(A Work in progress..)
Actually “Predictions for 2010″ is the wrong title for these few paragraphs. “Where we have been and where we are going” would be better. Maybe “A Rant at the world leaders”. I think I like “Out with old, In with the new” the best.
People are asking whether the world economy is in a recession or a depression. The answer, frankly, is yes. What we now call a recession was once called a panic, and then dubbed a depression because that sounded less, well, panicky. After the Great Depression of the 1930s turned into one of America’s (and the world’s) worst nightmares, subsequent administrations determined that economic downturns should be called something else – anything else – to avoid triggering a national malaise. They settled on recession, which seemed to carry a less threatening connotation – until the current one came along, at any rate. Chances are, the Orwellian types will coin a new term to replace recession, by the time this one is done. A rose is a rose is a rose . . . and some are more equal than others.
Indeed, pundits have christened the current economic downturn the “Great Recession”, and called it the worst since the Great Depression; as if that’s truly historic. Call it recession, call it depression, call it panic . . . call it what you will. This is no ordinary (or even unusual) downturn in the business cycle, as the pundits and politicians and bankers proclaim. (They’re whistling past the graveyard, trying to reassure themselves and us and avoid a panic.) This is a turning point in history. This is a combination of cycles that run the gamut from hundreds of years long to well over a thousand years.
It might be nice to believe that panic in the streets is a faraway prospect. While it’s true that this won’t be happening everywhere all at once in this or any other year, it’s also true that it can happen anywhere in 2010. In a time of economic dislocation and upheaval in the financial system, billions of people around the world are a paycheck or two from being on the streets – if they’re that secure.
The economic dislocation rampant since the 1980s isn’t just the bursting of one bubble after another seemingly ad infinitum – although that’s certainly an accurate description of affairs. More importantly, it’s happening because the old world system has broken down to the point that it can only generate growth through bubbles. Look back on the last 30 years or so of history, from one real estate bubble to the next, through the dot-com bubble, the currency speculation bubbles. They all collapsed because they had to, because there’s no productive substantial reality underlying them. (Take the residential real estate bubble, for example: unlike the family farm which most people called home prior to the Industrial Revolution, there’s no productive value in a home.) The Industrial Revolution and finance capitalism are a race to the bottom of human prosperity, in which even the big winners are wiped out over time because the bursting bubbles take everything down with them. As it’s said in Asia, “rice paddy to rice paddy in three generations”.
Of course, the bubble pops long before infinity is reached, as it must. That’s when the politicians and central bankers put their heads together and try to patch up the system that keeps things running. They don’t want a real fix, mind you, because that would tie their hands. Who wants real money, when you can get away with ginning up the fake stuff? So they fix things the Keynesian way, inflating their way to prosperity – or rather, inflating their way to the next bubble, because inflation doesn’t create wealth, it destroys it.
The fix to the immediate debacle began in late 2008 and accelerated in 2009. It has happened in a de facto way, rather than de jure, as various national central banks have drawn down their US dollar reserves and increased their gold holdings. The dollar isn’t disappearing, but it is being devalued and deemphasized. Central banks which between them now hold more than 15 percent of all the gold ever mined, expanded their reserves in 2009 for the first time in a generation. India, China and Russia are among the central banks that added some 429 metric tons of gold to their reserves last year. It was the first net expansion in gold reserves since 1988, according to some estimates.
As part of this process, interest rates in the US will go up: it’s the price the US government must pay to finance its ever-growing debt in a global economy that finds dollars less desirable, and US obligations less creditworthy. For a time, this will likely strengthen the dollar and depress US equity markets, as investors seek a safe haven. However the dollar’s strength will be relative to other major currencies, more than in relation to precious metals. Any dip in precious metal prices should be viewed as a buying opportunity. It’s only temporary, in view of the bigger picture.
That’s the long run. In the short run, we’ve got this crisis in the world economy, the global financial system. The central bankers and politicians are telling us that recovery’s on the way. We all want them to be right. Then along comes the Dubai debt default and global markets have a fit. There’s more where that came from. Will the markets recover in short order? Yes. Because central banks have created trillions of dollars worth of liquidity in the form of fiat currency – another name for debt. From an investment perspective, all that extra money has no place to chase returns but to go but into equity markets, driving the latest bubble – which manifests as a rising market in a sinking or at best artificially and temporarily stimulated economy. (That’s the 2009 rally in a nutshell.)
Governments and central banks the world over have reassured their citizenry that deficit-funded stimulus and rescue programs would fix the global financial collapse. In the US and many other countries, most of that rescue package has essentially gone to banks, to prop up their solvency and get them to lend money into the economy again. But the banks won’t lend to each other because they know they’re broke. They won’t lend more than a pittance to consumers and companies, because they know they’re all at risk of a default. (And default they do, as bank after bank gets closed by the FDIC.) So the money just piles into the markets, expanding the bubble as long as possible.
What happens when possible runs out? We may see sooner than anyone would like . . . sounds like the next bubble bursting. Of course this is a slow and historic process. The burst of one bubble isn’t the end of the world. It’s just another settling of the soufflé. This isn’t Humpty Dumpty falling off the wall. It’s more like Humpty cracking and poaching in place . . .
What to expect? “W (or double-W)” recovery curve. Virtually all the government stimulus and liquidity injections have essentially been pumped into unproductive assets, industries and financial institutions that have collapsed on their own and are being kept alive only through heroic and unsustainable efforts. Sure you get a bounce – and then a fall-back. Things get better as long as money is poured into things like auto rebates (“cash for clunkers”) and first-time homebuyer rebates. When the rebates stop, the semblance of prosperity comes to an end, and all that’s left is the debt. It’s not unlike the government deciding to bail-out buggy manufacturers in 1910, and borrowing money to do it.
It’s as if the good doctors of international finance are attempting to cure the patient with one heroic operation after another aimed at saving this organ or that system . . . and then hooking the patient up to an IV of pure poison after each new surgery. The whole international finance system with its baskets of fiat currency, bubbles and debt is well into an historic collapse, in the run-up to the new system that will emerge.
It’s a long way to a new system. Closer to hand, expect world equity markets to continue the rally they began last year. No rally is homogeneous and constant. This one has had its interruptions, and will have even more in the first half of 2010 which could see geopolitical threats that disrupt commerce (including energy supplies) and shake investor confidence. But the equity markets should recover for a time – because there’s still no place else to put the money and get a decent return. Then, sometime between May and August, comes a day of reckoning. Not the day of reckoning, just another settling of the soufflé.
Now a time for apologies. I stole this content. It is actually a summary of an Astrolgical prediction with the astrology bits stripped out. I have started reading Richard Nolle’s predictions every month, however understand that Astrology is looked at with a smirk. To see the original go to http://www.astropro.com/forecast/predict/2010-all.html
