Abroad and at home, it will be the year of a lifetime.
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SOME OF THE BIGGEST RISKS to international stability in 2012 flow from European financial weakness, both at the government level as well as within highly leveraged banks with major exposure to the sovereign debt of countries like Greece, Italy, Spain, Portugal, and Ireland.
The 2011 awakening of Europeans to the fact that their socialist, Keynesian spending habits and the mountains of debt those habits were accumulating are unsustainable was just the beginning of years of austerity (cutting of government spending) and deleveraging (governments, companies, and individuals attempting to pay down debt) which will crimp economic growth in the Eurozone.
It is to a certain extent a vicious cycle, with weak growth making it more difficult to pay down the debt load that is causing the weak growth. There are two very dangerous aspects to Europe’s fiscal woes. One is that the failure, or even the fear of failure, of a major European bank will cause ripples throughout the West’s financial system and markets — including in the U.S. where our direct exposure to Greek debt, for example, is minimal, but our indirect exposure through ownership of debt and equity in major European banks is quite large. In 2012, Europe stands at least a 50/50 chance of a Lehman Brothers-like event, causing some period of time of freezing-up of debt markets accompanied by a brief but sharp panic in stock markets. The U.S. will be less exposed than Europe but we are not immune to the disease.
The other possible contagion from European economic weakness stems from the fact that Europe is the second-largest export market for American goods (after Canada), and the largest export market for Chinese goods. Sluggish European demand will translate into fewer exports and therefore fewer jobs and less tax revenue in the U.S. and in China. And fewer jobs and less wealth in China, even if Donald Trump might cheer it, will have large negative ripples around the world as that nation’s burgeoning middle class becomes less able to buy Western products.
The fact that the U.S.’s debt situation is no better than that of most European countries makes it impossible for the U.S. to be of substantial direct aid to the Europeans, even if there were political will to go down that path. However, Americans should be wary of International Monetary Fund involvement in any European bailout. American politicians who are willing to risk our taxpayers’ money to help profligate European governments but don’t want it to appear they are doing so will call for increased IMF participation. Although deals can be structured in which nations’ participation varies from their IMF “quota” — the U.S. stake in the IMF is about 17 percent — it is hard to imagine such modifications doing anything but increasing the risk to American taxpayers. According to a Wall Street Journal analysis of the IMF’s involvement in bailing out Greece, “the U.S., Japan and big European countries are…financ[ing] a larger percentage of IMF funding than their quota would suggest.”
FOR AMERICANS, IT IS LIKELY that European financial ills will be the most significant international story of the year even as many of us sit comfortably around our fireplaces, looking back on the incredible rollercoaster of 2011.
Financially, 2011 was indeed a remarkable year. That the S&P 500 index ended the year a small fraction of a point away from where it began the year masked one of the most volatile trading seasons in my more than 20 years of trading. From late July to mid-August, the market plunged about 18 percent, then went through two months of mind-numbing volatility, before staging a 15 percent rally during the historically terrible month of October. Late November and early December saw a sickeningly rapid 8 percent fall in a matter of days, followed by a just as rapid recovery, leading into a relatively tame last few weeks of the year.
Given the risks from Europe as well as Iranian sword-rattling regarding blocking the Straits of Hormuz, through which 20 percent of the world’s entire oil supply is transported, continued market volatility appears likely. Adding in the fact that the outcome of the 2012 U.S. elections appear far from certain, investors should not be lulled into complacency by periods of stock market quiet.
While most “retail” investors don’t spend as much time thinking about bonds as about stocks, the bond market is far larger than the equity market, and its performance in 2011 was truly remarkable: the interest rate on the federal government’s 10-year note dropped from an already hard-to-believe level of about 3.75 percent to end the year at less than half that level, roughly 1.87 percent, offering fantastic mortgage refinancing opportunities to those few Americans who can still convince a lender to give them a loan and whose home isn’t worth less than the mortgage amount.
The bond market’s message is (at least) two-fold: First, excess capacity in our economy (in terms of factory capacity utilization and current unemployment levels) are leaving investors with no fear of inflation despite near-zero short-term interest rates and the nose-bleed heights of the Federal Reserve’s balance sheet. Second, investors are afraid of many other investments, something also seen in the 10 percent rise in the price of gold in 2011 — although it ended the year far off its highs somewhat mirroring gains in the U.S. dollar as the Euro weakened.
If, and it’s a big if, Europe seems on a path in 2012 to find a graceful way to deal with its long-term issues, the fact that the U.S. economy is performing modestly well means that bond investors are taking tremendous, almost dot-com-bubble-like risks loaning money for ten years at under two percent. Little stands in the way of a major bond market sell-off, especially since doubling current interest rates would still leave them quite low by historical standards. Such a sell-off would do great damage not only to the stock market but also to the financial situation of the U.S. government, which has to “roll over” debt on a regular basis. If interest rates rise substantially, forecasts for U.S. deficits and debt will explode along with them, causing both political and financial turmoil.
AND LAST BUT CERTAINLY NOT LEAST, 2012 promises to bring the most important election in recent American history. President Barack Obama has given Americans the clearest view since FDR — who turned a serious recession into the Great Depression with the exact same approach to business, economic liberty, and financial markets that Barack Obama now holds — into what Progressivism really means.
It means nothing more and nothing less than a tyranny of the bureaucracy, with the piling on of elected officials who think that Americans are too stupid to make their own decisions, that the constitutionality of a law is not “a serious question,” and that it’s just fine to pass perhaps the most expensive law in world history so that people can then find out what’s in it.
It is difficult to imagine that people (other than members of public sector unions) will look at their ballots this November, see the name Barack Obama, and say “sure, let’s do that again.” But difficult and impossible are not the same thing, especially with Obama and unions aiming to spend a billion dollars on his reelection.
Changes in the Republican nominating process, giving delegates proportionately in early states rather than a winner-take-all system, means that the GOP’s nominee may not be known until mid-spring. This is not all bad news for Republicans. On the one hand, it is reasonable to fear the damage Republicans may do to each other, including to the eventual nominee, in a hard-fought primary season. On the other hand, having a battle-tested nominee bodes well for the sure-to-be-brutal fight against Barack Obama and his henchmen. Furthermore, a spirited Republican contest keeps Barack Obama somewhat out of the news, reinforcing the idea that he is barely competent and simply not a leader while giving compelling evidence against the left’s usual talking points that the Republican Party is one of no ideas.
A man of faith in a godless age is hitting Americans where it hurts.
Mr. and Mrs. American Spectator Reader, let P.J. O’Rourke talk sense to your kids.
In Britain, defending your property can get you life.
The debacle of this president’s administration is both a cause and a symptom of the decline of American values. Unless Congress impeaches him, that decline will go on unchecked. An eminent jurist surveys the damage and assesses the chances for the recovery of our culture.
It won’t take long for conservatives to scratch this presidential wannabe off their 2008 scorecard.
The American Christmas, like the songs that celebrate it, makes room for everybody under the rainbow. Is that why so many people seem to be hostile to it?
Was the President done in by the economy, or by the politics of the economy?
H/T to National Review Online