Predictions, as Yogi Berra observed, are hard, especially about the future.   But it is occasionally worthwhile to read the stars, tea leaves or goat entrails–pick your favorite metric–and try to ascertain something of what the future may hold.   Danger abounds, particularly in predicting aggregate economic performance.  Black swans aren’t rare, they’re proliferative.  But here goes anyway.  I’ll start w/ observing and assessing the pieces, and then try to pull together the whole.

Housing

The market continues to contract.  Prices declines are accelerating.  Housing doesn’t seem, at about 10% of GDP, to be such a big component of the aggregate economy, but the 10% only measures the direct effect of building and improving and selling housing.  The knock-on economic effects of a thriving housing market, where prices have only a one-way, upward trajectory, carries immense power to leverage economic performance in the same direction.  The S & P Case Shiller Index of Home Prices indicates prices that are nearly touching their April 2009 lows, from FRED, the data base created by the St. Louis Federal Reserve Bank: 

Graph: S&P Case-Shiller 20-City Home Price Index

 

The housing market boom really started in the late 90’s, about 1997, so the chart doesn’t show enough.  Suffice to say, Newton’s second law applies here.  What goes up must come down, and usually in the arena of human and social behaviors, pendulums swing further (i.e., past equilibrium) than lessons from physical science would indicate.  My guess is that the “bottom” in housing won’t be in until this index reaches about its base of 100, so another 40% or so decline in prices.  The declines have come slowly of late and will continue to do so, at least until the economy falls into full-on contraction, after which the declines will be steep.  The new home market is abysmal already:

Graph: New One Family Houses Sold: United States

The number of new homes being sold is less than has ever been seen in the history of record-keeping, going back to the 1960’s.  Unfortunately, there still is a glut of homes.  The US Census Bureau’s latest look at homeowner vacancy has the rate at 2.6%, down slightly from its high in 2008 of 2.9%, but still a point higher than its low before the boom of about 1.6% in 1996. 

The US housing market is falling, again, but not as noisily as last time.  Who’s got time to worry about the housing market when we can celebrate our favorite team’s victory, like that our team of Seals scored over Osama Bin Laden a week or so ago?

Money

 The Fed will soon be finished with its latest phase of money-printing designed to prevent prices from doing exactly what they should in an economic contraction (i.e., decline).  Except in the housing market, their strategy has worked (which incidentally explains a great deal about the severity of the problem in housing–while all other prices increase, housing prices still decline).  Consumer prices have resumed climbing, and are now higher than before the slight decline during the recession:

Graph: Consumer Price Index for All Urban Consumers: All Items

Gas prices have enjoyed a particularly healthy recovery:

Graph: US Regular All Formulations Gas Price

 

As well have producer prices:

Graph: Producer Price Index: All Commodities

 

And particularly so, agricultural commodities:

Graph: Producer Price Index: Crude Foodstuffs & Feedstuffs

But money velocity has apparently hit a plateau and begun again to decline, indicating one of two things:  declining aggregate economic activity or an excessive supply of money for the economic activity that is taking place.  Price increases in the face of declining velocity indicate the latter is most probably the case.   

Graph: Velocity of M2 Money Stock

But what of the price/rent of money?  If there is excessive money being supplied, then the price of the money, i.e., its interest rate, should be low–even negative on a real basis.  A colorable argument can be made that the price of money has been negative for some time:

Graph: 10-Year Treasury Constant Maturity Rate

Is there any expectation that the purchasing power of the money being used to buy a ten-year US Treasury bond will not erode by more than 2.5% over the course of the holding period?  Exactly.  Real rates are negative, I don’t really care of economist’s protestations to the contrary.

Employment

The metric that perhaps provides the best snapshot of aggregate economic performance in a meaningful way for the individuals comprising the economic organism is the total employment level; never mind unemployment rates, subject as they are to the whims of potential employees and heavily impacted by unemployment insurance.  Total employment has a ways to go before returning to its latest high, and this in a population that is growing a little under 1% a year:

Graph: All Employees: Total nonfarm

It took until mid-decade after the 2001 recession for employment levels to return to their previous high.  At today’s rate of increase, assuming it continues, it will be 2020 or so until total employment regains its previous level.

Government

The debt ceiling must be increased, and it appears even that housekeeping task won’t be accomplished easily in this discordant political atmosphere.  Here’s what government debt (the total of all that is owed) looks like about now:

Graph: Federal Government Debt: Total Public Debt

And here is the deficit history (the deficit is the annual amount by which spending exceeds revenue, which is then added to the government debt):

Graph: Federal Surplus or Deficit [-]

Of course, government deficits exceeding a trillion dollars annually are forecast to obtain for a much longer spell than the longest term of any politician in Washington.  Maybe we should forget this representative democracy nonsense, and sentence some poor bastard to a life sentence as potentate.   Then at least we’d know to whom to apply the guillotine’s slice when the country is bankrupted by fiscal perfidy.  As it stands, no one can be convicted of killing Caesar, because no single slash of the knife is alone sufficient to do the job. 

Summary and Predictions

I have long argued that 2011 is apt to be to 2012 what 2007 was to 2008.  2007 was when the excesses of years of Fed Reserve inflationary policies finally peaked and plateaued, teetering along the edge of the precipice for a few months until the crash in the latter half of 2008.  But history is never exact in its repetitions.  The history of human social development is like a wheel rolling along a path.  The same point on the wheel touches the ground repetitively as it turns, but never at the same spot on the ground.   Even if the point on the wheel, i.e., the general social conditions are the same, the environment in which they are experienced is always different.  So, if my theory that 2012 will be analogous to 2008 is correct, marking an exceedingly, but not surprisingly short cycle, it will look different than 2008 in its particulars and its catalysts, but not so much in its effects. 

Considering that not much of anything substantive has changed in the economic picture to remedy the causes of the financial crisis except that private losses have been socialized; that the pendulum of economic contraction during the crisis swung lower than it should have (except in the housing and financial markets), yet has not recovered as it ought; that the financial crisis was used as an excuse to crudely substitute statism for capitalism across broad swaths of the economy; that inflationary monetary policies have only a short-term (<2 years) expansionary effect on demand which yields supply excesses that ultimately result in the very deflation that expansive money is intended to prevent; that 2012 is an election year which will likely yield an even more discordant political atmosphere with higher stakes (control over about half of the economy) than was experienced in 2008, I stand fast to my prediction.   2012 will be a watershed year, marking the return of financial and economic panic, but with a cupboard bare of salves and poultices for ameliorating its symptoms. 

In the short-term from here, the economy will hum along–not getting much better, nor much worse.  But later this year, probably due to the political impasse that increasing the debt ceiling will cause, the cracks in the economic foundation, having only been plastered over with Federal Reserve notes, will begin to reappear.  It would seem aggregate performance would not have far too fall, but lofty valuations in commodities and the stock and bond markets indicate the inflationary impact of Federal Reserve policies, which, it must be remembered, will accomplish the exact opposite of their intent, i.e., the Fed’s inflationary policies will ultimately yield price crashes in excess of what otherwise would have obtained.  Another deflationary spiral will set in, but without the option of printing money to forestall it (actually the option will still be there, but to no effect).  By 2012, in the midst of another presidential election, a crash of activity similar to that which occurred in 2008 will again happen.  When everyday economic decisions depend on the state, any potential disruption to stability in governance bodes ill for aggregate economic performance. 

Though political discord and fiscal impecunity will combine with Federal Reserve monetary mismanagement as the immediate cause of the calamity, its efficient cause runs much deeper.   The US economy has been on an unsustainable trajectory since its inception.  The foundation of the US economy, in fact of the whole of its society, is growth–relentless, unlimited growth.  But no organism ceaselessly grows.  The US has, in its present configuration, reached the limits of its potential growth.  Its cultural foundations are being swept away in a tide of demographic decay.  Its native population is rich and growing old.  Rich, graying populations are through with growing.  In the US, some of the growth will be replaced by its continued attraction of immigrants, a phenomenon also happening in other developed economies, except Japan, which is slowly dying due to its strict anti-immigration stance.   In the meantime, the friction of old being replaced by new will impair aggregate economic numbers for years, during which time the US will inexorably decline in wealth, power and prestige across the world.   There will be no sustained economic growth into the baby boomer’s retirement.  It simply is not possible to have that huge a cohort of the population growing old and dying while at the same time enjoying vigorous economic expansion. 

The only real question is how painful the lack of growth will be.  Just because McDonald’s and Exxon won’t sell more burgers and gasoline every succeeding quarter does not mean that they won’t sell any burgers and gasoline.  People will still eat, the number of them just won’t be increasing as fast as it once was.  People will still drive, but as little as possible, as the relative price of anything bought overseas will get increasingly more expensive.  (Did I explain that dollar devaluation and then abandonment as a reserve currency will accompany the stasis and decline of the empire?)  Eventually, not in my lifetime (I’m almost fifty), but eventually, the cycle of decay and decline will cease and the US, if any of it remains, will resume growing.  If the US no longer exists, then the cycle will start anew with whatever people inhabit the area now known as the US and North America. 

In the meantime, I wouldn’t get too giddy every time the US pulls a stunt like killing Bin Laden, believing it to be the manifestation of some sort of destiny determined by God that the US is exceptional, to include doing what no nation, empire or tree has ever done–continue growing to the sky.  It won’t.  And I believe 2012 will prove to be another touchpoint, as was 2008, in its turn from growth to decay.

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