The tumultuous 2011

[luvdovz.livejournal.com]

Some hurried to proclaim 2011 to be (well, at least they expect it to be) a bit better than 2010. The world is slowly coming out of the financial crisis, etc. But not so fast. Let's not forget that the new year begins with some serious concerns about a number of economies, some of them of primary significance.

One major concern is the shift of balance in the world economy - it's a gradual movement from a waning western economic dominance toward an ever more visible eastern dominance (to put it in general terms). The rise of the developing world, particularly China and India and some others, coincided with a weakening of the west, particularly USA and EU. This leads to a rupture in the consensus about how the world's fiscal system should be run. Simply put, China favors a strict state control on the economy while USA prefers solutions based on the principles of the free market, hence the volatility of the situation.

These tensions have lead to the recent currency wars, where the major economies did their best to devalue their national currency to increase their competitiveness. China used centralized control to achieve that, while USA did it by the good old trick of printing money in scales unseen before. All this made the life of the smaller economies pretty hard, and in their turn some of them were forced to respond by tightening the control on the capitals.

Add the high deflation risk in USA which could lead to more "easy quantitative solutions" (read: printing more money) and thus an even bigger pressure in the currency war and the control of the capital. This makes the concerns for the world economy and its ability to cope with the situation very valid.

An added risk comes from the inflation which puts more pressure on China and the other Asian regions. There's real risk that the inflation in China could get out of control. The central banks in Asia are realizing that they ought to increase the rate at which they're tightening their monetary policies if they want to bring down the inflation risk. But if tightening the fiscal policy is the response they're aiming for, the result could very possibly be the slowing down of the Chinese economy which would have a negative impact on the rest of the region and the world.

Meanwhile China could pursue a policy of creating deflation on the property market which at the moment is threatened to become a balloon that could burst and affect the savings of a lot of people from the young middle class in the country. So the main task for China and the rest of Asia should be keeping inflation under control at any cost and preventing economic disbalances that could potentially come due to a too fast influx of capital.

Things don't look any better for Europe. Greece and Ireland received billions of loans to save their economies, and there are concerns that Portugal might soon need help too. Many fear that the worst is still ahead if Spain's problems deepen. Spain is very big and its difficulties are very big too. If Spain fails it'll be horrible news for everybody, not just Europe but the whole world because that could lead to the failure of the Euro. If the Euro fails, the Lehmann Brothers failure would look like a picnic in the park. Such an event would surely push the entire Euro zone into depression. And if you think that problem wouldn't spread across the Atlantic, think again. These economies are very closely interconnected.

2011 will also be a year of tightening the belts in USA, Asia and Europe. No one else knows this better than people in UK. Everyone's attention is fixed on the economy, and for a good reason. Inflation is a huge problem in UK, prices are rising while salaries are taking a dive or staying stagnant in the best case. Goods and services that are vital for the economy are affected by the most drastic rises. Energy bills, food and clothes are experiencing the biggest price surge. It'll be a gloomy year for consumers and UK will be out of the game for a long time, it seems. Add the sting of the vast laying off, cuts in public spending and especially social security not only in UK but most western countries and you get the picture.

One of the major risks in 2011 will be the risk of political turmoil because most governments are taking very hard and unpopular fiscal measures for cutting their deficits, and that could suffocate the recovery and in a year we could be seeing a western world still struggling with a weak economy, facing slow recovery, if any, etc, while some of the so called "developing" economies are growing 4-5 times faster and this further shifting of balance is sure to cause conflicts as those new players would also demand to strengthen their position politically.

Surely it'll be a hard period to navigate across, with huge challenges and with many political and economic casualties in most corners of the globe. How do you think 2011 will affect your respective country? Personally, my native country (Iceland) has already sunken down the toilet mostly due to the greed of its bankers and many of its citizens who fell for their easy-money stunts and things won't be the same again for a long time as it has started its long and steep ascent back to normalization; while my country of residence (Sweden) is enjoying a relative tranquility on the economic front due to constructing a somewhat healthy economic framework and taking some moderate and smart precautions over the recent years. Apparently some places will have it harder than others, based on a variety of factors. What about yours?

Comments

[underlankers.livejournal.com]

My prediction is that real wages in the United States will remain stagnant another year, the GOP will try to repeal every single act of the President along with impeaching him as a Kenyan Islamofascicommunazi avatar of Tzeentech, and that if the GOP successfully repeals Pay as You Go we'll have a deficit Bush's Administration would envy. The Chinese, meanwhile, will be gaining an increasingly great portion of our debt and as our creditors will be amassing an increasingly greater influence on our foreign policy. I'd like to believe that would lead to a simple resolution of the Korean Peninsular crises before the shit hits the fan but I'm also a realist.

One thing is for sure, though, US problems will be blamed on everyone except the people who are responsible for them.

[luvdovz.livejournal.com]

a simple resolution of the Korean Peninsular crises before the shit hits the fan
Explain please?

[underlankers.livejournal.com]

Greater Chinese influence over the USA would mean neither side can afford to prolong a potentially catastrophic flashpoint. Hence, economic self-interests for both sides would dictate dealing with the problem now, as opposed to later when the Kim Dynasty finally implodes and the refugee crisis starts. The more the USA and China would be tied together, the less likely is it either one would consider any risk of armed conflict desirable because the two would be too intertwined to permit it.

[luvdovz.livejournal.com]

That's actually some pretty good analysis.

[underlankers.livejournal.com]

It's the principle behind the EU and it seems a pretty solid one. Given that the DPRK for the Chinese is like say, the Caribbean for the USA the best solution to prevent either side's hawks getting undue influence is to make even them realize how much of a bad, senseless idea a war would be. The USA would not be able to go to war with the PRC, sure, but the PRC would also be unable economically to risk war with the USA.

Short of that, however, you'd have the status quo with the USA not really interested in the DPRK's problems and the Chinese trying to put off the evil day as long as possible.

[onefatmusicnerd.livejournal.com]

I would like to point out that the only time the world economy has been more interdependent was just about a hundred years ago, and that really reduced the likelihood of a major war.

[underlankers.livejournal.com]

People warned at the time that a long general war between the Powers would produce an utter financial catastrophe and would prove unaffordable in the long run. Some writers even predicted the existence of the tank and extrapolated from things like the Petersburg Siege and the Russo-Japanese War what WWI would actually look like well before the guns started firing. The problem was the people who said it was unaffordable were right and Europe's still paying the price for that grilled cheese sandwich in Sarajevo.

[telemann.livejournal.com]

The new year might also bring a moderation of China's new arrogance, which will then dampen tensions in East Asia. Over the past year, China —booming while the West has been reeling — has been assertive with regard to Japan and South Korea and even the U.S. Since Obama took office, his Administration has made a series of overtures to Beijing and received almost nothing in return. But senior Chinese officials seem to recognize that they might have overplayed their hand, and perhaps they will spend 2011 signaling their benign intentions to East Asia and being more cooperative with the U.S. In the most recent tensions on the Korean peninsula, Beijing has been more helpful than in the past in talking tough to its ally in North Korea.

I think he meant that. (http://www.time.com/time/world/article/0,8599,2039884,00.html)

[luvdovz.livejournal.com]

That's an interesting read.

[underlankers.livejournal.com]

Something like that. The PRC worrying about the DPRK is as sensible as the USA not wanting a threateningly hostile regime in say, the Caribbean or Mexico. That's not arrogance, that's rational geopolitics. Uncle Sam being in debt up to his eyeballs'd be the main restraint on our side.

[reality-hammer.livejournal.com]

Because by ignoring "PayGo" the Democrats didn't create deficits far larger than the relatively small ones under Bush?

You can't do math, can you? Even attributing the 2009 deficit to Bush (if you recall Democrats pushed the budget bill into 2009 so the new Congress and Obama could sign it) Obama's deficits are far greater (http://blog.heritage.org/2010/02/05/past-deficits-vs-obamas-deficits-in-pictures/), both overall and in average. Prior to the recession the deficit under Bush had declined to a paltry 1 percent of GDP. The deficit for 2010? Ten times that amount. Democrat Congress. Democrat President. Democrat policies.

The chart above compares the President’s budget deficit projections to the Congressional Budget Office’s budget deficit projections under current law. In other words, the policy changes embodied in President Obama’s 2011 Budget puts our country $2.5 trillion deeper in debt by 2020 than it other wise would be if current law were left unchanged.

As for the blame part, you go that right. Dodd is getting out of town after laying one last turd on the country and Frank continues to wallow in it, safe in his liberally sculpted district.

Your job attempting to revise the facts is going to take a little bit longer for this topic!

[mikeyxw.livejournal.com]

"One thing is for sure, though, US problems will be blamed on everyone except the people who are responsible for them."

Absolutely. The blame lies on the voters who continually hire people who promise them both tax cuts and increased benefits while refusing to hire those who would put our financial house in order and on the US consumers (voters or not) who have been spending more than they have at an ever-increasing rate over the last decade.

[the-rukh.livejournal.com]

You couldn't just let us eat our Wheaties in peace, could you.

[luvdovz.livejournal.com]

Sorry... ;(
On the upside, if you have some raw cash right now... you could do miracles!

...I'm not helping very much, am I?

[the-rukh.livejournal.com]

No no, it's ok. The Wheaties are already ruined.

[meus-ovatio.livejournal.com]

So what you're saying is that Jesus will come back in 2011?

[ddstory.livejournal.com]

No, 2012. Learn that already!

[luvdovz.livejournal.com]

He's already here (http://en.wikipedia.org/wiki/Vissarion), duh.

[johnny9fingers.livejournal.com]

Good post.

But the hammers of this world will just dismiss it, alas.

[reality-hammer.livejournal.com]

There are no so blind as those you refuse to see.

[johnny9fingers.livejournal.com]

I would have thought that the substantial part of the OP's analysis is rather too Neo-Keynsian for your tastes.

[badlydrawnjeff.livejournal.com]

How do you think 2011 will affect your respective country?

We're in better shape to handle it than we have been in well over 2 years right now, but I'm honestly really concerned about an economic double dip.

[rasilio.livejournal.com]

I think 2011 is going to be the interim year.

For every sign of economic stabilization that there is out there there are 2 serious time bombs looming over it, the question is whether the economic world can stabilize and then begin to grow again before those time bombs go off. 2011 will be a year of watching and waiting to see which side wins that race.

Politically I see both wings of the ruling party working to secure their bases by playing it safe and working on popular bipartisan issues that don't really accomplish much and go a long way towards further alienating their bases in the process.

[malasadas.livejournal.com]

America solves its long term debt obligation problem by voting to turn the Baby Boomers into Soylent Green to be used in school lunch programs throughout the Sun Belt.

[the-rukh.livejournal.com]

I'm glad someone is coming up with Real Solutions.

[onefatmusicnerd.livejournal.com]

Win

[htpcl.livejournal.com]

DQ.

[anadinboy.livejournal.com]

the markets will boom safe in the knowlege of obama winning 2012.

[mikeyxw.livejournal.com]

Wow, the glass is certainly half full.

I expect we'll see the continuation of an uneven recovery. Things will slowly get better while giving plenty of material to those who go looking for gloomy financial data. Unemployment in the West will recover slowly but will still be painfully high for all of 2011. Job growth will be good in some months and not so good in others. I'll go out on a limb and predict that economic growth in the US will be okay, somewhere around 2.5%. Recessions caused by the financial sector take longer to recover from since the problem isn't the usual business cycle but rather that people need to accept that we really weren't as rich as we all thought we were. Remember the times when people used their houses as ATMs? It takes some time before people realize there is a shift, adjust to it, and the economy adjusts to their adjustment. Hopefully the FED is done printing money.

In the meantime, China will hum along until they hit their housing crisis and stop humming along quite so well. No idea when this will happen and how it will look, if I could predict such things, I'd be really, really rich.

[reality-hammer.livejournal.com]

We're going to spend the year blaming each other for what's wrong and claiming credit for what's going right.

Pretty much the usual.