Everyone is worried about the damage the “fiscal cliff” might do to the US economy in 2013, but the reality is that’s only one of the potential problems in our 2013 US Economic Forecast.
At present there appears to be four problems – aside from the fiscal cliff – that could throw the US economy into recession in 2013.
These are international problems that include:
The problem is no country has ever survived a debt/GDP ratio above about 250% without defaulting. Britain did succeed with this in 1815 and 1945, but on the second occasion it relied on exchange controls, inflation, and dozy domestic investors, while on the first occasion it had a government under Lord Liverpool far more capable than anything we have seen in the last 185 years.
The point is, if Japan gets a weak coalition after its election, the market may panic and cause a Japanese government default.
The Eurozone crisis is soluble – by the weak sisters leaving the euro – but this solution is unacceptable to the EU political elite, so we may get a crisis, a major default, a European banking collapse and deep recession instead.
China’s problems are hidden in its banks’ balance sheets. India needs a government that does not overspend (fat chance!), as does Brazil. As for Russia, its military will soak up all its gigantic oil revenues and its leaders will embezzle any money the Western banking system is foolish enough to lend it.
These crises will worsen in 2013. At some point they will combine into a gigantic BRIC crash, affecting the whole world economy
As for the fiscal cliff, the problem is that the package of “cliff” policy changes involves mostly increased taxes, so they will cause a recession of their own. That would, however, be salutary.
Since we do not currently have a banking crisis and have not levered ourselves up too far, an early recession would be fairly short and uncomplicated, and at the end of it we would more or less have solved the Federal deficit and US debt problems.
So, we should welcome this particular “problem” and hope the politicians don’t manage to avoid it. As I discussed earlier, facing the fiscal cliff would solve 77% of the deficit problem.
Should the politicians avoid the fiscal cliff, most likely by putting taxes up on high incomes while leaving most of the budget deficit in place, the short-term prognostication isn’t all that wonderful.
US economic growth has been held back in the last few years by the blizzard of regulations coming out of Washington, and there’s reason to believe there is an especially heavy storm of them coming in the next few months, having been held up before the election.
Thus, no matter much money Ben Bernanke creates, the US economy is not going back to robust growth in 2013. Creating more money will just increase inflation, and together with the continuing budget deficit will suck capital out of the US towards our creditors such as China and Japan.
In the long run, a recession is coming, like it always was. With bad policies in place worldwide, that recession will almost certainly be less painful if we get it over quickly, and don’t delay it into 2014 or later.
After all, with each year that passes under the current policies, the level of foolish investments in the financial system increases, so a delayed recession might well involve another financial crisis, like 2008 – and we’ve seen how much fun that was.
Overall, 2013 looks like a rough year for the economy. Gold and stocks in well-run emerging markets (of which there are only a few) seem to be the best safe havens.
Martin Hutchinson
Contributing Editor, Money Morning
Publisher’s Note: This article first appeared in Money Morning (USA)
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