The Crash of 2011: What if the green sprouts turn to weeds?

In 2007 — at the height of the boom — all the signs that the good times would soon come to a screeching halt were there: Home prices were climbing out of reach, consumer spending was being fueled by increasing debt and financial companies were leveraged to frightening levels.
Even so, most of us chose to ignore or pooh-pooh the impending storm, until the crisis broke with a thunderclap last fall.
Now that the Fed has flooded the credit markets and the government other rescue efforts are under way, the nation’s economic outlook and mood has brightened. The current conventional wisdom is that the recession is bottoming out and a recovery, although not a particularly robust one, is on the way.
But before we grow complacent, let’s consider: Our ever-growing national debt, our frightening Social Security and Medicare obligations, not to mention our fragile economy, are not going to disappear any time soon, no matter how far north the Dow climbs on any given day.
What if we’re headed for another tumble instead of a recovery?
Here’s how another crisis could unfold.
It’s next October, and a hurricane slams into Texas, knocking out refineries and causing oil and gas drilling in the Gulf of Mexico to stop for two weeks.
Oil prices zoom to almost $100 a barrel, leading to a drop in the stock market and further declines in auto sales.
On the heels of higher fuel prices, an unusually cold December drives up home-heating-oil costs even more, which leads to sharply lower retail sales in the Northeast in the vital pre-Christmas shopping period.
In 2010, unemployment rises to 12% as the public grows skeptical of the Obama administration’s recovery plan. With Republicans poised to gain a pivotal seat or two in the Senate, Democrats push through a costly new health care bill while they still control Congress.
The deficit continues to grow and the dollar keeps slipping against other major currencies. Interest rates inch upward, food and fuel prices rise, gold hits $1,000 an ounce and GM’s turnaround is nowhere in sight.
In mid-2011, in order to placate its increasingly belligerent neighbor, the South Koreans gives North Korea billions of dollars in aid and gifts funded by the sale of U.S. Treasury securities. The sale begins a wave of selling by other countries, leading to a sharp downdraft in Treasury prices, which causes panic selling by other countries, pushing short-term U.S. interest rates into the high teens.
With the economy going south, prices rising and the looming threat of an international flight from the dollar — not to mention a 1,000 point one-day drop in the Dow industrials — Congress and the administration are forced into action.
To show the world the United States is putting its economic house in order, it slashes government spending by 20% across the board, cuts Social Security payments and Medicaid benefits by 25%, raises the retirement age to 70 and imposes a 15% surtax on all income.
The actions calm the markets for the moment, but the public is stunned. With their job prospects slim, their meager life savings decimated and Social Security and Medicare payments drying up, they begin to lose faith in the future of the American Dream.
Granted, there are a lot of “what ifs” in my bleak tale — it’s just one possible scenario. Let’s hope it’s not the scenario.

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