Just because Pope Gregory XIII decided some 430 years ago that we’d celebrate a new year this weekend, many of us have the idea that somehow, next week will usher in some major changes. I suppose that’s healthy because we seem to need some sense of a new beginning in order to deal with the same old problems. Here are three 2011 problems and my view of their prospects for being solved, or not, in 2012.
Although neither Congress nor the administration demonstrated any capacity to mitigate big problems in 2011, at least they pulled back from decisions that might have made these problems much worse. They did not, for example, decide to default on U.S. Treasury debt or raise taxes while the economy is once again showing signs of recovery. I don’t think anyone expects 2012 to bring much change.
Some do believe that the upcoming presidential election will be interpreted as a referendum on the role and size of our government, and that it will provide one political party with the “mandate” needed to solve our fiscal problem. But don’t count on it. We don’t actually have one big problem; rather, we face a tremendous number of small ones all bundled together in our tax code and government subsidy programs. Even the entitlement cuts we all know are coming will carry enormous complexity, because your cost savings may be my pay cut. Perhaps the election will make it harder for both sides to point fingers and make excuses. It better.
A big change occurred late in December when the European Central Bank (ECB) began to vastly expand its balance sheet by making unlimited loans on weak collateral available to European banks. Of course, we won’t call this policy shift anything as American or Japanese as “quantitative easing,” but it sure smells the same. This is significant because the ECB has implicitly assumed the role of the Eurozone’s economic policymaker, along with the concomitant responsibilities. Although this change won’t make the peripheral countries economically competitive or reduce their burdensome debt, it seems to have reduced the immediacy of the crisis—witness the recent successful Italian debt refunding. Expect Europe to rekindle its crisis mood more than once in 2012, but we can all breathe a bit easier for now.
Emerging economies’ weakness
Be careful what you wish for. A year ago we wished for an inflation-tempering slowdown in the major emerging economies. Now we wait to see who will successfully engineer the soft landing we used to talk about in the U.S. My money is on China to be successful, along with its closest trading partners. I believe the outcomes, however, will be as varied as the geographies: India faces stagflation, while Turkey faces a debt problem — again. For many countries, this is the first time counter-cyclical policies could be implemented on the way up and on the way down. I expect more successes than failures.
In the end, the calendar turns, whatever it changes—or doesn’t change —so, let’s move ahead with hope.
Happy New Year to all!