I pray that America does not plunge into a 2nd depression. The challenge this time around, is that the current financial crisis is global and we are coming to the end of three major cycles in the American economy:
The Stock Cycle: We have seen long-term peaks in our stock market and economy very close to every 40 years due to generational spending trends(baby boomers): as in 1929, 1968, and it was the DOW 14000 in 2008
Oil and Commodity Cycle: Oil and commodity prices have peaked nearly every 30 years, as in 1920, 1951, 1980 -- and next likely around late 2009 to mid-2010
The Real Estate Cycle: We just went through the biggest real-estate boom and bust in the history of the world
The three massive bubbles that have been booming for the last few decades -- stocks, real estate, and commodities -- have all reached their peak and are deflating simultaneously. Additionally,
Europe: Europe may take as much as a decade to come out of its slump(please read http://sundarsblog.blogspot.com for Stratfor's analysis of the coming bust in Europe, especially the export-oriented Eastern European countries). Europe also has demographics working against it. Please read http://www.economist..com/
"The largest 13 EU economies have announced economic packages worth €90 billion, or 0.78 percent of their gross national product, from 1 September 2008 to 28 January 2009." But the stimulus packages may not work as planned. If the dollar remains strong against the Euro, American exports suffer.
Russia: The decline in the price of oil and other commodities implies that Russia will stay in a slump for a while as well. They will not soon be buying American products and services
The coming demographic disaster in Russia is also under-reported ("The country's population is declining by at least 700,000 people each year, leading to slow depopulation of the northern and eastern extremes of Russia, the emergence of hundreds of uninhabited "ghost villages" and an increasingly aged workforce. " Please read http://news.bbc.co.uk/2/hi/
Russia loses control over its periphery (Chechnya secedes, for example).
Japan: Continues its 20 year decline. "The strong yen has been hurting major export companies such as Toyota Motor Corp., which announced in November its plans to lay off 3,000 contract workers by the end of March 2009." Demographics also play against the Japanese. Since the Yen is strong, Japan is a market for American Manufacturing....But, WHAT AMERICAN MANUFACTURING???
Japan builds up its military again to protect its interests in the Pacific, as Russia and China get weaker. Japan emerges again to threaten America geopilitically by 2040. But in the short term, Japan is hampered by the global downturn in spending on its manufacturing products.
China: Those same demographic trends that helped to buoy the American economy after the tech bust are now working against us. The Boomers are largely finished. Their best spending days are behind them; it's now time to save for retirement. This means less consumption in the United States…which means less imports from China…which means less construction in China…which means less commodity usage…which means falling commodity prices and less disposable income in commodity producing areas like Russia, the Middle East, and Latin America…which means less sales for American and European multinational corporations….and the cycle goes on.
Demographics: China has had a 1-child policy since the communists took power. They have no social-security system. Therefor, a single person may be supporting her parents, grandparents and children under the same roof in coming years. Hardly a recipe for heavy spending by the Chinese population in the globalized economy. China's dependency ratio is high and rising.
Yes, China will continue to prop up the dollar. But the Baby boomers are no longer buying Chinese stuff. So China's heavily export-oriented economy disintegrates in 3-5 years. China splits up into several regional countries (as it has done many times over its 6000 year history) by 2025.
India:India is relatively insulated from the global problems. Banks have always been semi-nationalized, so did not participate in risky sub-prime adventures like the Europeans and the Americans. The rise of the poor in India and their buying power (buying mostly Indian-made products and services) implies the Indian economy sustains 5-7% GDP growth rates. India's currency, the Rupee, never got really strong, so its balance of trade will continue in India's favor. The high savings rate (among the people of India) and heavy gold holdings (a cultural phenomenon due to dowries paid in gold to marry off daughters) further shields the average Indian consumer, who has little-to-no credit card debt. So India emerges unscathed and is also protected geopolitically by its isolated geography (no significant threat except from the sea -- and India is actively building a blue-water navy -- see http://www.bharat-rakshak.com/
Demographics: A nation's "dependency ratio" is the ratio of the dependent population to the working-age population. In the case of India this turns out to be 0.6 (very goos). But even better, it drops dramatically as birth control becomes the norm. Hence productivity and the 'Demographic Dividend' help the Indian economy (less kids to support, more working people).
Brazil:Relatively insulated, will continue to sell sugar, coffee and other exports. Self-sufficient. Not bogged down by the financial crisis. Emerges relatively unscathed.
Oil-rich Arab and Gulf countries: Stagnate due to the slump in global demand of oil. But oil exports maintain the Sheikhs in palaces of gold, while the common man lives in 1-bedroom apartments with their families. Demographics favor these countries, but unlike India, the workforce is unprepared for the Information age. These countries need to drastically improve western-style education and ramp up their their manufacturing base to get to the next level.
Canada and Australia: Do pretty well due to agricultural exports and emerge relatively unscathed.
In Summation: In America, Interest rates go to 17-20% in the next 2 years. By 2014-2015, personal income tax rates are 70-80% (top slab). Corporate taxes go through the roof. Unions and the Govt. consolidate power. One has a union job (digging holes and then filling them up) or one works for the Govt./Military, if one wants to survive and thrive. Massive deflation in real-estate, stocks create terrific deals for people with cash reserves. Millionaires are created in the Bond Markets (both bond yields and prices skyrocket).
Gold goes to $2000. Oil and commodities tank in value. Unemployment is at 17-20% (Still a lot better than the Great Depression). Martial law will be imposed in some cities to control rising gang violence and drug cartels setting up shop. Religious fanaticism increases. 'Anti-foreigner' feelings return after a hiatus since WWII.
"Bubba Militias" will form in the countryside -- if you're not a Bubba, you're in trouble. But America becomes more nationalistic, gets back into the domestic manufacturing and agriculture game. By 2020, it has come out of the 2nd Depression and the next great bull market starts (also due to Demographics of its population).
Not very cheerful, but I cannot argue with the facts on the ground.
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