(Quarterly updates will be provided in bold italics.)
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 has squandered any opportunity to address global trade imbalances and rising U.S. overpopulation during his first two years 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” (merely creating the illusion of action) such as urging other nations to stimulate domestic growth and stop manipulating currencies, will be utterly ineffective, as they have been for decades.
Back-drop for 2011:
In addition to the effect of my theory stated above, the following form a back-drop that will shape events in 2011.
- Fiscal stimulus and Federal Reserve “QE2” – the Fed’s just-announced plan (as of the time of writing these predictions in November, 2010) to purchase another $600 billion in U.S. treasuries over the next six months: The former is winding down while the latter has yet to get rolling. The slow-down in Federal spending will tend to put the brakes on the economy. The latter will boost bond and equity markets, providing some psychological boost, while also boosting commodity prices, most notably oil. (3rd Quarter Update: Wow, was that a good call, or what?!?!?! Equity markets skyrocketed, as did the price of oil! And now that the effect of the stimulus program is over, the economy is rapidly descending into recession once again.)
- The new political reality of a Republican-controlled Congress and a president now forced to swing toward a more moderate (even conservative) agenda if he is to have any hope of re-election. (3rd quarter update: There’s a little evidence of swinging to the center, but not much. Obama now favors cutting regulations on businesses and extending the payroll tax cuts.)
- An escalating global currency war and escalating tensions over global trade imbalances. (3rd quarter update: A bill that would penalize China for manipulating its currency has passed the Senate, but it may not even be brought up for a vote in the House. But, clearly, there is growing dissatisfaction with China’s huge trade surplus.)
- Soaring national debt in the face of threats by ratings agencies to cut the rating on U.S. debt. (3rd quarter update: Good call! S&P downgraded U.S. debt as the president and Congress failed to come to terms with the debt crisis. Virtually all legislation aimed at boosting the economy is now paralyzed by concerns about increasing the debt.)
So, based upon my theory and the above back-drop, here are my predictions for 2011:
Unfortunately, this will remain a non-issue in 2011, and world population growth will continue to grow exponentially at a rate of about 1% per year. The world’s population will grow from 6.89 billion people at the beginning of the year to 6.96 billion by the end. (3rd quarter update: As of Oct. 19th, world population has already eclipsed 6.96 billion and will likely exceed 7.0 billion by year’s end. The U.N. is now projecting world population to reach a staggering 10 billion by 2100. But I have my doubts. See an upcoming post on the subject.)
- Population growth will also remain a non-issue in the U.S. Immigration policy will remain unchanged and an additional 1.1 million immigrants will enter the U.S. in 2011. As a result, U.S. population will rise to 314.5 million people by the end of the year and the ranks of our labor force will be swelled by another 600,000, at a time when the economy struggles to create jobs. (3rd quarter update: As of Oct. 19th, U.S. population is estimated by the Census Bureau to be 312.45 million. My prediction was based on population estimates which, at the time, didn’t account for the 2010 census, which lowered the U.S. population by about 700,000. As a result, U.S. population will probably hit 313.1 million by the end of the year. This is significantly below my prediction – a rare piece of good news.)
- Looking for opportunities to display bipartisanship, the Obama administration will actually make some token moves toward increased border enforcement, and perhaps will resume some workplace enforcement raids. The rate of illegal immigration will remain somewhat muted by the poor state of the U.S. economy. (3rd quarter update: The White House recently announced the suspension of all enforcement actions, with the exception of violent felons, a bone tossed to the supporters of illegal immigration, now that the Republican-controlled House makes passage of the “Dream Act” impossible. The administration continues its attempts to thwart any efforts by the states to enforce immigration laws on their own.)
- Through 2007 (the most recent year for which data is available), U.S. life expectancy remained stuck at 77.9 years, the same as 2006. (But you’d never know that because the CDC revises its numbers to make 77.9 look like an improvement.) Expect life expectancy to remain stuck at that level for 2008 or even decline slightly. There will be no further increase. (3rd quarter update: No new data has been released by the CDC yet, now long overdue for 2008. )
- The U.S. trade deficit will rise to over $50 billion per month and remain stuck above that level. There may, at some point, be an attempt by the U.S. to impose a “cap” on its current account (trade) deficit, ratcheting up global trade tensions. But this isn’t likely. (3rd quarter update: Good call! In May, our trade deficit topped $50 billion for the first time this year, at $50.8 billion. In June it rose further to $51.6 billion. It fell back a little in July and August, but it looks like $50 billion monthly trade deficits are becoming the norm.)
- The president’s plan to double exports in five years will lag even further behind than it did in 2010. Exports will grow, but imports will grow faster. (3rd quarter update: Imports continue to oupace imports and though total export growth is nearly on track to meet the president’s goal, it appears that exports are being propped up with a huge increase in oil exports. Exports of manufactured goods are lagging the president’s goal, falling behind by more than $5.1 billion per month in August, the most recent month for which data is available.)
- Unemployment will remain stuck in the 9-10% range. Economic reality will prevent it from falling and the government won’t admit to anything above 10%. But real unemployment (my U3a calculation) will rise to over 12.5%. Per capita employment will fall. (3rd quarter update: After falling to 8.8% in March, unemployment now remains stuck at about 9.1%. After rising to 12.0% in July – the worst level of the recession, my “U3a” calculation has fallen back to 11.7%.)
- The president’s commission to reduce the deficit will release its report. Both parties will distance themselves from major recommendations and instead make a show of cutting “waste and fraud.” The deficit will decline slightly to $1.2 trillion, mostly due to winding-down war efforts in Iraq and Afghanistan. (3rd quarter update: Good call! The president’s commission has been completely ignored and nothing but token cuts have been made, even in spite of the downgrade by S&P. The deficit cutting talks associated with the debt ceiling produced almost nothing, far less than S&P demanded as the minimum to avoid the downgrade. In the fiscal year just ended in September, the budget deficit actually rose slightly to $1.299 trillion from the previous year’s deficit of $1.294 trillion.)
- The national debt will rise to $14.9 trillion, coming dangerously close to exceeding GDP. (But that won’t happen until 2012.) Ratings agencies will ratchet up threats to cut America’s debt rating. (3rd quarter update: Good call, but too conservative! S&P actually downgraded U.S. debt in August, triggering a massive market sell-off. As of Oct. 19th, the national debt stands at $14.85 trillion. It now appears likely to exceed $15 trillion this year.)
- The Federal Reserve will hold interest rates at the current level of 0-0.25% throughout the year. They will complete the “QE2” purchase of $600 billion in treasuries and, by the end of the year, will be talking of the need to expand the program. (3rd quarter update: Good call. The Federal Reserve recently announced that it will hold rates at current levels for at least another 2 years. QE2 ended in June. There is constant speculation about the shape of the next Fed intervention.)
- Campaigning for the 2012 presidential election will have begun by the end of the year. Continued gridlock and high unemployment will have voters even angrier than in 2010. The TEA Party will become an even more significant force. (3rd quarter update: Another good call! The TEA party actually controlled the debt ceiling/deficit reduction talks in July. But now, a new movement born out of anger and frustration, “Occupy Wall Street,” appears to be gaining influence and could eclipse the TEA party. The field of candidates for the Republican nomination has narrowed to three candidates in the last quarter – Romney, Cain and Perry. The president’s low approval ratings are making a Republican win look like a strong possibility, if not a sure thing.)
In summary, the economy will settle into its “new normal” condition even more in 2011: stagnant or rising unemployment, a growing trade deficit, more quantitative easing, and more debt. Gridlock in Washington will worsen. Global trade tensions will worsen. The event that finally pushes these tensions over the brink won’t yet happen in 2011, being held at bay with more, but ever more ineffective, fiscal and monetary policy gimmicks.
The latter is a tough call. The economy is boxed in on all sides and it seems almost incomprehensible that no substantive action will be taken to rebalance the global economy and cut the trade deficit. Yet, I don’t see anything happening in 2011, since Obama has proven himself reticent to take a stand and make difficult choices regarding the economy. (3rd Quarter update: These last two paragraphs were right on the money. The economy is rapidly descending back into recession and the president has done vitually nothing, aside from offering an anemic, token jobs bill, to stem the downward spiral. And there are no new ideas out there. Anger over China’s huge trade surplus is boiling again, with threats of branding them currency manipulators and imposing tariffs, but free-traders seem to rule the day nevertheless.)