The Year of Rational Pessimism

The year 2012 could prove to be historically significant – the year in which the eurozone, the culmination of 50 years of European integration, falls apart, and the rating agencies’ downgrade of US sovereign debt turns out to have been justified. If investors suffered from irrational exuberance in the 1990’s, rational pessimism is likely to prevail in the coming year.

NEW YORK – Someone recently quipped that the best thing about 2011 was that it was likely better than 2012. By the same token, while there has been much concern about America’s political gridlock, something worse for America, and for the world, could have happened: the Republicans could have prevailed in their program of austerity-cum-redistribution to the wealthy. Automatic cuts won’t happen until 2013, which means that the economy in 2012 will be spared, ever so slightly.

Two more positive notes for 2011: America seems finally to have awakened to the yawning gap between the rich and the rest – between the top 1% and everyone else. And youth-led protest movements, from the Arab Spring to the Spanish indignados and the Occupy Wall Streeters, have made clear that something is very wrong with the capitalist system.

The likelihood, though, is that the economic and political problems that were so manifest in the US and Europe in 2011 – and which have so far been tremendously mismanaged – will only grow worse in 2012. Any forecast for the coming year depends, more than usual, on politics – on the outcome of the US gridlock, and on European leaders’ ability to respond to the euro crisis. Economic forecasts are difficult enough; but when it comes to political forecasts, our crystal balls are even cloudier. That said, here is my best guess.

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