We are sailing off the edge in 2012; historically, we are facing the biggest tax increase in absolute dollars ever. At 5 percent of GDP, it’s also the biggest tax increase/spending cut in relative terms since 1942.
It is possible we have a triad of storms for the remainder of 2012, with the storm of the century hitting on the exact dates of December 31, 2012 and January 1, 2013. Read on to see my predictions for the next four months.
Storm No. 1: Europe.
Europe is by no means a new problem, nor is it an unknown problem. As I see it, there are three potential scenarios on the horizon.
Disaster One: Everyone buckles down. The Greeks pay their taxes, the Spanish impose austerity, the Germans provide the funds, and the Union strengthens and works its problems out. This is a long-term ‘good’ solution, and a short term painful solution. It will probably cause a mild recession in Europe.
Disaster Two: The EU falls apart. The Greeks leave the EU, potentially followed by others. The remaining members either form a “Euro Lite” or go back to their marks, francs, liras and pesetas. Economic output would likely fall an average of 10 percent, unemployment would soar and inflation would rise.
Disaster Three: Nothing happens. In this most likely scenario, the whole thing keeps muddling down the current path of rhetoric and band-aid solutions. No real solution until growth lifts all the boats. Continued uncertainty ensues.
Photo: Protesters pass next to watermelons outside the International Exhibition Center in the northern Greek port city of Thessaloniki, Saturday, Sept. 8, 2012. Greek Prime Minister Antonis Samaras says the final round of austerity measures contains painful and unjust cuts but is necessary to restore Greece’s credibility and continue to receive funding from creditors. (AP Photo/Giorgos Nissiotis)
Storm No. 2: Iran.
Iran is also not a new problem. The three potential disasters here include: