What To Expect For 2011

If you don’t believe in horoscopes, then I suggest looking at history to predict the future.

For starters, let’s remember Bill Clinton’s notorious campaign slogan, “It’s the economy, stupid.” The alignment (or misalignment, nowadays) of the economy is the number one thing on people’s minds. Most folks ask themselves, “What are my job prospects? Are my basic bills paid? Can I take care of my children?”

One thing is for sure: unemployment is still hovering around 10%, with no clear sign of budging. Federal government hiring and stimulus programs clearly haven’t improved the employment outlook.

Housing prices are still overvalued, compared to long-term trends, so the real estate market will most likely drop 10-20% in 2011. Despite government-backed FHA loans only requiring buyers to provide a 3% down payment, housing sales still remain stagnant.

And more banks went out of business in 2010 than in 2009. Despite the Federal’s massive “quantitative easing” (ie money printing) in the past two and a half years, banks aren’t doing much lending these days. Generally, business owners remain skeptical about the future, and most aren’t pursuing aggressive growth strategies---which require loans---right now.

Interest rates are essentially zero, but lending is still slow and banks are still failing. It’s like turning up the heat, but the chicken still won’t cook.

We have to mention the elephant in the room before we go any further: government debt (from overspending) and financial policy. All of these crazy banking policies and practices originate from the Federal Reserve and the laws of the Federal Government.

Again, let us take a look at history. Has the United States Federal Government ever downsized during wartime? Has the United States Federal Government ever downsized, period? (In the last 80 years?)

The problem with most governments (at all levels, really) is that they’re like teeny-bopper brats with unlimited credit cards. The spending spree never stops while Daddy still pays the bills. When Daddy exhausts himself with bills he can‘t pay---or in more recent cases, files bankruptcy---then the spending spree is over.

Greece, California, Ireland and Iceland all defaulted on their debts because their respective legislatures couldn’t summon the strength to reign in spending. They made just too many hand-out happy promises to constituents to clean house before the diseases set in from all the dirt.

So my prediction? Congress votes on whether or not to raise the debt ceiling soon. If the habit of zero political discipline continues, raising the debt ceiling is more of an inevitability than a prediction.

Many adjustable rate mortgages are set to adjust up this year: far more than did in 2007. The loan defaults that set off the Lehman Brothers’ collapse was the first bump that set off the downward spiral. Far more loans are poised to adjust this year than in 2007. The results in 2011 can only be disastrous for the economy.

Stick around for more posts to learn about the silver lining.