The Worst-Case Scenario For 2011

Should auld acquaintance be forgot,
And never brought to mind?
Should auld acquaintance be forgot,
And auld lang syne?

– “Auld Lang Syne” – Robert Burns. (HT: Jim Malcolm)

People reading my stuff for a few years have no doubt inferred a certain level of pessimism. This isn’t entirely accurate. I’m a glass half-full type of guy. Just don’t inquire as to what I think is in the glass rather than water.

But today I crank the amps up on my pessimism. Today I crank beyond Spinal Tap and all the way up to John Derbyshire. Today I devise what I believe to be a worst case scenario for 2011.

In governance, the Federal Uber-State finally assumes complete control. This occurs, not through Hugo Chavez’s Rule by Decree, but rather through complete and irreversible state and municipal bankruptcy. Redstate Poster LRU links to a particularly damning article in the UK Telegraph. Analyst Meredith Whitney describes the financial status of US cities below.

“Next to housing this is the single most important issue in the US and certainly the biggest threat to the US economy,” Whitney told the CBS 60 Minutes programme on Sunday night. “There’s not a doubt on my mind that you will see a spate of municipal bond defaults. You can see fifty to a hundred sizeable defaults – more. This will amount to hundreds of billions of dollars’ worth of defaults.”


Financially, this is bad. Politically, this is about as cynical and pessimistic as one of Jethro Tull’s sarcastic Christmas Carols. Problems are what dishonest politicians live for. They are the lubrication for the vile machineries of the over-weaning pigs of state. They present opportunities to assume control, dispense “justice” upon the heads of their partisan enemies, and hand out the favors to the people who boost their careers.

With a $1Tr hole in the collective pension funds of state workers, the Federal Government has a fulcrum with which they can leverage these states into doing anything that Caesar desires. Unless that state government has a few $Bn in the seat-cushions somewhere, the only permissible response will be “Yes, Sir!”

Thus, every state and local government can be run with fiscal excellence of California and the cultural uniqueness of Delaware. All vestiges of Federalism will die. In 2011, I welcome you to The United States of Generika!! – Sweet Land of Homogenous Diversity.

So our states and localities all get taken over by the Inner Party. What else could go wrong, o Speaker of Calamity and Woe? Hmm….Your stocks have done OK recently, haven’t they? Next year, it may not be as fun.

Of course, all of those gains in 2010 are a result of governmental goosing to maintain an illusion of continued prosperity. Very few private investors are willing to play in this market. Insider selling outpaces insider buying by a vast distance. The market is being propped up by governmental intervention so that the sheep will stay confined in their increasingly shrinking pen.

Here’s how Helicopter Ben could run out of JP-8 in 2011. Charles Hugh Smith, author of the excellent weblog “Of Two Minds”, offers us a possible scenario of what happens when the average Generikan investor gets unplugged from The Matrix.

Beneath the surface, all central banks and governments have pursued a single fantasy the past two years: that massive injections of borrowed capital to “extend and pretend” and inflate new asset bubbles will magically restart global “growth.”

(Charles Hugh Smith Ob. Cit.)

He goes on to explain that our Federal Gubbermint overlords have no clue how to solve the current economic dilemma that dampens our national spirit. Like the overrated and ignorant Paul Krugabe, they appeal to magic. The mystical “animal spirits” of Keynesian Lore will arise to save us from our aggregate demand funk. As our Feckless Leaders see no resurgence of organic, non-policy driven demand, they look for bubbles that will allow for slash-and-burn profiteering. Gains are hoarded, loses are socialized.

Meanwhile, the private economy has adjusted to the new and more diminutive economy. Businesses operate at a smaller economy of scale. Fewer customers require less service, leading to decreased payrolls. Nine million fewer Generikans work. This is systemic; not temporary.

The private sector paymasters see this as a solution instead of a problem. The stock market gets fat, dumb and happy again. It does so in reflection of the contentment felt by Generikan Business not to have to supervise all these troublesome individuals formerly known as employees.

Yet now, as Old Man 2010 prepares to shamble off to the rest home known as History, people begin to question this eminently questionable status quo. Chinese hyper-inflation forces their Politburo to do what the Generikan Politburo known as The Fed should do and raise rates to resurrect the value of private savings. This reversion to thrift by China reduces the salability of US debt.

This reduces the ability of Ben Bernanke to continue buying up bad real estate bonds and other forms of toxic Generikan debt. The resulting interest rates on Generikan debt instruments truly represent the Marxian stupidity of our current elitist Inner Party. The Oligarchical Collectivists suddenly have no clothes.

The losses can no longer be socialized and revert back to their proper owners. They now show up in inconvenient places like balance sheets. This forces the evisceration of corporate assets to their actual market value. This forces reports of EPS and NAV that no longer divorce the real-world worth of corporations from the pathetic and ineluctable enstupidation of their short-sighted corporate boards. The shares crash, and Generika wakes up and smells the asphalt.

But until all the bad stuff happens, partake of life’s rich pageant! It could be worse out there….And probably soon will be. Happy New Year, Generika.

And surely ye’ll be your pint-stowp!
And surely I’ll be mine!
And we’ll take a cup o’ kindness yet,
for auld lang syne.