Bonddad has already provided a good overview of what to expect on the financial front in this diary, but I'd like to take a wider perspective on what's likely to happen in the coming year, and how the beginning of the next presidency could look like.
I'll look at:
- macroeconomics
- oil/energy/commodities
- Iraq, Iran, China and other geopolitical trends
- the blame game
macroeconomics
As bonddad has noted, the news coming on the economic front are likely to be overwhelmingly bad, with a tumbling real estate market, interest rate resets, foreclesures and all the accompanying pain. This will eventually take its toll on consumption and on jobs, as debt becomes less available (or more expensive), construction and finance sectors continue to fire people, and people cut on non-essential spending. Note that this is likely to be a slow motion process.
But bad as this may seem, the worst is likely to be what happens to the banking sector. Right now, nobody knows what skeletons will be found in banks' balance sheets, and banks don't trust one another. Credit markets are zombie-like, functioning poorly or not at all, and banks have trouble funding normal operations, let alone aggressive new lending. Many corporations have clean balance sheets and can hold out for a while, but small and medium entreprises may not last as long, and will feel the credit crunch at some point. And the biggest question remains as to the situation of the main investment banks, which have tons of impossible to assess stuff on their books, and even of some big commercial banks heavily involved in real estate and/or structure vehicles. A full-fledged banking crisis is still very much possible.
Stockmarkets have already sold bank and retail stocks to some extent, and preferred companies exposed to world markets, where profits have been strong (and even stronger when expressed in dollars, thanks to the currency's weakness). This is likely to continue, but weak domestic consumption is unlikely to allow profits to keep going up as they have in recent years, however you skew the sharing of value added between wages and profits. Some suspect that stock markets have remained strong in the second half of 2007 because all the money that could be taken out of the commercial paper markets was reinvested there - but that was a one shot boost. Let's say that I don't think stock markets will go up in the coming year.
All these news will not prevent the right from doing two absolutely contradictory things (not that this has ever been a problem for them:
- first, claim that everything is dandy and that the economy is really doing well (see for instance this, from a serial offender), despite the howls from "angry leftists that reall want America to fail" ("the angriest Democratic campaign (...) rails without cease against the greedy corporations that supposedly make ordinary Americans' lives miserable (...) might conceivably allow him to snatch a victory" - yes that would be Edwards, in this week's Economist), and;
- second, say that the current crisis (yes, there seems to be one), while a very small one and not a problem, requires more "reform" of the usual kind: tax cuts, labor deregulation and "leaving the markets do their magic" (I'll spare you quotes, but I'm sure you can find some if required...)
The goal, of course, is to hide the pain for as long as possible, and then dump it wholesale in the lap of the new president, which will then be blamed for all that's suddenly going wrong. I'd wager that "Democrat elected, Economy crashes" headlines are already ready to roll... More seriously, I expect the 2006 Congress to be blamed (via things like the increased minimum wage, which the right hates and blathers about incessantly).
My recommendation here, for what it's worth, is to emphasise as much as possible that the economic crisis is there, and that it is a Republican Recession. They had all the power (including a friendly Fed, which kindly let them blow the budget surpluses they inherited, and all the vetoes of the Bush presidency in the past year), it's their mess.
But please, let's not have Democrats caught unawares when Broder et al. suddenly start talking about the need for accountability in government, and the responsibility of the new crowd for the economy (and the need for bipartisanship, of course, to get the market "reforms" that will solve the situation).
oil/energy/commodities
To be frank, I have no idea where oil prices will go, because there are some very conflicting trends, and it's not clear to me which one will prevail.
An economic slowdown suggests that prices should go down somewhat. There's also the expectation of a surge of new projects coming onstream in 2008 (by the way, if you want to contribute to the effort by the Oil Drum crowd to make that database of oil projects as comprehensive as possible, please do help, it's a wiki page) which might help the supply situation in the short term.
On the other hand, these projects have to compensate for the decline of existing fields, and to cope with vastly increasing demand from booming emerging economies (like China and India) and from oil exporters themselves, which are enjoying an economic boom on the back of higher oil prices, and are often subsidizing gas for their populations - and have seen massive increases in car ownership recently.
The fact that oil prices are close to record levels now, despite the strong probability of a recession now being pretty much accepted by markets, suggests that the trend is still up rather than down, unless the economic crash is more brutal than expected. (I'll have a new Countdown diary where you can all bet on where the price will be in a year's time, once i've announced the winner of this year's bet once the final price is in tomorrow).
Add to that the biofuels boom, well underway despite the increasing backlash against that wasteful "solution", and you have a direct impact on food prices as well.
And the commodity markets are likely to remain strained given the incredible appetite from China and elsewhere.
The impact at home is likely to be persistent inflation. Energy and food are stipped of the CPI which the Fed and Wall Street look at, because they usually are volatile, but the long upwards trend they are in suggests that it is increasingly unrealistic to ignore these price increases, as they apply to items for which consumption can only decrease very little in the short term. Which means less disposable income for many.
Expect, of course, more push to open oil production in Alaska or in offshore areas, and more bellicose mocking of the environmentalists who are, of course, the real cause of higher energy prices by preventing investment in resources at home.
Expect more switch to coal as a "cheap" and "plentiful" (it is nether, in reality, but they are only talking about the monetary costs borne by corparations in digging up and burning the stuff, and about the next few years) and homegrown, and, in all likelihood, more calls for nuclear power.
Massive plans to support renewable energies seem like a no-brainer to me (but then I work in the industry, so I'm naturally biased) - they create a lot more jobs (many of them non-offshorable by nature: wind farms can only be serviced locally), and these a good quality jobs in manufacturing and local construction and high-tech maintenance services; they help reduce carbon emissions and lower fuel imports and, most important, they are already cost-competitive. They can be the core plank of a massive New Deal/Apollo programme, if the political will were there.
This is a no-brainer. Seriously. Big industry and venture capital are already investing significant numbers. A public boost can change the scale of the effort and make it have a material impact on everything - the economy, the energy balance, climate change, local development, you name it.
Iraq, Iran, China and other geopolitical trends
This is where things gets murkier, and where the unexpected is most likely to happen and change everything.
But still. The Iraqi mess is there and not going away, and will eat into the early years of the next presidency. I can see the rightwing noise machine blaming the next president whether s/he chooses to stay (incompetence, endangering troops, etc...) or leave ("cut-and-run", "conceding defeat at home when all was going well over there", etc...). I can see stories about poorly treated veterans suddenly been given a lot of air time - and of course the new administration will be blamed for that.
Iran. I bet that nothing much will happen there. There will be more noise, and a lot of diplomatic theater, and Will Kristol will use his new tribune in the NYT to call for war, but the Bush administration will continue to be contained by the combination of foot-dragging by Europeans, grumbling by Putin and the odd Iranian gesture. I may be completely wrong, but we won't hear much about Iran once the new president is elected. There is no real underlying issue there - the sense of crisis has been manufactured by the Bush administration all along. A sane president will just let diplomats work and keep the issue out of the headlines.
China. The big year for them. The Olympics.They are on display. The very year when their trade surplus (with both Europe and the US) threatens to be so big as to be macro-economically dangerous, and politically untenable in the West. The year when their coal and oil imports become so massive that they turn into full-fledged, open, security issues for them. When carbon emissions become an even more burning (pun intended issue) and they are on the hot seat, as their per capita emissions reach that of some European countries. And the year when we know if the big financial crisis catches up with them or not.
Russia. Expect Russia to continue its tit-for-tat with the Bush administration and its European lackeys. Expect a big confrontation over Kosovo (this is my sure-thing bet for naming one of the big crises of the coming year). Expect Europeans, against all odds, to have no spine against the White House fore the rest of the year - but to fight the next president quite strongly on carbon emissions...
And of course, all the wild cards. Pakistan. Afghanistan (NATO has lost over there. How much tme will be needed to admit it?). A famine in Africa (food is getting expensive) A massive pollution event in China. A terrorist incident on vital infrastructure anywhere. And, as befits a president who was warned, upon his arrival in the White House, that the 3 main threats to his country were a terrorist attack on New-York, a hurricane in New Orleans or an earthquake in California, I'd worry about being in California this year... and (tinfoil hat for a second) about the state fo emergency that this might justify.
the blame game
As indicated above, the obvious strategy of the rightwing noise machine will be to claim, against all evidence, that all is well until the end of the year and then, brutally, to switch to relentless coverage of all that's bad - all that's been bad, but suddenly needs urgent action NOW.
The economic crisis will be blamed on too much red tape, and too high taxes (AMT here we come). Soaring helathcare costs on too much regulation and interference by government. Energy prices on restrictions on domestic drilling. Iraq will be blamed on the defeatists and terorist lovers at home.
The only way to counter this is to speak louder than them. To talk about inequality now. About Murder by Spreadsheet. About jobs manufacturing solar panels. And about the overriding ideology of corporate profits, which has been transcribed in government action by the Republicans since 2001, and which results in stagnant wages, weaker benefits, skyrocketing heathcare costs, inflation, and the rich gorging, gorging, gorging.
They won't give it up without a fight. But you have to be ready for a fight where the landscape is dramatically changed, with a crashing economy, a tense energy balance, and a hostile world.