Debt turmoil is not entirely new
The present crisis is made worse by the fact that until recently, the issues confronting us were unknown to our generation. Admittedly, debt turmoil is not entirely new: Latin America experienced it in the '70s and '80s. But contrary to a claim by Citicorp's then CEO, the problem is that a country can go bankrupt but cannot be liquidated or simply vanish. It is forced to get back on its feet so it can function again.
The world came into the 21st century ravenous for consumption
Free trade and quantitative growth, without thinking for a minute that individual happiness might lie elsewhere. The United States was leading the charge. The technological revolution had given them a head start and also allowed them to stamp their culture worldwide on a new generation. And since wanting to impose this way of life was tied in with an imperialistic streak, America under its former president embarked on (failed) conquests that will cost it at least as much as the Second World War. Accommodative monetary policy was needed to pay for them. Ironically, the rock-bottom interest rates meant to keep credit flowing and the economy expanding triggered explosive growth in the emerging countries, causing the price of oil and other commodities to rocket in turn.
The devastating 2008 financial crisis, rooted in US subprime mortgages, put a cap on all these excesses. European integration and the euro suffered collateral damage. Monetary union had precluded the members' central banks from acting as lenders of last resort. The only safeguards left were the Maastricht restrictions, which were very soon practically brushed aside by many national governments.
Access to credit, Europe is in a tight situation
But talking about debt is one thing; we should first of all consider access to credit. Europe is in a tight situation because confidence has evaporated, curbing its members' ability to borrow. For France, defending AAA status as a political objective is sheer demagogy after 37 years of state budget shortfalls. But when it comes to deficit spending the US holds the lead over the motley cluster of disciplined and undisciplined euro zone members. By reducing its war effort, America will see its expenditure decline sharply. The debate in the election campaign will centre on vital issues and could have a psychological impact on the markets. And lest we forget it, the US is the developed country that stands the best chance of seeing bank lending take off again.
USA, pleasant surprise in store for 2012
To cut a long story short, America is at a political turning point. It has the means and the historical precedents needed to roll out drastic reforms. Its banking system is not laden with bad debt like Europe's, and in relative terms its federal treasury still has scope to borrow. Finally, the dollar is strengthening—or, better said, the euro is weakening—as the markets start to gauge the magnitude of Europe's predicament and the time it will need to get back on track. While 2012 could hold a pleasant surprise in store on this side of the Atlantic, the prospects for gains in the US are far more enticing. The dollar will probably stay firm and the New York stockmarket should mount a comeback.
A lot of extremely negative predictions have been made about 2012; if we believe them, the outlook for financial assets has rarely been bleaker. Yet one thing is certain: as we head into the new year, expectations have been adjusted to the actual global environment. Only a few profit forecasts on major companies still look a bit overdone. In view of this and the fact that political leaders have realised just how awesome the difficulties facing their countries are, the markets should be less unpredictable. As a consequence investors should become gradually more inclined to take more risks.
The outlook for Switzerland is mixed
Whatever people may think about the news that shook our central bank, the fact that the franc was allowed to strengthen from 1.45 to 1.0749 to the euro will have inevitable consequences on Swiss manufacturing and tourism. The banking sector, which has also been hurt by the strong franc, will be forced to downsize owing mainly to a lack of support from our politicians. Isn't it the role of government to ensure the greater good? Our leaders' disregard for one of Switzerland's leading industries will be felt bitterly by those who are going to lose their jobs.