A striking fact of the past four years is that the world's 10,000 or so economists have overwhelmingly failed to predict the three major economic developments of this period, 2007-2011. First, only a handful predicted the financial crash of 2007-08 and subsequent deep global contraction that I have called an “Epic” recession, to distinguish it from normal recessions (and also from depressions).
Second, the 10,000 have failed to predict the current protracted economic stagnation that has occurred since 2008 as well; instead, nearly all mainstream economists in recent years forecast a sharp “V”-shaped sustained economic recovery since 2008-09 that has yet to take place. Third, at year end 2011, they once again failed to see the sharp and even deeper retrenchment of the US and global economies that is coming, no later than 2013 – and possibly even earlier should the eurozone currency and banking system crash in 2012, which appears increasingly likely. In contrast to mainstream economists, the methodology applied to the US and global economy used by this writer to predict the US and global economies the past four years (as outlined in my book, “Epic Recession: Prelude to Global Depression“) has relatively accurately forecast the course of economic events. Based on that same methodology, this writer has recently predicted a double-dip recession in the US no later than early 2013, a major financial crisis in the eurozone and a slowing of the global economy once again. This double dip in the US and global slowdown in 2012-13 is treated in more detail in this writer's forthcoming book available in 2012, Obama's Economy: Recovery for the Few.” In the meantime, here are this writer's predictions for 2012-13 for the US, euro and global economy.
Predictions for 2012 to 2013
1. The US will experience a double-dip recession in early 2013. Or, in the event of another banking crisis in Europe, perhaps – though less likely – earlier in 2012.
Despite a continual hyping of economic reports by the media and business press in recent months, there is no recovery underway for jobs, housing or state and local government finances. Job growth has been stuck throughout 2011 at around 80,000 to 100,000 a month per the Labor Department's monthly data. The broader measure of unemployment, the U-6 rate, has been consistently in the 16 percent range, or about 25 million to 26 million for the past year. State and local governments continue to lay off workers in the 20,000 range every month. Little effective stimulus will be forthcoming from the federal government in 2012, despite the election year, and further deficit cutting is even possible in 2012. The first quarter of 2012 will record a significant slowing of gross domestic product (GDP) growth once again. Should the eurozone debt crisis escalate once more in the second quarter of 2012, the US economy will weaken further in the second quarter. It may even slip into recession if the euro crisis is particularly severe. More likely, however, is the scenario of an emerging double-dip recession in early 2013, when deficit cutting by Congress and the administration intensifies.
2. The Federal Reserve will introduce a third version of its “Quantitative Easing” QE3 program in 2012.
QE is when the Fed prints money to directly purchase bonds from the private sector at above-market inflated prices, thus pumping up the money supply. As in the past two versions of QE in 2009 and 2010, the result will have little effect on the housing markets, jobs or general recovery, but will once again result in a boost to stock, bonds and commodity speculation and related price inflation. The timing of QE3 will be driven by events in Europe.
3. Real deficit-debt reduction will begin with great earnest immediately following the November 2012 general elections, or no later than February 2013.
The deficit cutting yet to come will dwarf the recent $2.2 trillion August 2011 deal. It will result in another $2 trillion to $4 trillion in cuts, mostly spending on social programs and entitlements like Medicare, Medicaid and Social Security, as well as food stamps, unemployment insurance benefits, education and the 2010 Health Care Affordability Act. Tax hikes directly impacting the middle class will also occur, including heretofore untouchable measures like mortgage deductions.
4. Job growth will continue to stagnate and remain in the 24 million to 25 million range throughout 2012, with a number of “false starts” in jobs recovery determined by seasonal and other statistical factors.
There are no effective programs in place today to fundamentally increase net jobs in the US. Further tax cuts in 2011-12 will not stimulate investment or jobs. Corporations will continue to refuse to commit their massive $2 trillion cash hoard to investment or jobs as they await the outcome of the Bush tax extensions in late 2012 and maintain a large cash cushion in anticipation of events in Europe and the possibility of another global credit crunch. Bank lending to small-medium business will also change little, with consequent investment and job creation by small business remaining largely on hold in 2012 as well. Simultaneously, states, cities and schools will continue to layoff at the recent 20,000 a month rate – bringing the total of such public-worker jobs loss to nearly one million during Obama's first term. Post office employment will add to the layoff numbers, and federal government layoffs will commence in significant numbers in 2013.
5. Congress and the administration will pass two major tax bills in 2012.
The first bill will bow to multinational corporations' blackmail (and campaign contributions) and reduce the standard 35 percent corporate tax rate for offshore sheltered cash repatriation to the US. That tax rate will range between 5.25 percent and 10 percent, reduced from 35 percent. Multinational corporations will return about half of their current $1.4 trillion offshore profits hoard to take advantage of the lower rate – in a repeat of the same blackmail that occurred in 2004-05, when a similar bill reduced their rate to 5.25 percent from 35 percent to return about half of their then $700 billion offshore sheltered profits.
The second bill will be some kind of extension of the Bush tax cuts that will take place before the November 2012 elections; or, immediately after before year end. In the Bush tax extension deal, the top corporate and personal income tax rate of 35 percent will be permanently reduced to less than 30 percent in exchange for unverifiable tax loophole closings. The middle class will also pay higher taxes, and the earned income credit for low-pay workers will be reduced.
6. Home prices will continue to fall, foreclosures rise and negative equity grow.
Now at more than 11 million, foreclosures will continue to rise past 13 million. Home prices will continue to fall by 5-10 percent more in key markets (bringing the decline since 2006 to more than 40 percent on average). At least 17 million mortgaged homeowners (out of 54 million total) will experience negative equity. The Obama administration and Congress will force states' attorneys general to accept the federal plan to let banks and lenders off the hook for “robo-signing” and illegal foreclosures, in exchange for a token fine. Housing and commercial property construction will continue to stagnate in 2012 at around current levels.
7. US exports and, thus, US manufacturing will slow in 2012.
US exports will not outperform the global trade market and will slow, as will exports in general globally, including China and the eurozone. As US exports soften, so in turn will their positive effect on US manufacturing production.
8. Should eurozone banking implode, one or more major US banks will require further rescue by the Federal Reserve and US Treasury.
In the event of a default by one or more sovereign economies in the eurozone, major banks in France, Austria, Belgium and even Germany will become technically insolvent. In such case, the contagion will spread to US banks. Most vulnerable and requiring rescue are: Bank of America, Citigroup, Morgan Stanley.
9. The eurozone sovereign debt crisis will stabilize, then worsen again.
The euro sovereign debt crisis will temporarily stabilize in early 2012 as the European Central Bank follows the US Federal Reserve and introduces QE while negotiations among the euro states on a fiscal union begins. However, the sovereign crisis will erupt again in late spring 2012 as Italy and Greece encounter severe debt refinancing problems. Three to four times the currently available $1 trillion to $1.5 trillion euro bailout fund -more than $4.5 trillion will be eventually needed to resolve the euro debt crisis.
10. Two or more euro banks will “fail.”
Several euro banks will become technically insolvent and will be nationalized by their governments and bailed out. Major candidates include: the French banks, Societe General and BNP Paribas; the German “Commerzbank; the Italian “Unicredit”; and possibly one or more Austrian and Finnish banks.
11. Both Germany and France will experience modest recession in 2012; the United Kingdom will experience a more severe double dip.
German and French economies slowed to virtually no growth at year end 2011, and both will slip into recession in 2012. A second round of severe austerity programs in the UK, introduced at year end by the conservative Cameron government, will produce a further economic contraction in the UK.
12. China's economic growth rate will slow.
Having grown consistently in the 9 percent to10 percent range in recent years, China's GDP will slow dramatically in 2012, potentially to half the rate of previous years. Chinese manufacturing exports will contract. India and Brazilian economies will slow significantly as well. All three key economies will introduce stimulus programs, in contrast to the US, eurozone and Japan.
13. Global trade will slow and begin to contract in 2012.
Already heading in the direction of contraction, given China's slowing economy, continuing eurozone instability and slowing growth in the US economy, the pace of declining world trade will quicken, and global trade in general will contract. Global manufacturing will follow in turn.
The foregoing “baker's dozen” of predictions about the US and global economy in the coming year are based upon a non-mainstream economic analysis this writer has developed in his 2010 book, “Epic Recession: Prelude to Global Depression” and its forthcoming sequel this in 2012, “Obama's Economy: Recovery for the Few.” Both works represent a new theoretical framework for analysis of the continuing economic crisis. This framework is the consequence of the recognition that the restructuring of the US and global economy that occurred in the 1980s in response to the earlier economic crisis of the 1970s has now collapsed with the events of 2007-08. Sometimes called “neoliberalism,” this earlier 1980s restructuring has today run its course as capitalist economies are once again in the process of attempting to restructure the global capitalist economy. The result is continuing economic instability and volatility. The economy, US and global, therefore continues to reflect a degree of severe systemic fragility. To date, this uncertain condition has been called by this writer a “Type I” epic recession. But epic recessions have the internal tendency to transition from “Type I” to “Type II', the latter a condition that is immediately preliminary to a global depression. In the book, “Epic Recession: Prelude to Global Depression,” written in late 2009, it was predicted the US and global economies would reach a juncture point to a potential transition circa 2012-14, during which time it would be settled whether today's Type I epic recession would indeed transition to a Type II and a possible depression. In 2012, we'll see whether this process has begun, as the US and other economies weaken and the “wild card” of euro banking instability runs its course. Should a bona fide banking crisis erupt in the eurozone, it is all but certain that transition to a “Type II” epic recession will occur. The odds of a true global depression in turn will rise significantly.