For the record, this is how the “most predictable crisis in history” unfolds:
1) Europe has kicked the can on the Euro about as far as they can. The PIIGS have borrowed too much for too long and cannot ever pay it back, but as long as they are in the Euro they cannot default or devalue. Germany will not pay off their bonds, so the EMU will break up, probably by spring (3-6 months). Just to break up the Euro will still require a massive amount of lending (printing) from the ECB to prevent every bank in Europe from going belly up. Europe’s economy will be in recession for several years, inflation and devaluation will lower income and net wealth in the north by 10-20%, and in the south by 30-40%.
2) In America, despite claims that we have unleveraged from European sovereign debt, the crisis will roll across the ocean and American banks will have to deal with about $1 trillion in bonds and CDS suddenly wiped out. We will find out that, as conservatives predicted, Dodd-Frank did not eliminate “too big to fail”, it institutionalized it. First the Fed will bail out foreign banks to the tune of trillions, then the Fed will bail out the US banks; neither will require a vote in Congress. The Obama Administration will act like it doesn’t cost a thing, but it will. It will be another nail in our fiscal coffin, another 10%+ loss in wealth and standard of living from inflation and devaluation. The US will also slide into a shallow recession (we are just about there already) for the rest of 2012.
3) China, while considered a potential savior, will be forced to admit to its own debt problem. With the US and European markets in the toilet, growth will drop sharply. The real estate bubble in China will collapse, and all their foreign reserves will not be enough to cover the massive amount of malinvestment they have been using to inflate their growth numbers. China will erupt in civil unrest, with tens of millions of unemployed men marching in the streets.
4) The rest of the world won’t fair much better, recession and devaluation will be the norm. A few countries that never succumbed to the lure of cheap credit will do alright (Switzerland and Norway for example), and become islands of security, although their export industries will suffer.
What can we do to lower the inevitable pain? Elect a Republican House, Senate and President. Cut federal spending like crazy. Cut regulations like crazy, and agencies like the EPA entirely. Open up the entire US to energy exploration and production. That’s just the easy stuff.
A permanent solution requires heavy lifting. Privatize the Social Security and Medicare entitlements, offload Medicaid to the states and gradually eliminate it as a federal program. Break the government monopoly on education at all levels in favor of school choice. A Balanced Budget Amendment and the political will not to sidestep it. Paying down the national debt and removing the easy ability to grow it back. Permanently shrink the size of the federal government to early 20th century levels. Replace the national income tax with a small sales tax. Get control of the border by putting in place a secure border and visa system.
Many would call this an impossible dream, but I have no doubt that this is all very possible, in the sense that it already existed one hundred years ago. What it will require is a conservative reawakening unlike any we have seen in our history. Unlikely, but not impossible.
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