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Saturday, December 31, 2011

Crystal Balling 2012

Hey Barry:

It's a natural time to look ahead to see what's on the horizon for 2012.

EUROPE AND THE WORLD

First, there's a high probability of another recession in Europe.

The European debt situation seems to be beyond the capacity of the EU to solve without severe social consequences, regardless of statements to the contrary. Most European economists predict a deeper recession in 2012. Read it here: http://www.thisismoney.co.uk/money/markets/article-2080188/Economists-estimate-30-40-chance-break-euro-2012.html

Additionally, a recession there has the potential to break up the Eurozone. Previous experience has demonstrated that such currency breakdowns have negative consequences. You can read Professor Jayanth R. Varma's comments on several histories here: http://www.iimahd.ernet.in/~jrvarma/blog/index.cgi/Y2011/currency-breakups.html

In the European situation, standard Keynesian policy calls for national government macro intervention to prevent extreme social misery and unrest.

But, the Euro governments appear to be in thrall to bankers; they are installing austerity measures and raising taxes at a time of recession.

Such a course will probably lead to deepening social malaise; it also increases the likelihood of an Arab Spring or Occupy Wall Street movement growing larger and perhaps becoming more violent. Consider the current situations in Syria and Yemen; this may emigrate to Greece.

A broader theme for 2012 is that our worldwide political system appears to be incapable of managing a strong economic crisis. This may be due to the influence of monied interests on the various legislatures.

Part of the cause of our current malaise has been that credit has been so readily available and so cheap that the market system has been distorted. Governments and consumers have come to rely on low interest and readily available capital. Now that GDP growth is slowing down, the accumulated debt is becoming onerous for governments and consumers.

Thus we have a worldwide imbalance where there is too little aggregate demand and too much aggregate supply. It is worthwhile to consider policies which will increase demand and reduce income and wealth disparities. Continuing our current policy of rigid adherence to today's political system in Europe and the USA will only serve to make our governments more vulnerable to an ultimate break up. A better strategy will be to install more flexible policies which address the imbalances we see today. I have proposed just such a policy constellation and it is available here: http://www.mkeever.com/owsplaneleven.doc

UNITED STATES OF AMERICA

A European recession carries the risk of a US recession. Current history shows that the developed countries are intertwined economically - what happens there comes here. This is despite the fact that United States fiscal and monetary policies appear to be ameliorating our recession.

Our FED has been contributing massively to this problem by continuing its quantitative easing and zero bound interest rate policies. At the same time, wages of working people are shrinking while capital formation is increasing.

An example of our inability to address the problem is the recent NDAA where Congress gave our military the right to detain United States citizens without our Constitutional protections. That was precisely the wrong thing to do. Another example is our government deadlock over raising the debt ceiling.

Concerning US elections, it is this observer's opinion that the US electorate is looking for some solutions to the problems outlined above. The Republicans have proven that they are incapable of understanding the situation, much less actually solving the problems. The electorate is looking for candidates who demonstrate they can lead us to a better future.

It is an opportunity for Democrats and for you, Barry Obama. But, at this time I believe the electorate has not seen an adequate response from either the Democratic Party or the President's campaign. The hope is that such a response will be forthcoming in the national campaigns.

Happy New Year!

Your pal,

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