The Lull Before The Storm: What’s Coming in 2011

Artfully phrased economic Dooooooom!  From Gonzalo Lira.  Excerpts:

To be sure, there were other important stories in 2010—the Mortgage Mess, Wikileaks, Wayne Rooney. But these three issues—auguries of EMU collapse, successful Fed monetization, and commodity price rises—are the ones that mattered on a macro-economic level this past year.

In 2011, every other financial story will be either a cause or consequence of one of these three issues: Guaranteed.
Europe..
Europe is in deep shit—there’s really no polite way to say it.

All of the EU, really(Germany and France also.  Indirectly, at the moment, but they are not insulated from events.) but specifically, Spain..

Not “Spain is in trouble”—that’s obvious, but that’s not my point: Spain is trouble. Trouble for the German banks that own so much of the Spanish debt. Trouble for Germany, which is propping up its insolvent banks (What, you think German politicians are any less craven than American politicians?). Spain is trouble for the European Union, for what a German banking crisis might mean for the EU as a whole and as an institution.

More than anything, Spain is trouble for the European Financial Stability Facility, because Spain is too big to be saved—and there’s really no way to finesse that hard fact.
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How the EU and the ECB handle an eventual Spanish sovereign debt crisis will determine the very future of the European Union.

Because there will be a Spanish sovereign debt crisis—it’s inevitable. The Spanish balance sheet is not improving fast enough, even with so-called “austerity” measures, because even though the Spanish government might be cutting spending, the comunidades autónomas—roughly analogous to states or regions—are expanding their budgets in order to take up the slack, and thereby increasing the Spanish deficit.
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So when Spain goes into crisis—which should take place no later than August 2011, and perhaps as early as this coming March—the European Union’s collective and institutional reaction to this crisis event will determine whether a smaller, healthier European Monetary Union continues to exist, or whether the whole concept of EMU is ripped to shreds by events.

Which brings us to the United States..

There is a limit to sympathy: You can feel sorry for someone—but only up to a point. Insofar as the United States’ fiscal situation is concerned, that point has been reached, at least for me: I can no longer feel sorry for the American people.

Americans want more services and entitlements, but with less taxes—and then they’re all surprised when their local, state and Federal governments cross the edge of insolvency, and into the nightmare land of feverishly staving off bankruptcy.

During 2010, the Federal government debt finally crossed the 100% of GDP mark—and continued rising non-stop. Actually, the debt’s growth accelerated. Why? Because the Bush tax cuts of 2001—implemented when there was an expectation of surplus, with clear sunset provisions, and no massive war expenditures—were extended by the mindless Republican Congress and the spineless President, Barack Obama.
And:
In late 2010, we finally started to notice something which has been festering for years, like one of those yucky worms that winds up eating your brains and driving you mad: The financial condition of the U.S. States and municipalities—they’re bankrupt.

For fiscal year 2010, the states’ combined budget shortfall is $191 billion. Of that figure, $68 billion is offset by the Recovery Act—Obama’s stimulus. Currently, the 2011 combined deficit of the States will be in the neighborhood of $160 billion—but that doesn’t seem credible, considering the ongoing unemployment. Regardless, $59 billion of those will be offset by the Recovery Act—which still leaves at least $100 billion up in the air.

However you look at it, the States have a huge collective hole in their budgets. And this hole is going to get worse, before it gets any better—just like the Federal government’s massive yearly deficit.

Which brings us to Commodities:

Commodities rose drastically all throughout 2010: Every single commodity class, every single one of them rising by double digit percentage points—at least.
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I know I have the reputation for being the crazed hyperinflationista—but you don’t have to buy any of my dollar-hyperinflation arguments to acknowledge the fact that, a., commodity prices have experienced a sustained and enormous rise in their prices, and b., this sustained rise in the prices of commodities will inevitably hit consumers at all levels of the economy.

Therefore, I would expect food, heating oil and gas prices to rise considerably over the winter of 2011—that is, now. This will be a knee to the ‘nads of the American economy—indeed, to the world economies.

There’s really not much more to say, about the issue: A sharp rise in consumer spending on essentials would shove the American and world economies firmly back into recession, this time potentially with negative growth.

What happens after that? It depends on the fools at the helm of the good ship S.S. Depression II.

Lira's bottom line?

So bottom line: It’s looking like 2011 is gonna suck. But hey! At least two of these three story-lines are gonna come to their respective climaxes this year—so 2011 might well suck, but at least it’ll be exciting!

I'm wondering how each of these huge economic phenomenons will effect each other.  Any one of these three in stronger economic times would influence, drag, or overlap into the other sets of events.  With each of these world engines at critical and vulnerable points, what will happen if they all seize up close to the same time?  Could the overall effects be so much more than the sum of its monetary parts?  The cynic in me says "Of course."