A bill was passed to raise taxes on people making over $400k. No spending cuts. The sequestration cuts were postponed for two months, lining up nicely with the next time we're going to need to raise the debt limit. The tax increases will have almost no effect on the deficit or the debt, the democrats wanted them for increased "fairness." The economy is otherwise doing well, so expect the market to go up for most of January. Then February will be hard on the markets as posturing for the end of the month fight over spending and the debt limit gets out of hand.
What's going to happen to the national debt? Sooner or later, inflation. The Congressional Budget Office keeps putting out 25 year projections on social security, and they seem to indicate that SS is in ok shape. The CBO assumes that work force participation will return to pre-crash levels, with 62% - 65% of our population working at decent paying jobs. This ignores a decade long trend where fewer people work and workers make lower wages. What if you factor that in? SS is in trouble, just like you already knew. This is another area of bi-partisan agreement, there will be no acknowledgement of this problem. When it gets serious, everyone will be surprised.
Retired Germans, finding long-term care costs in Germany prohibitive, are starting to take their benefits elsewhere - eastern Europe, Thailand, the Philippines - where costs are far lower. The trend is so well established - over 50,000 - that the German legislature is now looking into it to decide what they think. In the next 10 years as retiring boomers overwhelm the systems of the west, this will become the new normal: export your retirees to low cost countries, and save hugely on medical, nursing and housing costs. Under 60? Consider how you feel about retiring in Costa Rica, Peru, Thailand, Slovakia. Under 50? You might not get much of a choice. Consider taking a language class at your local Jr. college.
Egypt's new constitution was approved by almost 2/3 of the voters. Unfortunately only a bit less than 1/3 of the voters turned out, but almost 2/3 of them approved it. Egypt is now a democracy with equal rights for women, minorities, and people of different religions, "in so far as those rights are consistent with islamic law." In other words, islamic priests now decide if rights are reasonable. Many Egyptian businessmen started withdrawing their money from banks. It's now illegal to enter or leave Egypt with more than $10,000 in cash. Egypt is mostly uninhabitable desert, and fits their population of 83m, a quarter of the US population, into an area the size of New Mexico.
Last week the Fed announced they would keep interest rates low until unemployment hit 6.5% or inflation hit 2.5%. It's been estimated that the Fed's artificially low rates are costing pensioners and pension funds $465b per year. When will they quit? We've seen that the unemployment rate is skewed by the millions of people who have given up looking for work, and the yet more millions that have been moved onto social security disability. What does 6.5% mean in this environment? And inflation? Who measures that? Inflation is a weighted number, and the weightings used might not apply so well to you. Food and energy are under weighted in the government numbers which helps keep the official inflation rate down, but the average Walmart shopper spends a quarter of their income on food - tell them food inflation isn't important. My take-away - the Fed will raise interest rates when Bernanke is damned good and ready to raise them. Meanwhile, TIPS yields, the federal bonds indexed for inflation, are going up at record rates - Wall Street is banking heavily on inflation.
Southern Europe desperately needs the Euro down at about $1 if they're to have any hope of economic recovery. Meanwhile the Euro has moved up in the last six months from about $1.25 to a bit over $1.30, and I think it's on its way to $1.40, perhaps even $1.50. This will prove devastating for European economies, making it even harder for their companies to export their way out of their unemployment problem.
China is flying planes provocatively close to Japanese territory. China wishes to assert more control over the pacific, and wishes to challenge the American navy to see how they will respond. A war between China and Japan / America nominally over a few uninhabited rocks, the Senkaku Islands, is all too possible. The US fought several wars with the Soviet Union, in Viet Nam, Afghanistan, etc, but these were proxy wars: only one side was publicly engaged, there was always plausible deniability for the other side. If Chinese and American planes and ships actually shoot directly at each other, this will be a level of engagement not previously seen between nuclear powers.
First, a review of how I did last year:
Generally speaking I now expect us to muddle through 2013 much like we muddled through 2012. This is not the year when Europe, the US, China or Australia crashes.