A Few Predictions for 2011

If you’re like Time Magazine’s Joe Kline who wrote yesterday that “nothing much happened in 2010,” then you probably think that 2011 is going to be pretty uneventful as well.  However, for those of us that live on this planet, you can expect that the coming year too will be filled with notable scandals, significant geopolitical maneuvering not seen since the Cold War, and economic stumbling blocks slowing our national recovery.

Despite reports this month which showed lower than expected job growth and lower than expected consumer confidence, the bulls are out in force this week, predicting GDP growth in 2011 averaging 3 percent and year end unemployment of about 9.3 percent. This is the optimistic outlook.  It assumes there won’t be serious bank collapses, increased deficit spending, major policy initiatives, or foreign crisises of any notable magnitude, any of which could destabilize the economy and which you’ll see in a moment, is a highly dubious claim.

Intensified Finance and Bank Consolidation

First, let’s consider a few notable hotspots in the banking industry which could lead to problems.  As you may know, banks in trouble are currently engaged in what we’ll call “aggressive collection of assets.”  That is, foreclosing on homeowners in mass in an attempt to balance their books, but many Americans have paid their mortgage payments faithfully.  The result is a series of scandals so outrageous it needs to be read to be believed.

Congress (controlled by Wall Street) will attempt to legalize or otherwise forgive the banks indiscretions in an attempt to save many of them, most notably Bank of America, from collapse.  Congress may narrowly save the bank, but it depends on how much they cooked the books.  Wikileaks has promised to release damning internal documents outlining the bank’s misdeeds which founder Julian Assange predicts may lead to resignations.  Even if the bank isn’t close to collapse, there are 98 other smaller banks which are on the brink of failure according to an analysis by the Wall Street Journal’s Michael Rapoport.

“Certainly there have been some indications that it's ebbing a little bit,” Rapoport said in a recent interview with NPR.  “The level of failure is still going to be very high and as recently as the Friday before Christmas Eve, we saw six failures. So it hasn't ended yet.”

It should be noted that banks that do fail are likely to have at least some of their assets purchased by other larger banks, further consolidating power in a few very large entities.

The Burst of the Chinese Housing Bubble

Chinese Ghost Town of Bayannao'er. Click for big and note the absense of cars.

International finances could have an unpredictable effect on the economy here in the US.  Of immediate concern is the Chinese housing market, which is said to be “the mother of all housing market bubbles.”  Unlike in America, Chinese state controlled banks can artificially keep the market growing by continually providing loans to developers.  The desire to offset any potential pain and suffering to a later day has created “ghost cities,” devoid of residents, and yet China keeps building.  Malls, apartment complexes, thousands and thousands of homes, all priced incredibly high and with no demand to fill them. More images here.

How China reacts to the crisis will have significant effects on our situation here in America.  Pressure will be high for China to begin to deflate the bubble and provide bailouts to various industries as a way to offset social unrest.  If China decides to sell off some of it’s US debt which currently totals about $2.2 trillion, it could raise US interest rates, immediately putting the breaks on the US recovery.

The Coming Dept Crisis and State Bailout

While the federal US government has its own debt problems, almost all of the states have problems of their own bringing in far less tax revenue than is being spent.  The 2009 stimulus allowed states to delay painful decisions on cutbacks, but now the well has run dry.  State debt will come to a total of at least $130 billion this year.  California and New York may be the most egregious examples of fiscal insolvency, but all with the exception of four states are below water.

Doing what they do best, Washington has continued to put off a decision on whether or not to bailout the state governments.  The new Republican congress and the president have both promised to be more debt conscious in the new year which would indicate a reluctance to bailout the states, but a desire to offset major layoffs, tax increases and cutbacks will provide political pressure to provide some kind of fiscal assistance.

A federal bailout will be evidence that the government is not serious about deficit reduction and will harm market and consumer confidence.  In addition, it will discourage states from making the necessary cuts in teachers, police officers and government benefits.  In this case, budgetary problems are likely to return a year or two from now.  If Republicans are firm and hold up the state bailout, government spending will rapidly decline resulting in higher unemployment and reduced demand.  Either way, the economy will suffer.

The Cost of Oil Will Rise Significantly

Increased demand coupled with market manipulators and speculators sent oil prices soaring to new highs in June of 2008, toping off at about $140 a barrel, which translated to about $4 for a gallon of gas and a $45 billion profit for companies like Exxon Mobil. 

As demand is slowly restored, prices will begin to creep higher again, but this time it will be even more pronounced.  The Federal Reserve’s massive quantitative easing last fall (which is essentially printing money, don’t believe those who say it’s not) will likely cause significant inflation.

Commodity prices are always the first to rise in an inflationary cycle.  Since August, the price of a barrel of oil has risen about $20.  Likewise, other commodities like gold have risen over $100.  The Fed’s QE is having an effect and will continue to cause the cost of gas and other industries that it impacts (like food) to increase.   The high cost of oil pushed the economy in to deep recession in 2007 which ultimately resulted in financial collapse a year later.  Now it will slow the recovery.

Other Issues Likely To Arise

Echoes of Cold War hostility between the United States and Russia will increase in the coming decade.  Russia, which the United Nations projects will lose 23 percent of its population by 2050 and almost 5 percent of its population in just the next 10 years, is on a rapid path to decline.  To offset the devastating economic and political impact this will have, Russia has increased its aggressive imperialistic tendencies against its neighbors like Georgia, Ukraine, Poland and other eastern European countries.  According to State Department cables released by Wikileaks, the Chinese expect Russia will attempt to invade or otherwise topple the Georgian government.  Politicians in Poland have accused Russia of sabotaging a plane which killed the Polish President and 95 other government officials last April.  Expect incidents like these to continue for the foreseeable future.

The European Union will continue to face budgetary problems in Portugal first, then in Spain.  We’ve known about this for a while.  What’s only recently become apparent is that there isn’t enough money in the EU bailout fund to properly provide for Spain’s massive debt.  The Federal Reserve has a history of providing TARP money to European Banks in the past and it will continue to send American tax dollars to defaulting EU nations to provide for international banking concerns.  The American citizen, or more accurately, future citizens, will pay for Europe’s societal and economic decadence.

Finally, with Republicans scheduled to take control of the House of Representatives in a few days, for the first time in years, Democrats will be exposed to ethics investigations.  If the Obama administration goes into the 2012 election cycle with a reputation for “Chicago style” politicking, independent voters may decide they’ve had enough.