Making Sense Of 2011

This is the time of year when you are supposed to look back and make sense of what happened during the year and make predictions about the new year. A futile task if there ever was one. 

How can anyone make sense of a world where:

  • California prohibits the production or sale of beer to which caffeine has been added (They want drunks to fall asleep at the wheel?).
  • Katy Perry and Russell Brand are getting divorced (Boy, didn’t see that coming).
  • Cheetah, the famed comedian, dies at age 80 (Some controversy about he being the “real” Cheetah).
  • Words like ”amazing,” “baby bump,” “shared sacrifice,” “occupy,” “blowback,” “man cave,” “ginormous” “the new normal” are banished (Just when I was thinking about building me a man cave).
  • We are bombarded with coronal mass ejections—solar flares (see Harold Camping, below).
  • Harold Camping retires in confusion over his faulty Rapture forecasts (Poor Harold; he should try econometrics).
  • The Rugby World Cup boosted host country New Zealand’s GDP (It must have been the additional beer consumption).
  • Brazilian shoppers boost U.S. holiday spending because things are cheap here (They have inflation and higher taxes—Bernanke and Obama, take note).

These data are just too confusing for me. 

I’ve said enough about the economy this year and I’m fairly content with my calls. I don’t do those predictions for the new year any more. I did a 2010 forecast, and 12 out of the 15 forecasts were correct (not nos. 12, 13,and 14). My Megatrends article in 2009 is also pretty good, but I think I would like to re-write it to change some things in hindsight.

But here is what really interests me about 2011: Looking back in time since the Crash of ’08, I am impressed by how closely our depression has hewn to classic depression models, especially the Great Depression of the 30s and 40s where there was so much government meddling in the economy. (I urge anyone to read Murray Rothbard’s America’s Great Depression for the best analysis.) For example, we continue to experience the following indicia of a depression:

The classic credit crunch/liquidity freeze. It was “solved” but only for Wall Street and the big corporations. Not much has trickled down to the masses. The Fed opened the money sluices in 2009 and stood as a lender of last resort to the commercial paper market and opened up the discount window to all comers (not only the Primary Dealers, but also the money market funds and others). But the LRBs (local and regional banks) are something else. Their loan books are still lean (they are looking to new, riskier investments to pump up earnings). What is interesting is not that there is a lack of money for lenders to lend, but loan demand is weak. If you read the reports from the National Federation of Independent Businesses, small businesses (<500 employees) aren’t borrowing. They aren’t willing to take on debt because of uncertainty about the future of the economy and the future of government policies.

High level of unemployment. This has been persistent and is not yielding to classic Keynesian fiscal stimulus nostrums—not that they have ever worked. The reasons for this are complex, but it has mostly to do with capital destruction. And that has to do with the concept of deleveraging/liquidation of malinvested projects. I believe we still have a long way to go before we can say that there will be enough real capital formed to restart the economy and create jobs. Real capital is not something that can be printed; it must be earned and saved. Let me put it another way: if there were sufficient real capital, we would be in recovery and unemployment would be much lower.

Declining prices. We have been having “inflation” in the Austrian economic theory sense (money supply expansion), but official price inflation measures have been modest and are now declining. If you look at the charts on True (Austrian) Money Supply, we have seen money supply expansion for most of this year and it has resulted in what most economists interpret as economic growth. What they are seeing for the most part is money steroids-induced growth. When the money goes away, the activity goes away.

Deleveraging/Liquidation of Malinvestment. We see persistent declining prices in major asset classes (real estate) because of the continuing deleveraging/liquidation of malinvestments. This is most obvious in the housing markets where prices continue to decline. There is also another factor and that is the oncoming worldwide economic recession has reduced demand for commodities and those prices are declining (See the PPI). To complicate matters, the current economic good news is a head fake, mostly an artifact of an increasing money supply. The effect of monetary stimulation is wearing off and economic activity is starting to decline (almost all measures of manufacturing and industrial activity in the U.S. are declining, but that is another article, soon). 

Contracting money supply (deflation). Money supply may be contracting again. I believe this will result in further economic stagnation, a decline in the stock markets, an acceleration of declining prices and wages, and more quantitative easing. I am not suggesting that QE creates positive economic effects, but after the current money supply expansion wears off (the above noted head fake), a decline in money supply will indicate reduced economic activity. The government and the Fed, as well as the central banks of the major economies, will fight this with every tool they have.

Failed fiscal stimulus. We don’t need to say much anymore about this as we see our president on the stump in a rather desperate attempt to pump us up in the hope that talking about the subject will create jobs. Conventional wisdom still beats this drum in favor of more spending and more debt. But that won’t fly with the Republicans, at least before the election. 

A resurgence of gold as an investment asset. Massive government debt and Fed money supply expansion has created an unstable future, a weak dollar, and a demand for gold and silver. We have seen major banks and hedge funds jump on the gold train, something that they never have considered before. As DoctoRx has written many times, gold and silver have been overhyped, but still remains an important investment in view of long-term economic risks. As readers know, he suggests waiting on the sidelines for a while longer. Much of gold’s price depends on the status of the dollar, U.S. economic performance, U.S. debt levels, Fed policies, general commodities prices, and  instability in the rest of the world. Unlike FDR, citizens have the right to own gold and protect themselves against long-term degradation of their assets.

In other words, no matter how much the Fed and the Administration try to flog the economy, nothing has really worked. As much as Bernanke boasted about being able to prevent another depression, he and the Bush-Obama Administrations have done everything they could to make things worse. And the classic indicators of a depression are still playing out and reminding us of the inefficacy and incompetence of conventional economic wisdom.

What will 2012 bring? I don’t exactly know, but I think it will be continued economic stagnation and perhaps even negative GDP, continued high unemployment, and more quantitative easing. (I will discuss this soon.) What will really be important in 2012 is the Presidential and Congressional elections. If the Republicans take hold of the presidency and Congress, then in 2013 we can hope Obamacare will be repealed, spending will be seriously cut, and some of the more egregious new regulations will be eliminated. I don’t have a lot of faith in the Republicans to achieve real reform, but I think they will know why they were voted in and that they will have only 3 years to attack some of our fundamental problems (spending, debt, entitlements). If Obamacare manages to take hold, then I don’t have much hope for America’s long-term prospects.

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2 comments to Making Sense Of 2011

  • In the linked article, I relate that 2012 saw the death of fiat money, that is, the death of fiat currencies, with the rise of the US Dollar from 73.50 beginning in September 2011. Currencies will continue sinking and global financial derisking and deleveraging will be ongoing taking even the US stocks that rallied in the fourth quarter lower. A new dynamo of economic and political action is at work. Political capital is replacing investment capital. Diktat not choice will rule economics and politics. Soon out of sovereign armageddon, that is a credit bust and financial system breakdown, European leaders will meet in summits to announce regional framework agreements, cede sovereignty to a Federal Europe, establish a fiscal union, provide a committee for fiscal sovereignty, announce austerity measures, institute structural reforms, and impose debt servitude, and provide stakeholder committees from government and industry to provide credit as well as to manage the factors of production via public private partnerships in order to provide for regional security and stability.