January 3, 2012
It has been quite a while since I made a written forecast of any sort about the economy. In fact, the last one I could find dates back to July 2009 (2016: The End Of This Recession?).
In that post, I said that, “My own personal guess is that we have another two or perhaps three years before any public sector slowdown starts to bite. That is 2011 or 2012. But then there will be a period of real depression while the capsized public sector tries to right itself.
What might that take? Four or perhaps five years? Using my recession-ready-reckoner (a term I ought to get copyright for) we are looking at between 2015 and 2017. So I’ll play it safe and suggest 2016.”
Looking back, that is proving to be disturbingly accurate. Though I admit that I failed miserably to spot the extent to which the euro would suffer. In something of a schoolboy error, I presumed that the debts could be repaid by some significant belt-tightening…
While a lot of the belt-tightening has clearly begun, or is planned to start soon, there is going to be much more of it than most sensible people would have thought necessary.
Starting the year off with some doom and gloom does not seem like the start I want to make, but looking around, I find it impossible to imagine that Europe and the world has anything other than a very deep recession about to arrive. The economists that work from chart to chart will use terms like “double-dip” but this is still a part of the overall recession started in 2007/8. Anyone familiar with Ralph Elliott’s Wave Theory will recognise the long term downward trend.
The theme of the coming year must be the squeeze because whoever or whatever you are, there is tightening. Be it to banks and their lending to small businesses, banks lending to each other, wage rises or lack thereof, benefit cuts, lower consumer spending, a lack of new job creation, government spending on infrastructure and on and on, there will be squeezing.
This is to squeeze the debt out of the system. While it seems impossible to know how long it might take, this is the trend. The question is, can we all become liquid and solvent at the same time? This is the challenge to us all as individuals, not just to governments.
Just how much more liquid and solvent Europe can become before the euro crisis makes the effort academic, who can say. But try we must.
This is likely to be exacerbated by the incoming Basle rules that require banks to sell large amounts of assets to improve their balance sheets. Banks improving their balance sheets must be a good thing, but the simultaneous mass selling of assets won’t be good for markets. (The Economist described the situation well a few weeks ago.)
In fact, it would seem reasonable to expect volatility to be all over the map, as it was in 2011, but with a stronger downward trend. This probably means that the kind of big swings in the markets, similar to August 2011, should be expected. If the euro fails to survive the year, expect stock and bond markets to go into meltdown and then to be closed for short periods.
The news of a few weeks ago that banks were taking up borrowing facilities from the ECB suggests that the threat of a full-on credit crunch has not left us. In fact, the scale of the borrowing suggests that European banks were very close to the cliff edge. Of course, borrowing from the ECB needs to be a fairly temporary measure, but the banks need to work their way through this to stability themselves. Just like governments and individuals, they need to be liquid and hold much less debt.
All of this will squeeze politicians too. There are some big spending requirements on the near horizon (climate change for example) but no money to spend. With welfare costs rising, it would seem that civil servants and the military will be the big budgetary losers. There is a certain logic to this – how large a military do you need if everybody else is too financially strapped to wage a war with or against you?
Despite the recent commotion and rhetoric, I don’t see much changing between the UK and the EU. David Cameron has avoided a nasty referendum and pleased some people at home. The other 26 member states will do their best to agree a ‘financial compact’ that Germany is happy with and they can shoehorn through their own parliaments. In other words, the agreement will be vague and difficult to interpret with strict financial controls notably absent.
The real question for me is how many times in 2012 will Brussels be able to host a summit that is “make or break” where nothing is made and nothing broken, in fact, no obvious progress is visible? Sooner or later, the failure of Europe’s political leaders to agree to anything substantial will render them irrelevant to the wider world, a superpower sized Belgium.
Hopefully, I am wrong…financialguy