Surprises and Disappointments

June 27, 2011

Unexpected developments frequently are disappointing.  Japan’s massive earthquake in March, which triggered a massive tsunami and serious nuclear facility accident, arguably top the lists of greatest disappointments and greatest surprises during the first half of 2011.  Although Japan lies in geologically active region, it was not possible to know precisely where and when earthquakes will strike, or to foretell their severity and the chain reactions of destruction that might follow.  A slowdown of U.S. growth to about 2.1% annualized in the first half of 2011 from 2.8% in the second half of 2010 proved to be another disappointing surprise related in part to Japan’s disaster.  When the Congress decided at the eleventh hour not to let the Bush tax cuts disappear even partly and the Fed launched a second round of quantitative easing, the pundits were betting on stronger, not weaker, growth. 

Not all disappointments are surprising.  European leaders continued to fumble a resolution of the various debt crises in the euro area.  The pattern of clumsy brinkmanship was already well-established by the start of 2011.  Intensifying fear of contagion and financial market strains were identifiable ramifications so long as a lack cohesion continued, and that seemed a safe assumption.  Polarized Euroland growth likewise is disappointing but not very surprising. 

Some surprises are not disappointing.  The dollar was widely projected to appreciate in 2011.  Some analysts perceived a chance that dollar-euro parity might be challenged.  Had these experts realized that Europe’s debt crisis would become even messier than imagined, dollar bullishness would have been even more pervasive — and yet just as ill-advised — at the start of the year.  That said, it’s a good thing that the dollar didn’t soar to par against the euro, 70 against the yen, or $1.70 versus sterling.  Such moves would have undermined the need for rotating U.S. growth away from personal consumption and toward foreign demand and business investment.  Another pleasant surprise has been the continuing low level of Treasury yields.  If the interest rate doomsayers had been right about an imminent spike in financing costs, the U.S. expansion could have stalled given other unexpected headwinds like crude oil prices averaging 14.5% higher during in the first half of 2011 than in 2H10.

Some surprises are disappointing to some segments of the population but not to everybody.  Unexpected evolutions of politics generally fall into this category.  Michelle Bachmann’s emergence as a front-running Republican candidate for the presidential nomination is an example.  Although a Tea Party favorite, she didn’t have the name recognition coming into 2011 that many of her rivals enjoyed.  As a hard-core social as well as fiscal conservative, her surprisingly high polling numbers in Iowa will energize her followers but trouble other elements of the GOP and U.S. electorate.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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