I’ve had a weird feeling since the elections and Bernanke’s QE2 announcement last week. I think that the year 2012 will go down in history as a historic date, on par with 1776, 1860, and 1941. The next two years are shaping up to be nasty and brutish. The Republicans and Democrats will extend the Bush tax cuts in the next few weeks. That will be the last compromise. It seems compromise always adds $4 trillion or so to the National Debt. Republicans will put forth bills to reverse everything that Obama passed in the last two years. He will veto these bills. Gridlock will ensue. Fingers will be pointed. Investigations will dominate the airwaves. Both sides will be angling for the 2012 elections. The future of our country doesn’t matter to professional politicians financed by corporations, unions and other special interests. They only care about the next election.
While the two parties play their games, we will add another $3 trillion to the National Debt. The recommendations of Obama’s deficit commission, which hit everyone, will be ignored, shunned and scorned. None will be implemented or even considered. Another 60 billion barrels of oil will be extracted from the earth with far less than that amount being discovered. No energy policy or initiatives will be started. House prices will fall another 20%. The dollar will fall. Gold, silver, oil and agricultural commodities will rise. Unemployment will stay high. Sounds like a perfect storm.
The question is whether the whole thing holds together through the 2012 elections. Another economic collapse in 2011 or early 2012 could change the dynamics of our political system forever. I believe that Michael Bloomberg will use his billions to run for President as an independent in 2012. It is becoming more possible by the day that Obama is challenged by Hillary in the primaries. The Republicans are destined to nominate a standard issue neo-con like Romney, Palin, Thune, or Pawlenty. Bloomberg would appeal to moderate Democrats and some moderate Republicans. A true libertarian conservative candidate would have an opportunity to capture a decent portion of the electorate. A four way race could allow a new President to win with less than 25% of the vote. Without a candidate receiving 270 electoral votes, the election would be in the hands of the House of Representatives. The next President of the US will end up leading the country through the dangerous portion of the Fourth Turning. War, chaos and social unrest are on the horizon. 2012 will determine the future course of our country.
Perfect Storm – February 2013?
A cross-post courtesy of market veteran (and occasional robust NC commenter) Bruce Krasting
I wish I could get a penny for every dollar that is going to be paid to lobbyist to fight the various recommendations of the Fiscal Commission. As advertised, they basically took no prisoners save a small portion of the older population that would starve without a monthly SS check. I think this exception was in response to the deficit panel being referred to as the “Cat Food Commission”. They may have dodged that bullet, but just about every other group in society is going to have a gripe.
-The mortgage deduction would be largely gone. There are a dozen industry groups that will rain on that parade.
-Social Security would be “socialized”. Some say SS is a third rail. We are about to see that in action. A big savings comes from a recalibration of COLA increases. So right away you have 60mm Americans apposed to this.
-$1.1 Trillion of tax deductions would be done away with. Think of all the tax lawyers and accountants that will line up to cry about this one.
-Get this. Federal workers would be required to put up half of their retirement contributions versus the 1/14 that they currently pony up for. You can imagine the howls we will get on that.
-The military budget gets a hatchet job. So the entire military industrial complex will rise up with one voice to appose it.
-My quick read of the proposals confirms my prior expectations that anyone in America who is under 45 should just bend over now. Most of the pain of the fiscal commission will be felt a few decades out. This group of folks is getting creamed and as far as I know they have no advocate. As this plan gets rolled out I suspect that the opposition from younger people will rise to a level that will make the US look like France.
But none of these things really matter. What’s important is to focus on this critical comment:
4. Don’t Disrupt a Fragile Economic Recovery Start gradually; begin cuts in FY 2012.
Gradually indeed. There is a total of a whopping $17 billion of cuts in mandatory payments through January 1, 2014.
Next week there will be a great debate on what to do with the Bush tax cuts. Actually I don’t expect much debate at all. Our legislators hate to raise taxes and I don’t think they have the guts to do it now. They will point to the big unemployment numbers and pass the tax trash for 24 months. They will defer the hard choices on income taxes and the critical AMT.
Then there is good old Ben Bernanke. As of now his plan is to finish QE-2 next June. QE-1-Lite (the top up) will, in theory, be an evergreen program. But after 24 months the MBS portfolio will have been substantially reduced and the monthly prepays and related POMO Treasury buys will be significantly less than we are getting today. I think there is no stomach in America for a QE-3. The global (and now domestic) hostility to this crazy experiment makes the possibility of a 3pete decidedly slim.
So mark your calendars. Sometime early in 2013 we will self immolate as all of the promised steps of belt tightening, budget cuts, smaller government, smaller social payouts hit. At the same time taxes will be going up for every single wage earner regardless of what they make. High earners will get butchered. To top it off Big Ben will have to be throwing out a hefty sized anchor at pretty much the same time. The markets will surely see it coming.
The last transition of executive power was in the midst of an economic panic. Based on the timetable and the proposals in front of us we are setting up for a repeat. We will get the answer to that next week when the tax issue is pushed forward a few years. My bet is that hard choices on spending, monetary and tax policy will all be kicked down the road 25, 26 months. I wonder if our leaders understand that?
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