Hump day approaches for the Gregorian calendar. That’s the time of year when concerns about 2011 recede and worries about 2012 become more immediate.
It’s a safe bet some new developments will spring out of nowhere to cause both consternation and delight as we proceed through the next 366 days. But carry-over issues will also linger on and, in some cases, loom larger and evolve in unexpected ways and directions.
On the international stage, nuclear armament will be a growing problem. Iran is expected to have nuclear weapons capability within the new year. There are few foreign affairs specialists who believe Israel will simply let that happen without taking assertive action.
In North Korea, which has already conducted a couple of nuclear weapons tests, the nation’s strongman, Kim Jong-il has just gone to his final reward. There have been indications succession will devolve onto the youngest among his three sons, Kim Jong-un. On account of his youth, he’ll have to quickly establish that there isn’t a power vacuum at the top.
After nine years of military intervention, the U.S. is pulling its troops out of Iraq. They are leaving behind a fledgling democracy in which traditionally feuding factions, broken down along religious lines within the Muslim faith, seem barely able to tolerate each other.
Elsewhere in the Middle East and North Africa, the Arab Spring threatens further disruptions and social unrest. Syria is on the brink of civil war. Electorates in Egypt and Libya may soon choose fundamentalist Islamic parties to take charge of government affairs.
In the economic realm, the debt problems of Europe will remain a challenge for some time to come. On a personal level for individuals living in the most heavily-indebted nations, the problem is a lack of hope. The medium-term future appears to hold nothing but austerity.
That means not spending as much, maybe not having a job and enjoying life less. This does not fit in with the national make-up of some of the governments within the Euro zone. Not everyone has quite the same appetite for restraint and discipline as the government in Berlin, for example.
It’s well-known that the financial problems of the region are largely situated on the southern periphery. I don’t think it would be inappropriate to say a more free-wheeling approach to life and spending is part and parcel of the Mediterranean “temperament”.
Not only can such an attitude not be changed overnight, but perhaps it never should be. As the belt-tightening pain intensifies and experience with the new governments in Italy and Greece moves past the honeymoon stage, dissatisfaction will find expression at the ballot box.
There are reports of record volumes of withdrawals from Greek banks and of citizens loading up suitcases with cash to head for border crossings. The clear intent is to deposit assets for safekeeping in more secure financial centers such as Cyprus, Switzerland and London.
Furthermore, foreign banks operating in Greece have been making it easier for depositors to open accounts outside the country. Subsequent transfers of funds have been reducing liquidity when needed most and contributing to a downward spiral of confidence.
Debt and deficits are hot-topic items in North America as well. In the United States, the debate pits a Democratic party which wants to pull in more revenue from the rich against a Republican base that has adopted, as an article of faith, that there should be no tax increases.
The Democrats want to see the rich contributing more to the social safety net. Some of the wealthy agree this might not be a bad idea. Revisions to the structure of the U.S. tax system may be where efforts should be directed. Too many loopholes permit seeming inequities in what certain individuals, who can afford the best accounting and legal advice, are required to pay.
To the Republicans, any tax hike smacks of punishing those who provide the economy with capital, vision and entrepreneurial drive. The volume needs to be turned down on the rhetoric, but that’s not going to happen. 2012 is a Presidential election year.
Even in Canada, with our well-grounded banking sector and relatively stronger government finances, much of the talk is about austerity. Everywhere one looks, governments are proposing spending cutbacks. There’s one good thing to say about the fragile nature of the recovery. It has muted tax hike proposals relative to spending cuts.
The question of which has more of a direct impact on the economy, a personal taxation measure or a government spending move, has long been a matter of debate in the economics community. Most economists come down on the side of the individual. For example, it’s thought there’s more bang for the buck in a personal tax cut than a government spending cut.
Ontario is under threat of a debt-rating downgrade if it doesn’t try harder to rein in spending. Moody’s investor services is also turning a sharp eye on the finances of well-known institutions in the province that are linked to Queen’s Park for some or most of their financing.
Included in this group are entities in the MUSH sector – municipalities, universities, schools and hospitals. Specifically mentioned in media reports have been the Universities of Toronto and Ottawa, the Hospital for Sick Children and the City of North Bay.
Mayor Rob Ford in Toronto is preparing for strife with the city’s unions over budget cuts. If the city and various CUPE locals can’t agree on compensation and revisions to some contentious clauses, there are likely to be lockouts and a period of discomfort for the city’s residents.
A major initiative for Ottawa will be to persuade the provinces to do something about escalating costs in health care. Ottawa’s role in providing health care funding to the provinces was set out in an agreement signed in 2004. The Harper government has committed to increasing its contribution by 6% per year out to 2016.
After that, however, the provinces will have to get their costs under tighter control. An annual increase in line with nominal gross domestic product growth (i.e., 3% to 4%) will be more likely. In most provinces, the share of medical costs in overall expenses approaches 40%.
Finally, one of the chief early complaints of the Occupy Wall Street movement was the dearth of legal action against any of the principal players involved in the financial collapse of 2008.
While the U.S. Justice Department has still taken no action, the Securities and Exchange Commission on December 16 brought down a civil fraud suit against top executives at Fannie Mae and Freddie Mac, including the two former CEOs.
The majority of U.S. home mortgages are owned or guaranteed by those two government agencies. The alleged wrongdoing was in connection with public statements about the proportion of total portfolio holdings that were comprised of sub-prime mortgages.
The contention is that a level of 2% to 3% was asserted on a number of occasions. The SEC believes the figure was actually closer to 10%. Wider knowledge of the higher number would have influenced risk assessments and might have alleviated the ensuing financial collapse.
Together, both mortgage-lending agencies have required U.S. government bail-out money to the tune of $150 billion dollars and counting.