5 Predictions for 2012

By Charles Goyette

“It's tough to make predictions,” Yogi Berra is supposed to have said, “especially about the future.”

It is tough.  I would like to predict Ron Paul’s presidential election in 2012, in which case I could easily predict that America will set out on the return road to being a republic of peace and prosperity.  But the American people have made so many bad political decisions lately, that it is much easier to make predictions about the unfolding of the global debt crisis.  So here are 5 safe predictions for 2012 that can help you protect yourself and your family in 2012 in the event Americans don’t wake up in time and elect Congressman Paul. 

#1: The U.S. and global debt problems will prove to be bigger than the conventional wisdom acknowledges.

In one of the most boneheaded calls since Ben Bernanke claimed the subprime mortgage crisis was contained in 2007, Moody’s Investor Services asserted two years ago that "investors’ fears that the Greek government may be exposed to a liquidity crisis" were "misplaced." Frankly, it’s no surprise when Moody’s misses something, but the conventional wisdom has joined in on underestimating the sovereign debt crisis �" which explains why so many banks are holding bad European debt. 

Similarly, prolonged Washington debates about raising the ceiling on the visible portion of the U.S. national debt, now $15 trillion, only succeed in diverting attention from the enormity of the hidden debt, which includes a staggering $116 in unfunded liabilities.  Meanwhile a downturn in China will impact that country’s willingness to keep funding U.S. debt. 

#2: The solutions advanced by the governing classes will continue to be inadequate to the problem.

Just as the scope of the debt crisis is downplayed, the fixes offered are always inadequate for the true scope of the problem.

Having ineffectively tried to hold the line on the Greek crisis, the European Central Bank and the International Monetary Fund are up to their eyeballs in Greek debt.

Kyle Bass of Hayman Capital notes the ECB has been buying Greek debt since rates were 6.34%; 10-year Greek rates are now an astonishing 32 percent. "If the ECB can’t hold back Greek rates, what makes anyone believe that they can do anything for Italian rates (where Italy’s debts are $3 trillion while Greece was a paltry $500 billion)?"

The governing classes have responded to the compounding U.S. debt inadequately as well. The automatic provisions triggered by the failure of the congressional deficit reduction super committee target $1 trillion in budget cuts over nine years.

That represents cuts of just over $100 billion a year, while the federal debt grows by that amount each month. And as if to say, "Crisis? What crisis?," the politicians saw to it that those cuts don’t begin until 2013, coincidentally after the presidential election. To add insult to injury, the plan counts on highly unlikely savings of $169 billion from lower interest costs going forward.

#3: With each new state initiative on the debt crisis, the media will breathlessly report that the problem has been solved. The equity markets will try to take a ride on those reports.

On October 27, European leaders in Brussels announced "a blockbuster package" to stem the debt crisis. At the same time, there was euphoric talk that China would somehow ride to the rescue. The Dow jumped 340 points, almost 3%, only to give it all back in a couple of days.

A month later, action taken by the Fed and other central banks �" once again aimed at providing liquidity instead of addressing the underlying problem of debtor solvency �" was good for 490 points.

It is little different than the giddy announcement three years earlier when 15 Eurozone nations agreed to provide their banks with more liquidity and fresh guarantees. As we have learned, the move did nothing to solve the debt issues that have only grown since then. But the news spiked the Dow 936 points that day �" a gain that was also soon given up.

There are always some investors who are taken in by the latest in an unending string of breathless announcements that the debt crisis has been fixed. Wall Street gladly separates them from their money. Remember, the problem was years in the making. Its solution will demand a long process of costly adjustments and debt liquidation. Real solutions will not be greeted with euphoria.

#4:  It will become increasingly difficult to delay a systemic global monetary breakdown.    

So far, some of the worst consequences of the global debt and monetary breakdown have been papered over and delayed.  But they cannot be avoided. That is because the debt is too big to be backstopped forever. Despite knowing that Greece lied about its deficits to gain admission to the Eurozone, naïve ratings analysts, state officials, regulators, bankers and investors all believed that Greece would be forever backstopped.

Maybe Germany could backstop Greece, but who is left to backstop Italy? China? But a third of China’s reserves are already backstopping the U.S. Treasury, more backing Freddie and Fannie.

Can the Federal Reserve backstop everybody? It’s been desperately trying to keep the American people from finding out just how much it has been backstopping the rest of the world. And what backstops the Federal Reserve?

Only the printing press.  Therefore:

#5:  For astute investors the allure of gold will grow. 

Gold, which is nobody’s liability and doesn’t need to be backstopped by anyone, will increasingly serve in a monetary capacity in 2012, despite the best efforts of the fiat money of nation states to compete with it.   

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Charles Goyette’s new book, RED AND BLUE AND BROKE ALL OVER: Restoring America’s Free Economy, comes out in March.  And coming in February 2012, Charles Goyette's Freedom & Prosperity Letter.