2011: Will it be bad? Or will it be worse?

Byline: | Category: Uncategorized | Posted at: Saturday, 1 January 2011

It’s the time of year when people pretend to predict the future.  So, for what it’s worth, here is how I see 2011 shaping up:

1.  Neither Italy nor Spain will require a major bailout . . . much to Europe’s growing chagrin.  The default of either country would be the death knell of the Euro.  Instead of a heart attack, the patient will linger with terminal cancer and be further weakened by chemotherapeutic attempts to shore up confidence in Greece, Portugal, and newly stricken Belgium. 

2.  Austria will join the growing list of countries of economic concern.  It is over the 60% debt to GDP threshold that is often the dividing line between sustainable and unsustainable systems.  And its banks are especially exposed to Eastern Europe.  But perhaps most disturbing, because it is on the Euro, its largest industry, tourism, isn’t able to take advantage of a declining economic condition.  In that regard, Austria will be on the leading edge of a second round of sick European economies who recognize that the Euro is more hindrance than help.

3.  Germany will continue to be damned if it does, damned if it doesn’t.  Its debtor neighbors will resent having to continue begging the Deutsch for dough.  But once they get it, they’ll resent even more the restrictions that come with the loans.  Through currency, Merkel accomplished what Frederick, Bismarck, and Hitler never could by force:  a Continent united under rule by Berlin.  It won’t continue.  At some point resentment will bubble over into conflict.  While at home, Germans will come to the realization that they’re sitting atop an unsustainable spiral scheme of loaning their already overly indebted neighbors even more money so that they can continue to buy even more from Germany on credit.  However it ends, it won’t be pretty.  It won’t end this year.  But it will end soon.  And it’s a cautionary tale to the US-Chinese relationship.

4.  The biggest foreign economic surprise of the year will be Luxembourg.  With just a half-million citizens, the tiny nation has the same population as Nashville.  Yet its banking industry is one of the world’s largest, containing nearly a trillion dollars in assets.  Worldwide decline in confidence of the Euro in 2011 will deplete those assets, primarily benefitting Switzerland and to a lesser extent the UK.  While Luxembourg’s public debt is a relatively low 14% of GDP, its total external debt is the world’s largest:  38 times larger than GDP.  No, I didn’t say 38 percent, I said 38 times.  As investors flee the Euro, Luxembourg will feel the pinch.

5.  No American state will default on its debts in 2011.  Even California will somehow muddle through, though it will issue IOUs instead of money for months.  The following year, however, won’t end so well.

6.  At least one mid-size American city will go into bankruptcy.  Others will be queued up behind them.  There will be no federal bailout, although an unholy alliance of Democrats beholden to public employee unions and Republicans in hock to the banks, will pressure Congress and the President to act.  Tea Party outrage at the idea of further bailouts ends the attempt.  The Fed, however, acts by buying munis.  It doesn’t work.  Across the country municipal bond rates will skyrocket.  Public construction projects will dry up for lack of funds.  For a time in early 2011 it will look like the private economy is coming back just in time to take over from a period of overextended public spending.  But by late in 2011 bonds and banks will be in crisis and private construction will join public construction on the sidelines. 

7.  Early 2011 optimism will give way to a dark economic reality.  The only question:  is it a double-dip?  Or did the first recession never really end?  The one area where almost everyone agrees:  Keynes is dead.  Paul Krugman never gets past denial.  Incredible as it might seem, his lamentations grow even more shrill.

8.  Gold will fall early in the year, dropping into the 1200s, if not lower, before June.  The bond crisis and a growing consensus that the Euro is in its final days will inflate gold to back over $1400, where it will end the year before really taking off in 2012.

9.  Multiple economic crises and presidential politics will combine to make the President announce that American combat forces will be gone from Afghanistan by the end of 2012 and all forces will depart by 2014.  NATO will announce that its Afghanistan mission will end in 2012.  The last American brigade will leave Iraq in 2011.

10.  President Obama will receive pressure from activists on the internet left and pundits from the middle to drop out of the race, but then what?  Hillary Clinton will not run for President.  Russ Feingold will not run.   Howard Dean will not run.  The simple fact is that there is no room to Obama’s left and no Democrats remaining to his right; hence no challenger.  Instead, most realistic Democrats will resign themselves to the fact that they are likely to suffer an enormous presidential defeat, and no one of any consequence steps up to be the next McGovern.   By year end Barack Obama will have only token opposition in a race to secure a nomination that no one wants.

11.  Republicans, meanwhile, will provide lots of electoral entertainment.  By the middle of 2011 the pundits will announce that the race is a contest between Mitt Romney and Sarah Palin.  Neither will be the favorite by the end of the year.  Instead, the shortest man in the race will cast quite a long shadow.

12.  Republicans in Congress will be a big disappointment.  There will be many individual bright spots, but not enough Paul Ryans to overcome the Lisa Murkowskis.  A real third-party challenge will begin to coalesce.  2012 will begin with the question: will the splintering of the GOP be enough to cause the re-election a President with a sub-40 approval rating?  It becomes the Democrats only hope and the media’s clarion call to highlight disaffected conservatives. 

13.  As bad as this forecast is, it might be worse.  The question of the year is: what happens in Asia?  Will it be bad, or will it be worse?  The bad will come as a result of a booming Asian economy (except, of course, Japan).  Commodity inflation will result.  We’re already seeing it.  The consumer price index was up only 1.1% year on year.  However, the producer price index was up three-and-a-half percent during the same period.  Producers can’t continue to absorb higher costs without pushing them on to consumers–not without even higher unemployment.  A raging Asian economy exacerbates this problem making 2011 bad for the West.  But worse, is what happens if the Chinese bubble bursts–or, God forbid, the Yen finally collapses under its own weight–a foregone conclusion whose date is the only thing in doubt.

With that, may you have a happy 2011!

BTW, Can we finally stop calling it “Two thousand-something”?  My resolution is to pronounce this year, “Twenty-eleven.”

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One Response to “2011: Will it be bad? Or will it be worse?”

  1. The Sen. Says: