This blog will be my last blog for this year. In order to conclude this year end, I figure that I should share my prediction for 2012. Many things happened during 2011 from US credit rating falling to AA status to Eurozone tumbling. However, this is just the beginning. 2011 is still in the eye of the storm and I believe storm will actually hit our economy in 2012. Based on my research, I come up with three main predictions for 2012.
Prediction #1: There will be european sovereign debt crisis due to several PIIGS nation exiting the Euro
Since September 2011, no matter how technocrats in PIIGS nations are trying to implement the austerity measure, their long term (10 year) bond rate is still going up. The higher the bond rate, the more cost for them to borrow the money to roll over their debt. As many of PIIGS nations' debt to GDP are exceeding 100%, it is mathematically impossible for them to pay all the obligation and keep going. In fact, I can't imagine they can keep going this scheme without falling off the wheel by end of 2012. Once some of them are default on their debt, there will be another Lehman moment. This will ignite all the derivatives (Commonly known as Credit Default Swap) to explode.
Prediction #2: There will be massive money printing from the Fed and other central banks around the world
For the United States, Fed will print the money to help Europe simply because of US banking system's exposure to the credit default swap. US government and Fed will try everything in their power to print money to bail European nations out. They know how big the size of CDS. According to the trusted source, size of derivative is now exceeding $1 quadrillon. If that amount of derivative is exploded due to PIIGS's default, US financial system will be implode in no time.
Second reason for Fed to print money is because US wants to improve its export so that creating more jobs. In order to accomplish this, they will print the money in order to make US export more attractive. On the other hands, this means that trading partners will have to suffer their export. So, what they are going to do to counter this? They will also print to weaken their currency to make their export more attractive as well. Each trading countries will do this in order to avoid the recession in their home countries. This is what currency wars all about. It is really "race to the bottom". We can reasonably assume that this process is highly inflationary. Due to money printing around the world, there will be massive inflation in 2012 (Can be 30 - 50% inflation...)
Prediction #3: Gold and silver price will go through the roof
Price of both gold and silver has plunged for past few weeks. This happened because all the banks must sell their assets including gold and silver to cover their short term obligation. Especially, european banks needed to do this because ECB has not yet printed the money to bail them out as of yet (And of course, there are manipulation of gold and silver...). But, make no mistakes about it. Foundamental of owning gold and silver has not changed at all. As a matter of fact, economic situation in both Europe, US and all other developed nations has become worse and worse as compared in beginning of 2011. Even if there will be more manipulations like 2011, there are only two things they can ultimately do: 1) default on their debt or 2) print the money to keep this game going. I believe they will choose choice #2. They will postpone the final day of reckoning as long as possible. This will result in massive inflation if not hyperinflation. I strongly believe what Ludwig Von Mises said. He said
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
Many people may think that this won't happen in here any time soon. However, this will happen much sooner than most people think. US's national debt and total debt obligations have increased exponentially since mid 2008 when Ben Bernanke started to implement Quantitative Easing. Since 2008, inflation rate also increased exponentially along with these massive money printing. As I wrote many blogs explaining about commodity price increase during high inflation and hyperinflationary environment, I believe both gold and silver price will go way up in this year.
Because of fiscal irresponsibility of all the governments around the world, year 2012 can be a disastrous year for most people. But, this does not have to be for you. If you are fully prepared and financially educated, this can be the best time to get ahead financially.
Have a happy 2012 everyone!
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Published: 31 December 2011