Hope and Fear – Part I: Year of Promise
“It is my guiding confession that I believe the greatest error in economics is in seeing the economy as a stable, immutable structure.” - John Kenneth Galbraith - A Journey Through Economic Time (1994)
- Fiscal stiffs
- Best laid plans
- No gold but oil
How did the doomers get 2012 so wrong? They spied the Mayan calendar and saw end-times December 21. Less credulous eyes saw the 13th Mayan Baktun, each Baktun lasting 144,000 days, ending on December 21. To the instant that end was followed by the 14th Baktun. This, the new and current Baktun that we are in, will end in another 394.3 years. Then another Baktun will start. On and on forever, as was the Mayan's philosophy of time.
Lesser doomsday scenarios also failed to materialize for the same reason: careless analysis.
The euro zone didn't disintegrate, Japan's bond marked didn't blow up, China's economy didn't melt down, oil prices didn't crash, and the U.S. economy did not collapse into a second Great Recession.
Defying expectations of doom, the benign economic events of 2012 set the stage for complacency in 2013, despite lingering post-financial crisis anxiety. Above the distant clatter of war sabers in Asia and a metastasizing Islamic extremist threat in North Africa, the comforting hum of recovery dominates the sphere.
The housing market correction that began in 2006 leveled off in 2012. Prices begin to rise as long-term unemployment finally eases. The kids move back out of Mom's and Dad's house where they took refuge after the crisis. New households begin to form again and relocate to new jobs that are at last appearing.
The debt ceiling standoff will end in a stalemate as did the fiscal cliff. The ECB will pledge more funds to prevent a liquidity crisis in the euro zone next time one arises. Barring war, China will continue to shuffle paper and fib its way to meet growth expectations.
All of these salubrious trends, taken together, may not be enough to excite the animal spirits into speculative fervor but will be enough to lull investors into the kind of complacency that can later lead to bullish optimism and all of the errors of judgment entailed.
What could possibly go wrong, outside of the unlikely event of Japanese and Chinese warships or fighter jets bumping into each other as they contest awkwardly for the Insecure Nations Sovereign Rights Defense Vigilance Prize in the East China Sea?
Not all signs point to the kind of self-sustained recovery that justifies the optimism I'm seeing today.