This is the 6th annual installment of my predictions for the coming year. Over the years, I have learned that the closer I stick to the effects of the inverse relationship between population density and per capita consumption – rising unemployment and poverty, declining wages and benefits, worsening trade imbalances – the more accurate my predictions tend to be. It’s when I stray into other economic, financial and political arenas that my predictions are less reliable. Who can make accurate predictions when policy is based on flawed economics and, therefore, illogical assumptions? Nevertheless, as much as it’s an exercise in futility to make such predictions, it’s still fun.
So here goes. 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 constrains our ability to store and use many 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 the effect.
Only actions to stabilize our population (especially reducing immigration) and action to restore a balance of trade through a sensible return to the use of tariffs have any hope of mitigating these effects.
Back-drop for 2013:
In addition to the effect of my theory stated above, the following issues form a back-drop that will shape events in 2013:
- The world population will continue to grow at approximately 1% per year, adding another 70 million people. The U.S. will do likewise, adding another 3 million people. The corporate world welcomes all of these new consumers, but already has plenty of capacity to meet their needs. Thus, all are destined for the unemployment line.
- Right out of the box, on January 1st, comes the biggest factor in determining what kind of year 2013 will be – the “fiscal cliff.” (Or, as I’ve more accurately dubbed it, the “Bottom of the Canyon.” See https://petemurphy.wordpress.com/2012/11/12/fiscal-cliff-or-the-bottom-of-the-canyon/.)
- The drive toward austerity in Europe has driven that continent into recession. What will happen next and what will be the impact on the U.S.?
- No one understands that, because of it’s extreme population density, the Chinese are incapable of becoming western-style consumers. Yet, development continues toward that end. At some point, there’s going to be one hell of a big disappointment in China – disappointment with their inability to boost domestic consumption and rely less on exports, disappointment with profits as sales growth grinds to a halt, and disappointment among the Chinese people with their leadership. Could 2013 be the year it happens?
- The Federal Reserve is gushing money into the mortgage market in a bid to reinflate the housing bubble, but using ultra-low interest rates instead of lax lending standards. Mortgage rates are at record lows and the market seems to be responding, but barely.
- With the Federal Reserve gobbling up new U.S. debt and mortgage-backed securities, foreign nations are being crowded out of virtually every avenue for plowing their trade dollars back into the American economy. Simply put, global trade imbalances are worsening and making the global economy ever-more unstable in spite of the best efforts of central banks to mask the problem.
- The Republican party is licking its wounds and pondering policy changes to modernize its message, while Democrats crow about a mandate and political capital.
- The Arab world is coming unglued. The so-called “Arab spring” movement looks less like a turn toward democracy and reasonableness and more like a violent changing-of-the-guard in their dictatorships and theocracies. And is 2013 the year that Iran’s progress toward a nuclear weapon becomes intolerable?
So, against that backdrop, here are my predictions for 2013:
- The President and Congress will, after much ado, come to an agreement to keep digging the hole at the “Bottom of the Canyon.” As a result, the federal deficit in 2013 will be little-changed from 2012, perhaps falling slightly below $1 trillion from its slightly-higher-than-$1 trillion level.
- The recession in Europe will drag on, though muted by increased money-printing by the European central bank. Riots in Greece and Spain will grow increasingly violent. New gimmicks will be invented by the IMF and the European Central Bank to maintain an illusion of solvency in such countries.
- Growth in China will slow more than expected and may become a net drag on the global economy.
- U.S. GDP will muddle along in the 1-2% growth rate range, with the effects of government stimulus offset by the drag of recession in Europe and by stagnant exports. Per capita GDP will barely grow at all. Though the economy may surge a little in the 1st quarter as it rebuilds inventory following the holiday season, the economy will teeter on the brink of recession the rest of the year.
- The U.S. trade deficit will swell to nearly $600 billion. The goods deficit will top $775 billion. The deficit in manufactured goods will surpass $500 billion.
- Unemployment will continue to hover in the range of 8% throughout the year. Per capita employment will decline.
- In spite of the Obama administration’s rhetoric supporting U.S. manufacturing, President Obama’s inaction on the trade deficit will actually yield a decline in manufacturing employment.
- Median household income will decline.
- “Immigration reform” will be passed by Congress as the Republican party tries to outdo Democrats in currying favor with Latinos. Included will be a thinly-veiled but large-scale amnesty program that will grant legal status to millions of illegal aliens. This will prompt a new wave of border crossings by illegals.
- China’s economic growth rate will slip below 6%.
- Global unemployment will become the main focus of international organizations like the G20, the IMF and the World Bank as riots spread in Europe, the Mideast and even in China.
- The credit rating of the U.S. will be cut by at least two more ratings agencies.
- At least three major U.S. cities – beginning with Detroit – will file for bankruptcy.
- Israel will attack Iranian nuclear sites and the U.S. will be sucked into the war to follow.
And, in keeping with “tradition,” the following are two “long-shot” predictions that, while not likely, I could envision actually happening:
- Last year, I predicted the breakup of the European Union. It didn’t happen, of course, but I still see this as a real possibility. Perhaps not a complete breakup, but a contraction in its membership, including not only Greece, but at least one wealthy, solvent country unwilling to tolerate endangering its own economy to prop up the likes of Spain and Italy.
- Late in the year, the Federal Reserve will reverse course and halt all monetary easing, concluding that it has become an enabler of congressional inaction on critical economic issues.
In summary, 2013 shapes up to be yet another year of slow economic decline, but not without some major contortions revolving around budget negotiations. I’ll provide occasional updates on these predictions as the year progresses.