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2011: Living in interesting times

Some economists have high hopes for 2011. The stock market has broken 11,000 and many predict GDP growth. I don't necessarily see a rising stock market and GDP as indicators of economic health, especially since the vast majority of stock market gains goes to a very small minority of people. The stock market may zoom, GDP may grow, but what will be happening to the majority of people - considering the forces and trends that are in play? Maybe it's my pessimistic side, but I continue to have some major concerns about the economy:

1. Municipal, county and state debts and expenses

States and cities are having trouble meeting their financial obligations (read: paying the bills), even after an influx of federal stimulus funds and some budget cuts. State revenues plummeted by 31% in 2009 from $1.6 trillion to a total of $1.1 trillion. Some states, like Illinois, are six months behind on payments of over $5 billion.

The states also owe an enormous amount in health care and pensions to their retirees in the Boomer retirement avalanche that started recently. Collectively, public employee retirement obligations are underfunded by $1 trillion. Eight states (including my own, Oklahoma) are underfunded by over a third. How's that for conservative fiscal management?

On top of the plummeting revenues and unfunded liabilities, the American Society of Civil Engineers gave our infrastructure a "D" in 2009, and civil engineers estimate that governments (including state and city) must spend $2.2 trillion over the next five years to shore up the condition of our roads, sewers, water treatment plants, dams, bridges, and other infrastructure.

How will states, counties and cities meet their obligations to pay current employees, finance a cascade of retirements for another 25 years, and maintain our infrastructure, which is over 50 years old in many places? One hint: Meridith Whitney predicts fifty to one hundred "sizeable" municipal bond defaults worth billions of dollars over the next few years.

In addition to the aforementioned defaults, choices may include declaring bankruptcy, deep cuts in services, increasing fees and taxes, and cutting wages and benefits of employees and pensions of retirees. And, of course, continuing to let the infrastructure deteriorate.

2. The housing market

Although home prices have fallen over 20% over the last three years, median home prices have not fallen to the long-term "trend line." Some analysts have predicted further value decreases of 20 - 40 - even 80%. With homes forming the bulk of the assets of the typical American family, further price falls are likely to cause pain across the board: consumer spending, municipal tax revenue, lack of mobility to move to new jobs, ability of retirees to fund their retirements. Etc.

Interesting twist: the legality of the foreclosure avalanche is also now under serious scrutiny. With banks pulling all sorts of blatantly illegal shenanigans - robo-signing, fake witnesses, failure to transfer ownership documentation, etc. - will they be able to kick people out of their homes? We'll see how this plays out in 2011.

3. Employment situation

The U3 unemployment figure is officially 9.8%, or 15.1 million Americans. After adding people who would like jobs, but haven't looked in the past four weeks, and people working part-time but who would like to work full-time, that figure transforms to U6 - 17%. Additionally, the mean length of unemployment is the highest since 1948 - 35 weeks. And do these numbers even attempt to measure the impact of the recession (which is reportedly now over) on the millions of independent contractors and self-employed who have seen their revenues cut in half?

The real stories are those of people struggling to hang on, of people who are losing jobs, homes, and hope, of people who don't yet realize that life may never again be what it was - for them or their children. These problems have always existed, but are increasing in number as the middle class becomes hollowed out.

Hiring may improve, but it would have to improve quite markedly to employ even a fraction of the people who lost their jobs during the recession along with the new graduates hunting for a career.

4. Energy peaking and prices

2010 was the year that the International Energy Agency reported that peak (conventional) oil happened back in 2006, but continued to predict that our energy demands would be met by a combination of other energy sources, most of which are of lower-quality, riskier and more expensive to extract.

Oil prices are up around $90 per barrel again. In my opinion, still too cheap for the value of the energy we get from oil, but possibly beginning to push the envelope of what our extremely dependent economy can finance. Will prices cool off again, or will sustained high prices result in another economic crash? High energy prices have often preceded major recessions and depressions, so stay tuned.

Coal, just as much as oil, is fundamental to our economic and household systems. The assumption that coal could continue to fuel our way of life (via electric cars, for example) is implicit in many of the plans for an energy transition, especially if that energy transition has to happen in the next five years, since solar and wind produce only a very small fraction of our total electrical capacity. Now China is reporting that they won't be able to continue growing their coal production, resulting in potential increase of Chinese coal imports. Peak coal is now on the horizon.

5. Food prices

Food prices are again reaching the highs set back in 2008 due to a series of crop failures caused by extreme weather around the world. In 2008, rocketing food prices caused riots and social unrest. What will happen this year?

Food prices might be more of a cause for concern for the world's "undeveloped" countries, but food banks in America are also hard-pressed to meet demand, and one in seven Americans, or 43 million people, are already on food stamps (aka SNAP).


All that, and I even managed to avoid mentioning the $14+ trillion federal deficit! To be sure, we are living in interesting times, and 2011 could be one extremely interesting year. The economic, energy, and environmental indicators that I follow are negative, and the leaders of our world are not responding in a constructive way. As Jared Diamond observed in Collapse: How Societies Choose to Fail or to Succeed, it's our response to crises that decides our fates.

Rather than acknowledging the true extent of our predicament, our leaders are fiddling with the deck chairs while they hold their breath for a deus ex machina - hydrogen cars, dilithium crystals, alien saviors, economic revivals, miracles. Like the rest of the world, I don't know what surprises 2011 has in store for us. But rather than hoping for the unsustainable to miraculously become sustainable, or a benign government to sprinkle fairy dust all over us, we need to get ourselves in gear and start creating communities, food systems, and economies that will hold the center, come hell or high water.

What do you think? Leave a comment below.

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