Revisiting My 2011 Forecast

At the start of the year I provided a forecast of what I expected to see take place in the year 2011. Now that it is the end of the year I thought I would revisit my 2011 forecast to show you how I faired attempting to anticipate what happened this year.

The following items in bold are the events/trends that I thought would take place in 2011. I provide my thoughts on what actually happened after each item mentioned.

More Larger-Magnitude Earthquakes: 2011 already has begun with a couple of strong earthquakes. On New Year’s Day Argentina experienced a magnitude 7.0 earthquake while central Chile experienced a magnitude 7.1 earthquake on Sunday.

This statement was focused on the number of large-magnitude earthquakes that we would see instead of the intensity of the large-magnitude earthquakes that we would see. As I mentioned in the previous article, 2011 saw a slight decline in the number of magnitude 7.0 and greater earthquakes versus 2010 levels. However, 2011 featured one of the strongest earthquakes in recorded history: the magnitude 9.0 March 11 Japan earthquake.

More Wars and Rumors of Wars: A report issued the International Crisis Group suggests that there are currently at least sixteen politically unstable areas around the world that could potentially escalate this year to become the world’s next conflicts.

This year did see a significant rise in the amount of armed conflict in the world, particularly in the Middle East. For more on armed conflict in 2011, you can access the following article

Greater Political and Social Instability: I expect there to be far more unrest in Europe this year than in 2010. The latter part of 2010 saw a noticeable pickup in instability throughout Europe with violent protests in places like Rome and Britain. One reason why unrest is likely going to pick up further in Europe is that heavily-indebted countries like Spain and Portugal are likely going to need a bailout to the dismay of other Europeans whose taxpayer dollars may have to be used to bailout them. Another reason why unrest is likely going to pick up further in Europe is that European governments are likely going to attempt to implement reforms and benefit cuts that are unpopular with their citizens. These factors and probably more are likely going to make massive demonstrations and probably some violent demonstrations more common in Europe in 2011 than in 2010.

I thought that we would see the bulk of the social unrest in the world take place in Europe when I wrote the statement above. Although there was increased social unrest in Italy, Britain, Greece, and Spain (as people protested against austerity measures), the main focus of unrest this year was concentrated in North Africa and the Middle East. The change that took place in the Middle East and North Africa this year has been remarkable because so much has changed in a short amount of time.

I mentioned in my forecast article that I would also not be surprised if the following events or trends took place in 2011:

Europe Achieves Greater Union: Many experts believe that European leaders ultimately face a tough choice: end the Euro or have Europe become more unified (i.e. accept fiscal union). I believe it is more likely that European leaders will work to bring more unity to Europe than to end the Euro this year.

It’s hard to quantify how much more unified Europe became this year, but it seems Europe is moving towards further integration. The ongoing crises in Europe have compelled key European leaders like German Chancellor Angela Merkel and French President Nicolas Sarkozy to push for more fiscal integration and even fiscal union. In fact, European leaders (except for Britain’s David Cameron) have agreed to work on ratifying a new European Treaty that is intended to strengthen fiscal discipline by giving the EU the ability to impose sanctions on countries that have a Debt/GDP level above 3% (ironically, many European countries already violate this threshold and would qualify for sanctions).

The Federal Reserve Engages in Quantitative Easing 3.0 (QE3): The Federal Reserve hopes that the widely unpopular Quantitative Easing 2.0 (QE2) is enough to prevent a major downturn in the U.S. economy. However, not long after QE2 was announced the Federal Reserve already began to publicly hint that QE3 could take place if needed. I expect the Federal Reserve to pursue QE3 at some point in 2011.

The Federal Reserve has resisted the urge to engage in QE3 so far. However, some believe the Federal Reserve has engaged in QE 2.5 through “Operation Twist”, which is a program where the Fed sells short-term debt and reinvests the proceeds in long-term debt. This action is intended to suppress long-term interest rates, which the Fed hopes will spur companies' willingness to borrow and to spend.

Prices of Essential, Everyday Items Rise: Countries across the globe are competing in a global currency war. The objective for these countries is to devalue their currencies so they can gain an export trade advantage. A consequence of currency devaluation is that paper money is able to buy less. I expect this global currency war to continue in 2011, so the paper money people have will buy less of the everyday items they need, or in other words, the price of everyday items in terms of paper money will go up.

I’m not sure what it is like elsewhere in the world, but gasoline prices, food prices, and the prices of other important items are higher where I live than they were a year ago.

Nothing Substantial Gets Done in the U.S. Congress: To get things done in the U.S., Congress (the House of Representatives and Senate) and the President have to work together. Right now only the Senate and the President are aligned. The House of Representatives are full of Republicans who are likely going to pursue an agenda that is opposed to the President and the Senate’s agenda. As a result, it should be very difficult for any major laws to get passed in the U.S. in 2011.

The U.S. Congress managed to pass bills like the controversial NDAA and managed to approve the increase of the debt ceiling in 2011, but Congress is so dysfunctional right now that it seems that U.S. lawmakers can't pass any important pieces of legislation without facing a deadline or resorting to brinkmanship. The inability of the congressional super committee to meet a November deadline to agree to deficit reduction measures is an example of how dysfunctional Congress is.

The Growing American Tea Party: If little gets done in Congress there could be an even greater level of dissatisfaction with the status quo and with political elites in office. You could see a significant rise in Tea Party membership as more Americans join to voice their displeasure.

I expected the U.S. Congress to be extremely unpopular in 2011, but I thought the American Tea Party would be the primary beneficiaries of the extreme dissatisfaction with Congress. Instead, we saw some of the dissatisfaction with the status quo help fuel the rise of Occupy Wall Street Movement.

The Chinese Economy Becomes A Concern: Some pundits for years have forecasted a slowdown in the Chinese economy without a slowdown actually taking place. Currently, the risk of a slowdown in the Chinese economy is higher than ever because Chinese policymakers are purposely attempting to slow it down to stop a terrible inflation problem that could destabilize Chinese society if it is not stopped. If a major slowdown in the Chinese economy takes place it could be a new source of global and economic instability.

There is some growing concern about the health of China's economy. For instance, Ambrose Evans-Pritchard, the Daily Telegraph’s International Business Editor, wrote an article a couple of weeks ago discussing some significant warning signs concerning China’s economy and financial system. However, the concern about the health of China’s economy is not a story that is making daily headlines. It seems the weakening of China’s economy is going to be more of a 2012 story than a 2011 story.

I’ll let you judge how well or how poorly I faired attempting to anticipate what happened this year. The results definitely show that I am not a prophet (nor do I claim to be one) because there were things that I got wrong or failed to anticipate. I plan to share a 2012 forecast in the coming days. In the meantime, I like to wish everyone a Happy New Year and thank you for reading!