My predictions are based upon the economic theory I’ve proposed in Five Short Blasts. 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.
Back-drop for 2012:
In addition to the effect of my theory stated above, the following issues form a back-drop that will shape events in 2012:
- In 2011 (in the wake of the global financial melt-down in 2008), the financial world’s patience with and tolerance for sovereign debt, both in the U.S. and Europe, reached a breaking point. The effects of the inverse relationship between population density and per capita consumption have long been masked by deficit spending, propping up macroeconomic growth. But no more. Austerity programs on both continents threaten to end economic growth as we know it.
- The “super committee” in Congress is tasked with identifying $1.2 trillion in cuts over ten years by November 23, 2011. Otherwise, automatic cuts to defense spending and medicare will kick in. The “super committee” is already under pressure to “go big” and come up with much larger cuts – at least $4 trillion.
- Civil unrest is breaking out all over the world. The “Arab Spring” movement, while aimed at the removal of dictators, is just as much about high unemployment in those nations. Riots in Greece have been provoked by austerity programs in a nation already suffering high unemployment. And the “Occupy” movement in the U.S., while lacking focus, is clearly an expression of anger by the “99%” toward the wealthiest 1%. Again, high unemployment has played a key role in coalescing these groups, which already are showing signs of potential for turning violent.
- Against this backdrop of high unemployment, the world will add another 77 million people this year, and the U.S. will add 3 million of its own – all of whom will be headed straight to the unemployment line.
So, based upon my theory and the above back-drop, here are my predictions for 2012:
2012: How Bad Will It Get?
Contrary to the rosy forecasts of some economists like Mark Zandi, 2012 is going to be a bad year – potentially very bad. This is what I believe 2012 holds in store:
- Expressed in per capita terms, GDP will decline throughout the year and the U.S. will slide back into recession. The recession could be deep enough to result in actual GDP contraction. It wouldn’t surprise me if the recession rivaled the depths of the 2008/2009 recession.
- Europe will sink into a deep recession as austerity programs begin to bite.
- Monthly job growth will be modest, falling short of what’s needed to absorb labor force growth. Unemployment will rise from the current level of 9.1%, though the Labor Department will likely claim that workers are leaving the work force, effectively holding unemployment steady. But the number of unemployed will grow to over 19 million. (See my posts on monthly unemployment.)
- The U.S. trade deficit will gradually worsen, rising to nearly $60 billion per month. The deficit in manufactured products will lead the way, rising to nearly $30 billion per month. Export growth will seriously lag the president’s goal of doubling exports in five years.
- Our trade deficit with South Korea will begin to worsen dramatically as the year wears on and as the new free trade agreement with that nation takes effect.
- “Obomney” will win the presidential election in November. I felt compelled to make a prediction about the outcome of the 2012 presidential election. Normally, it would be an easy call to predict that Obama will lose the election. His already-low approval ratings will only erode further as the year wears on, as stimulus spending comes to a halt and as new spending cuts begin to take their toll on the economy. However, the slate of Republican contenders is so weak that it’s difficult to see any of them beating Obama, with the exception of Romney. In the final analysis, what difference will it make? Both are flip-floppers who bring nothing new to the table. One wants to create the appearance of doing something about the economy with some token spending programs. The other will create an illusion of doing something with some token tax breaks here and there. Both will be hamstrung by the new intolerance of deficit spending. Romney will win the Republication nomination. The race between him and Obama will be close but marked by a total lack of enthusiasm among both Democratic and Republican voters who know that the choice will make no difference whatsoever.
- Poverty in America will continue to worsen. The percentage of households earning less than 50% of the poverty level will top 2010’s record level. The percentage of households below the poverty line will rise to the worst level since 1966.
- The “Occupy” movement will continue to gather support, spread and grow. These protests will turn increasingly ugly as the police become more forceful in routing protesters and as protesters take on a more militant tone in response.
- The “super committee” will either fail in its attempt to identify $1.2 trillion in spending cuts, or Congress will reject whatever they come up with. Congress will then prevent the big cuts in Medicare and defense spending that were supposed to result. By the end of 2012, the U.S. will face another debt crisis and its debt will receive further downgrades by ratings agencies. This time there may actually be a default.
In addition to the above, I’d like to have some fun with some “long-shot” predictions. These are things that could happen in a worse-case scenario:
- The European Union will collapse and break up, as a result of a default by Italy being too big for the EU to manage in an orderly fashion. It will begin with a defection by one of the wealthier members of the EU, most likely Finland, leaving the rest of the EU unable to deal with Italy, triggering a domino effect of defections. Previously agreed-to bailouts of Ireland, Portugal and Greece will fall by the wayside without an EU to back them, and there will be multiple sovereign defaults in those nations.
- The Federal Reserve will implement yet another round of “quantitative easing.” The Fed will issue to each bank a sum of money sufficient to pay down each home mortgage on its books by an amount of about $10,000, in effect paying off $10,000 worth of everyone’s mortgage. The total program will amount to approximately$1 trillion in new, printed money. The goal of the program will be to re-energize the housing market, essentially providing every homeowner with $10,000 of additional equity in their homes.