By the election month of November 2012, the USA will be in the clutches of a major recession. It will be a replay of 2008.
Recessions are bad for incumbents. A recession is even worse for an incumbent who was elected to overcome a recession, only for it to reappear four years later. That is my theory. This has happened to only one President: Jimmy Carter.
Why will there be a recession in the USA? Because we live in a world economy. Europe is going to get severely hit next year.
Euro-area governments have to repay more than 1.1 trillion euros of long- and short-term debt in 2012, with about 519 billion euros of Italian, French and German debt maturing in the first half alone, data compiled by Bloomberg show. European banks have about $665 billion of debt coming due in the first six months, according to Citigroup Inc., based on Dealogic data.
Holger Schmieding, chief European economist at Berenberg Bank in London, said the “avalanche” of refinancing needs in the next two months means the crisis could worsen and “the ECB would then finally be forced to step up its anti-crisis response to save the euro and itself.”
Given his view that the ECB is unlikely to drive yields much lower or cap them, Citigroup economist Juergen Michels said he expects a “deep euro-area recession and strained financial markets” in 2012 with the region’s economy contracting every quarter.
America exports to Europe. These sales will decrease.
Then there is credit demand. Because Europe’s governments need to finance $1.4 trillion worth of debt, that money has to come from the capital markets. Money that is lend to PIIGS will not be lent to other borrowers.
In the midst of a recession, when government deficits always rise, who will loan to PIIGS and their creditor nations, such as France? At how high a rate of interest? The higher the rate, the more negative the effects on the economy. This will make the recession worse.
Some Americans still suffer from the illusion that there is a firewall between Europe and the USA: the Atlantic, Digits ignore borders. Money is mostly digital.