2010 Predictions

(Published on Nov. 9, 2009)

(Quarterly updates will be provided in bold italics.)

The election of a new president added a lot of uncertainty to my predictions for 2009, so my success rate wasn’t that great this year. But now Obama is a known entity, and what we know is that he is heavy on talk and promises but light on meaningful action, except to maintain the status quo.  He will continue to rely upon government stimulus to boost the economy, as well as reinflating the housing bubble with government-backed debt.  There will be no meaningful steps to restore a balance of trade.

My predictions are based upon the economic theory I’ve proposed in Five Short Blasts, and there is virtually nothing that President Obama can do to mitigate the effects of this theory in the coming year, given that he squandered his first year in office. To very briefly restate my theory:

As our population continues to grow beyond its optimum level, forcing people to crowd together, per capita consumption inevitably declines as a lack of space makes it ever more difficult to store and use products, especially larger products. As per capita consumption declines, especially in the face of ever-rising productivity, rising unemployment and poverty are inescapable. This same effect occurs when we attempt to trade freely in manufactured goods with nations that are already overpopulated. The more overpopulated our trading “partner,” the worse is the effect.

Only actions to stabilize our population (especially reducing immigration) and action to restore a balance of trade through import quotas or tariffs have any hope of mitigating these effects. Because free trade with overpopulated nations instantly raises our effective population density, its effect is much more immediate than the steady growth in our population. Actions like import quotas and tariffs, designed to restore a balance of trade, will take several years to take effect as manufacturing is slowly shifted back to the U.S. Other “actions” (more like a lack of action) such as urging other nations to stimulate domestic growth and stop manipulating currencies, will be utterly ineffective.

So, based upon this theory, here are my predictions for 2010:

World Population

The world’s population will add almost 100 million people and will top 6.9 billion people by the end of the year. This is more of a “given” than a prediction, but it’s important to acknowledge this fact because it forms the backdrop for my other predictions.   4th Quarter Update:  As of January 1st, 2011, the world population is estimated to have risen to approximately 6.89 billion, adding approximately 96 million people in 2010 – nearly one third of the entire population of the U.S., the 3rd most populous nation on earth – at a time when the global economy is struggling to create a single job.

World Economy

The world economy finds itself in uncharted waters in 2010.  The economic model upon which it’s been based since the end of World War II – free trade and globalization – has been collapsed by global trade imbalances.  2009 was spent in a frantic effort to staunch the bleeding.  The patient has been stabilized, but now what?  The dominant theme of 2010 will be contradiction – the contradiction of trying to resuscitate a global economy dependent upon the U.S. binging on debt, while at the same time applying pressure to the U.S. to reign in that debt.  With that as the backdrop, here’s my predictions for the world economy in 2010:

  1. As measured by GDP (gross domestic product), the global economy will grow throughout 2010 in response to government stimulus plans by most of the G20 nations.  Few will have backed away from stimulus by the end of the year.  4th Quarter Update:  According to the U.N., global GDP grew at a rate of 3.6% in 2010 after declining 2.1% in 2009. 
  2. Unemployment will continue to rise throughout the world, intensifying competition for exports to the American market.  (Same prediction as last year.)  4th Quarter Update:  According to the U.N.’s “World Economic Situation and Prospects Monthly Briefing” published on 1/18/11, “… few new jobs have been created to rehire those workers who have been laid off. As more Governments are embarking on fiscal tightening, the prospects for a quick recovery of employment look even gloomier. The longer term employment consequences of the present crisis are already becoming visible, as the share of the structurally or long-term unemployed has increased significantly in most developed countries since 2007.”
  3. There will be a lot of talk about replacing the dollar as the world’s reserve currency, perhaps with some kind of “basket” of currencies, but little will be accomplished as such talks bog down with squabbling about the make-up of the basket.  4th Quarter Update:  As predicted, all of the talk about replacing the dollar as the world’s reserve currency has subsided.
  4. The dollar will continue to fall but, contrary to economic theory, it will have little impact on prices.  The price of oil will not rise significantly, as the faltering U.S. economy keeps a lid on demand.  Other import prices will remain unaffected as foreign manufacturers cut costs.   4th Quarter Update:  Bad call on the price of oil.  It rose from $82.75 on Jan. 8th, 2010 to $91.38 per barrel on December 31st, an increase of approximately 10%.  That’s not a huge increase, but faster than the overall rate of inflation.  According to the BLS, import prices rose 4.8% in 2010, less than an increase of 6.5% in export prices.  So much for the theory that the falling dollar would work to our advantage!  Good call on import prices!

U.S. Population

  1. The population of the U.S. will soar to almost 312 million.  4th Quarter Update:  Sadly, the U.S. added 2.63 million people to its population in 2010, ending the year at approximately 311 million.  Thankfully, my prediction of 312 million was a bit high. 
  2. Illegal immigration will remain a low priority for the Obama administration.  4th Quarter Update:  Worse than being a “low priority,” the Obama administration has actually encouraged illegal immigration by halting all work place enforcement.  
  3. Legal immigration will also be a low priority of the Obama administration.  Following in the footsteps of previous administrations, the Obama administration will continue to import approximately 1.1 million additional workers, oil consumers and carbon emitters as a ploy for boosting economic growth.  4th Quarter Update:  This is exactly what’s happened.  See the chart of  quarterly population growth that I’ve been posting each quarter.
  4. After stalling in 2009, average life expectancy will actually take a tick downward in 2010.  4th Quarter Update:  Nothing new to report since the CDC issued its final report for 2007 in May of 2010.

U.S. Economy

  1. In spite of recognition of the role of global trade imbalances in wrecking both the U.S. and global economies, President Obama will continue to pay only lip service to restoring a balance of trade.  The U.S. trade deficit will slowly rise from its recession-curtailed level of about $30 billion per month to over $35 billion per month by the end of the year.  The administration’s focus will be on China alone, chastising them to float the yuan, all to no avail.   4th Quarter Update:  Good call.  After worsening to $50 billion in June, the trade deficit has settled back to $38 billion in November.  (December data not yet available.)  As predicted, all of the focus has been on revaluing the yuan, which hasn’t happened.  The Obama administration has consistently backed down from labeling China a “currency manipulator.”
  2. Cap and trade legislation will be enacted, but carbon permits will be virtually given away instead of sold, watering down its effectiveness.  The shipping industry will be left out of the legislation, bowing to foreign charges of “protectionism” if it were to be left in the bill.  The result will be a further exodus of American manufacturers, exacerbating the trade deficit.  4th Quarter Update:  Bad call.  Though passed by the House, the Senate never took it up.  It’s now a dead issue.  I see no prospect at all of any legislation dealing with carbon emissions.   
  3. The Obama administration will rely even more heavily upon stimulus spending by the government to prop up the economy.  Another stimulus spending bill, topping one trillion dollars, will be enacted.  4th Quarter Update:  Additional stimulus spending by the federal government isn’t going to happen, but that’s a technicality.  The Federal Reserve has picked up the slack with “QE2,” another round of money-printing. 
  4. The federal budget deficit will remain at approximately $1.5 trillion.  4th Quarter Update:  The 2010 fiscal year deficit ended at $1.3 trillion – a slight improvement, but still astronomical.  The deficit for 2011 is currently projected at $1.5 billion.  Republicans are promising to cut the deficit by a measley $32 billion.  No politician will ever deal with this issue in a meaningful way.  You can take that to the bank.
  5. The underlying economy – with stimulus spending factored out – will continue to decline in the first half of the year, stabilizing by the 3rd quarter, but showing no appreciable growth thereafter.  4th Quarter Update:  Strip out inventory building, and 3rd quarter GDP rose only 0.6%.  The first estimate of 4th quarter GDP, boosted primarily by a rise in exports and decline in imports (unlikely to continue)  came in at 3.2%, below the consensus of economists. 
  6. Government data will show unemployment continuing to rise in the first half of the year, hitting 10.5%, before stabilizing and beginning to fall in the 3rd quarter.  (With mid-term elections approaching, there’s no way the administration will report anything less than falling unemployment by that point.)   But, my measurements (see previous posts on monthly unemployment rates) will show continued rising unemployment, with U3(a) rising to over 14%.  4th Quarter Update:  U3a has held at just under 12%.  Unemployment actually fell in the first quarter.  Since then, it’s remained stuck at about 9.8% until the government began leaning heavily on the “mysteriously vanishing labor force” gimmick to make unemployment seem to decline to 9.0%.
  7. The Fed rate will remain at 0% throughout the year.  The Fed will continue to increase its balance sheet, primarily through the purchase of U.S. treasuries (which requires printing money) throughout the year as well.  There may be a feeble attempt to start mopping up liquidity injected by the Fed, but such an effort will quickly be reversed.  4th Quarter Update:  This prediction was dead-on.  Interest rates remain at zero.  The Fed ended its program of treasury purchases, made a feeble attempt at reducing its balance sheet, but has now implemented “QE2,” a program to resume a huge purchase of treasuries.
  8. Consumer credit will continue to dry up and consumer indebtedness (as a percentage of income) will be lower by the end of 2010.  4th Quarter Update:  Good call.  Consumer credit contracted in the first three quarters of this year, but rose in the fourth, for an overall decline of 1.6% in 2010.
  9. GM and Chrysler will remain wards of the state throughout 2010.  Ford will sink into quarterly losses again as foreign car-makers cut costs and recapture market share.  Chinese autos will hit the market by the end of the year.  4th Quarter Update:  Good call on GM and Chrysler, though GM has issued an IPO to begin weaning itself away from government ownership.  Bad call on Ford.  I underestimated the response by American buyers, rewarding Ford for not taking government bail-out money.  No Chinese autos yet, but they’re coming. 
  10. The stock market will continue rebounding in 2010.  (Remember, stock prices are primarily driven by global corporate profits and have little or no correllation to the state of the U.S. economy.)  4th Quarter Update:  Good call.  After hitting a soft patch during the summer, the market ended the year at its highest level since the beginning of the recession.  “QE2” has crowded foreign buyers out of the bond market and pushed them into equities.  I look for the stock market boom to continue into May, but pull back in anticipation of QE2 ending in June. 
  11. The mid-term elections will be a disaster for democrats.  Losses in both the House and Senate will be breath-taking, though probably not quite enough to return Republicans to a majority in either.  Pundits will cite one factor in particular:  voter anger over lingering high unemployment.  Also mentioned will be concern over soaring budget deficits.  4th Quarter Update:  Another good call, though the Republicans did easily seize control of the House.  As predicted, unemployment and high deficit spending were the key issues.

At the end of each quarter, I’ll do a review of these predictions versus actual events.


2 Responses to 2010 Predictions

  1. KK says:

    ..you are an optimist: things will be a lot worse then this.

    • Pete Murphy says:

      You may very well be right, KK. But I think the government will continue to mask our problems with more stimulus spending, along with more help from the Fed in terms of zero interest rates and more balance sheet expansion. A day of reckoning is coming. I just don’t think it will be this year.

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