking S&P downgrade by a month last year. This is a new crack emerging. New downgrades are another reason the Fed will approve a third round of Q.E. That’s because the money created may be needed by the Fed to buy more bonds from the banks so that the U.S. can find customers for its debt without greatly raising its interest rates due to the credit downgrades. There is one hedge agains that need, however:

Now that the U.S. has largely lost China and Russia as major financiers of its debt, it can only hope that Europe’s troubles actually buy the U.S. a little reprieve from its own debt troubles this summer … as they did last year. 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. That European windfall, however, is not any longterm answer for the U.S., and it is highly unlikely the U.S. will make long-term advantage of this slight extension of time that it courts with low interest rates for its debt. It has not proven itself to be that wise in the past. Its politicians would rather vie for who gets to rule the failing country. If it is smart, it will turn as much of its debt into longterm debt at these low rates as it can because these rates will certainly be going up, and the U.S. has no end in site for its debt needs.

In the end, the only correction I make to my economic predictions from the beginning of the year is that the Iranium Reaction will simmer down for awhile. Iran will, nevertheless, continue to be a rising, blood-red, sickle-shaped moon. It is NOT going to back down due to sanctions. It knows that power struggles in the Middle East raise oil prices. That is good for Iran and bad for the U.S.; so Iran will choose to weather the present sanctions partly in hope that conflict will be as bad for the U.S. economically as the sanctions are for Iran now and mostly because of religious ideology that drives everything for Iran’s leaders. (Iran will also likely find back doors for selling its oil to avoid the sanctions … or, at least, believes it will. The U.S. is not going to quarrel physically with Chinese or Russian ships going through the straight of Hormuz filled with Iranian oil.)

For now, you’ll have to gauge my prediction on the Iranium Reaction not by when the situation boils over but on the fact that it continues to build up pressure. The president right now is keeping a lid on it, while turning up the heat.

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