2010 is ready for the history books and most of us are glad that year is finally in the rearview mirror. Worldwide economic collapse was avoided in 2009 and the global economy stabilized and strengthened some in 2010. However, the pace of recovery was very modest in 2010, constrained by the continued effects of the US recession suppressing demand and curtailing imports, and the EU euro dollar debt crisis diverting hundreds of billions from the capital markets to fund internal emergency loans. With all the conflicting forecasts and lackluster predictions, what will the future hold for 2011? Here’s my forecast for the coming year.

The World View from the US Perspective

Overall, the world economic recovery is very fragile and economic power is rapidly concentrating in just a few nations outside the US; the OPEC oil exporting countries, the European Union, and China.

OPEC

It’s old news that economic power continues to grow in the oil exporting nations that we send our dollars to. What might be new news is that the much anticipated peak in worldwide output occurred in 2007 and 2008, much sooner than most predictions. China’s emergence as a major crude importer caused worldwide demand to outstrip production capacity for the first time in history, resulting in spot market prices that reached record levels. Remember $150 per barrel crude and its effect on fuel prices?

While many nations export crude, the OPEC cartel in general, and Saudi Arabia in particular, tries to balance their production to have supply exactly meet worldwide demand. OPEC’s goal is to get maximum value for its diminishing resource, while balancing the knowledge that too little supply will drive up prices and push the world economy into recession (which results in lower production and revenue for their member countries). Expect the Saudis to vary their production to try and hold spot market price at $90-$100/bbl to achieve this balance.

However, China’s emergence onto the world stage to compete for available oil supplies means that the era of cheap energy is ending. We just haven’t realized it yet because the Great Recession in the US (the world’s biggest importer) has temporarily reduced its internal consumption and made more supply available on the world market.

In the meantime, China has further increased its crude oil imports, taking up some of the slack. In this scenario the stage is set for an astronomical increase in oil prices when the US economy recovers and returns to importing at previous levels to meet its energy needs.

The OPEC bottom line – The most likely scenario is for a slow, steady increase in crude oil prices throughout 2011 as the global economy gradually recovers.

An alternative scenario is for crude prices to remain essentially stable if demand is suppressed by continuing recession in the United States or China’s real estate bubble bursts, sending it into economic recession (see below for more on this possibility).

Europe

The formerly robust European Union is more and more often being viewed as a misfit conglomeration of “have” and “have not” countries.

Germany and France are the economic powerhouses of the EU. The economic weaklings are the so-called PIIGS countries, Portugal, Italy, Ireland, Greece, and Spain, whose national budgets have been fueled by huge levels of deficit spending for several decades. In many cases now servicing the associated debt consumes double digit percentages of their national budget (Ireland’s is an astonishing 32%!) and is straining them to the breaking point.

There is substantial fear that these countries could default on their national debt obligations, dragging down the value of the euro dollar and endangering the economies of every EU member. In 2010 Germany led the bailout effort for Greece, which has had to reduce its national budget by a whopping 12%. The reduction in traditional government services and associated layoffs has not been received well by its citizens as news coverage of the many nationwide demonstrations has shown.

Ireland, which offered token resistance to the idea of a EU bailout, was next on the list. Arguably, it’s in the worst financial shape of any of the EU member nations for two reasons. First, many years of deficit spending in concert with so many of it’s sibling EU members.

However, unlike other EU nations, Ireland also had its own real estate bubble growing, which finally (and inevitably) burst. Irish banks began to go insolvent when the values of mortgaged real estate dramatically declined. To quell a rising financial panic the national government then took the bold (and very risky) step of publically guaranteeing all deposits, after the fact, in order to stave off economic collapse. Unfortunately, the enormous resources required to make good on that guarantee coupled with inadequate regulatory oversight to spot troubled banks before they failed, exceeded even what the Irish government could muster. The Irish government is now sporting a new $100B+ EU loan to bailout its banks and keep the economy functioning.

But, like Greece, the Irish bailout came at a cost of laying off thousands of government workers (further pushing up unemployment), cutting government salaries, and, most unfortunately, cutting the government pensions of those already retired. And also like Greece, Irish citizens are protesting in the streets over the reduction in salaries and services.

The creditworthiness of these countries had declined to the point where they were unable to borrow on the world market (at reasonable interest rates) to fund their governments, and they wouldn’t have been able to borrow at all if they had retained their national currency. Next on the bailout list may be Portugal or Spain.

Note that Great Britain, which still uses the pound sterling and not the euro, is currently running equally high budget deficits, although for fewer years than its European neighbors. It has begun budget reduction efforts driven by 2010 election results, which has resulted in the greatest civil service layoffs since World War II and has reduced this once proud world power, whose national anthem is Rule Britannia, to investigating the sale of the Royal Mail Service to a foreign company and exploring ways of sharing operating costs of its new aircraft carrier with rival France.

Will the value of the euro dollar collapse or be abandoned by some EU members? It’s unlikely in the intermediate term because the weaker nations don’t want to leave a currency backed by economically stronger nations. If stronger nations like Germany and France reverted back to the mark and franc, they would suffer an avalanche of capital inflow from those abandoning the weakened euro to seek currency stability.

The 2011 EU bottom line – The EU will remain intact and (with the exception of Great Britain) will remain committed to the euro. That stability is good for the world recovery. However, EU economies as a whole will underperform because of the hundreds of billions of euros in internal loans that will be diverted to bailout its weaker members. Look for the EU to develop some type of controls to prevent its deficit spending members from continuing to drag down the whole Union. The EU’s potential to be an economic powerhouse will be unfulfilled until the finances of its major members are set in order.

China

Economic power is rapidly shifting east and military power will soon follow. China is VERY rapidly moving beyond being merely a technologically backward player to becoming a dominant force on the world economic stage. One example of China’s pace of development is its achievement of being only the 3rd nation in the world to place a human being in orbit, a remarkable feat by any measure.

China is awash in the dollars amassed from their long term trade surplus with the US, so many in fact, that they cannot convert them into the yuan, the Chinese national currency, to directly power their economy because dumping such a huge amount of dollars on the open market to buy up the available yuan would severely devalue the dollar (sudden oversupply) and drive up the value of the yuan (sudden scarcity), making Chinese exports much more expensive. Obviously China doesn’t want to impair its export driven economy by making those exports more expensive.

So, what is China doing with all the dollars it’s holding but can’t convert? It’s almost literally buying entire countries and continents!

China is aggressively moving to secure sources of raw minerals to ensure that its economic development can continue. It has invested heavily in Australian mining companies to the point where Australia now derives a significant portion of its GDP from mineral sales to China. China wants to further increase its ownership stake in these Australian corporations, but the Aussie government has refused to allow further investment leading to majority ownership, fearing a complete takeover of its national mineral wealth.

China is also investing heavily in natural resources across the African continent. Africa has very few large cap mining corporations on the continent (DeBeers of South Africa being one of the few exceptions), so China is dealing directly with each country’s national government to negotiate exclusive deals to develop their mineral wealth.

For African nations, in exchange for the exclusive right (key words) to exploit their mineral resources China offers to use its financial and technological muscle to rapidly develop the mines, often located in remote areas, and associated infrastructure like rail lines and ports, along with guarantees to employ a large segment of a nation’s population in each mine’s operation.

This rags-to-riches promise is obviously attractive to impoverished governments with limited economic means to develop their mineral resources on their own, but it comes at a terrible price. So far the workforce for these mines has indeed been hired locally, but their new work situation is far from Utopian. In most cases they “work for the company store” as was common in the USA a century ago, are charged exorbitant rent for living in barracks far from home, and make nearly every purchase at high price from local retailers wholly owned by the company. As you might suspect, little is left to send home to the family after meeting these expenses.

Meanwhile, management remains firmly in the hands of the Chinese corporations, effectively preventing African nationals from gaining management experience and improving the intellectual capital of their country.

The effect of all this activity will be to eventually drive up the cost of strategic minerals worldwide as China locks up the remaining mineral resources essentially at the cost of extraction.

Finally, China is in the midst of its own housing bubble fueled by rampant real estate speculation, very similar to what the US experienced early in this century. The rapidly growing Chinese middle class has very few financial instruments to invest in, but real estate is available to anyone with sufficient cash to fund the purchase. In a Chinese version of Flip This House, individuals and extended families are investing in real estate for the sole purpose of the prospect of selling in the near future at substantial profit.

After watching the fallout when the bubble burst on the American market, Chinese officials recognize the dangers and are taking steps in their command-and-control economy to cool things off. Recently, foreigners have been limited to a purchase of a single home in China, the government is urging banks to curtail credit used for real estate purchases (not expected to have much of an effect since most purchases are 100% cash), and is talking about limiting the number of houses, apartments, or condos that their citizens can own at one time.

If the Chinese real estate bubble bursts causing a huge loss of personal net worth like the American bubble did, you can expect China’s internal consumption to dramatically decline, reducing the volume of consumer goods that China imports from around the world. A dramatic reduction in Chinese imports could tip the world back into recession as exporting nations lose the jobs and revenue exporting to China provides.

The 2011 China bottom line – China’s consumption of world resources has reached the point where it affects worldwide market pricing and availability. If China’s economy continues to perform well in the coming year, it will compete more aggressively on the open market for limited global resources.

Much depends on whether the government can reign in internal real estate speculation. The most probable scenario is that China will successfully cool off the overheated housing market that threatens its economy. However, if the real estate bubble bursts, then China’s new middle class will lose a significant portion of its wealth, driving down internal consumption. Dramatically reduced imports of luxury goods and high end manufactured products will impact the global recovery and could produce another global recession.

The 2011 World Economic Forecast

Most likely scenario – Slow, steady economic improvement as the EU powerhouses (Germany and France) continue to fund bailouts of its heavily indebted partners in the euro dollar and China avoids its own economic recession by deflating its real estate bubble.

Alternative scenario – Worldwide recession if several European nations abandon the euro dollar and revert to their own sovereign national currencies or China’s real estate bubble bursts, seriously reducing its internal consumption and the imports it drives. The recession could be severe in this scenario, since the United States’ own economic recovery will not have progressed to the point where it can make up for the reduced demand on the world market. The countries who will be least affected and could emerge as new economic superpowers would be Germany, France, and the OPEC countries who have amassed decades of oil trade surplus funds.

I share my economic forecast for the US in 2011 Economic Forecast – Part 2: The United States (US).

Which scenario will come to pass? It’s hard to tell because we haven’t been here before, but I’ve shared my best guess. Do you think I nailed it or do you have a different opinion? I look forward to your thoughtful comments, insight, and opinions.

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The typical American household budget percentage breakdown looks like the list below. For most of the categories a range is shown. A range makes more sense to help you see where your personal budget fits (or doesn’t fit.) If your budget doesn’t fit the typical American household budget, rejoice! The average American household budget is jacked up – we carry too much debt and we just don’t save enough. We’re so worried about our neighbor’s new pool, our co-worker’s new car and our friend’s new designer shoes that we spend more than we earn to try and keep up. But take heart! Review the percentages below, compare your household budget and then read on to find out how you can move yourself into the elite minority of Americans who have mastered where their money goes.

Typical Household Budget Percentages

33-38% Housing (59%-66% of this is on shelter – mortgage interest, property taxes, repairs, and rent, and other items)
15-19% Transportation (up to half of this is vehicle purchase – 2 cars per household average)
13-14% Food Budget (55% at home, 45% away)
0-2% Alcohol
0-3% Tobacco and related products
0-2% Caffeine related products
4-5% On clothing and related services (drycleaning)
4.5 – 6% on out of pocket Health Care
9% Personal Insurance and Pensions (breakdown: 1% life and other personal insurance, 7.5% Social Security, .5% investment
5% Entertainment
2.5% Charitable Contributions
2% Reading and Education
1% Personal Care products and services
2% Miscellaneous
4% Credit Card, Consumer Loan Interest

If your budget closely matches the above, here’s what you can do to fix that. Do these in order. Do not proceed to the next step until you’ve addressed the current step:

Stop using your @#!&*! credit cards!
Make a down and dirty budget right away! Don’t worry about it being right at first…you can perfect it over time. Just do it!
Cut back on your easy to identify, frivolous spending habits (3 dollar lattes, magazines, 450 extra satellite channels, etc.) If you’ve got some expensive habits you’ve wanted to quit for some time, now’s the time. For example, if you’re a hard-drinkin’, chain smokin’, coffee drinkin’ fool, you can reap a windfall of up to 7% or more of your income! Just cutting back to 2 drinks per day, only drinking coffee from home and quitting the cigarettes will net you a nice amount of extra cash and add years to your life! Refine your budget after eliminating what you can.
Reduce your 401K and other investment payments (if you have any) to the minimum allowable to keep your 401K and/or other investment accounts open. If your employer has a stock matching plan, keep that in addition to the minimum to keep your investments accounts open (but only up to the minimum you need to get all the matching money.) You’re going to reap a whole lot more return on paying off your debts than you can ever hope to reasonably get from traditional investments. If you’re paying into a college fund for your kids – keep doing that – if you’re not and you really want to, hold off until step 6. Refine your budget to reflect the extra income available, if any.
Build an emergency fund equal to 2% of your gross annual income. It should be a little hard to get to (like a separate checking account or mutual fund), but not too difficult (Certificate of Deposit.) Work this into your budget – it’s very important. You will not believe the amount of stress that will melt away when you do this.
Pay off your debts – everything except mortgages. And don’t just move your revolving debt into a second or third mortgage – that’s bad. Pay them off using a rapid debt paydown system. Pay off any student loans (for future reference, these are a bad idea.) Pay off your car(s) too. If you’re not upside down on a car loan (your car is worth more than you owe) you can sell it and get a cheaper, paid for car. Throw a small (inexpensive but fun) party for yourself and your loved ones every time you pay off a debt.
Take all the money you WERE spending to pay off your non-mortgage debt and start putting it into those investment accounts you put on idle. Make sure you’re investing at least 10% of your gross income. If you followed steps 1-4 exactly, you should have lots of breathing room in your budget now. If this is true and you want to invest more than 10%, go ahead, but be sure to reward yourself too and live a little. Grow your emergency fund to a level you’re comfortable with (2 or more months of income is a good start.) If you have young kids and you want to send them to college, start putting money into a college fund of your choice for them, if you haven’t already. Throw a bigger party than usual when this is done.
Pay off your mortgage and throw your biggest party yet! You can start towards this by refinancing to a single fixed rate mortgage (your credit should be in pretty good shape having paid off all your other debts.) If it’s a 30 year mortgage, pay more than your monthly payment to dramatically lower the amount of interest you give to the bank. If it’s a 15 year fixed – wow! That’s excellent!
When you’re totally debt free, regularly give away whatever you think you can afford. It’s good for the soul!

Easy? Not. Worth it? Doing the above will pay dividends in your life in many more ways than just dollars and cents. You will assure yourself a dignified and financially secure retirement. Do this well and you will also build a way for your kids and your grandkids to enjoy prosperous lives, and they will remember you with fondness and respect long after you’ve moved on to the other side. Now get started!

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There are a number of concerns in the case of homeowners allowing their homes to go into foreclosure because they can not afford them anymore, and what the consequences will be for such a decision. Before choosing to let a house go into foreclosure, though, every homeowner should look into a few other options to stop foreclosure first. While foreclosure refinancing is the option that most homeowners attempt first, credit and income considerations and tighter lending guidelines have precluded most homeowners from qualifying for a loan right now. This makes it necessary for homeowners to gain more broad foreclosure advice and look at other methods to save their home before willingly allowing it to go into foreclosure.

Regardless of the homeowners’ financial situation and the current real estate market, the house should be listed on the market just on the off-chance than an interested buyer wants to purchase it before the foreclosure goes through. Selling to avoid foreclosure is always a better option than foreclosure. Foreclosure victims can also try to work with the lender for a short sale, where they would sell the property for less than what they owe on the loan, including all of the miscellaneous foreclosure costs and accelerated interest. With this option, at least the short sale will pay off the loan and save the homeowners’ credit more than having a foreclosure show on their report.

If the short sale is not a viable way to stop foreclosure, homeowners should ask their lender about giving a deed in lieu of foreclosure. This option involves just giving the property back to the bank, and the can not go after anything other assets that are owned by the foreclosure victims. The mortgage company accepts the deed instead of foreclosing or having the loan paid in monthly installments, so there will be nothing else for them to go after. Of course, this option still results in homeowners losing their home and is only slightly better than a foreclosure, but anything the homeowners can do to preserve their credit will help at this point as the homeowners begin the process of financial recovery.

It will depend on how the bank pursues the foreclosure and what state the property is located in to determine whether or not they can sue the former homeowners for a deficiency judgment in order to go after any other assets. With just the foreclosure, though, they are not entitled to anything else. Homeowners, when applying for the mortgage, pledge the house as collateral for the loan — not their car, 401(k), or prize racehorse. So all that the lender can take as payment for the loan is the house. Nothing else is used to secure the mortgage and the bank only has the right to the loan payments or the security without suing for more after it is determined the security is not worth the amount needed to pay the loan.

The best place for foreclosure victims to begin researching these issues is to look up their state foreclosure laws and consult the original loan documents to determine what kind of foreclosure the bank can proceed with (Judicial or Non-Judicial). This small amount of foreclosure information will tell them if the mortgage company can sue them afterwards and try to go after any other assets. Some states do not even allow this practice, making it the bank’s responsibility to ensure that the real estate is of a sufficient value to pay off the loan in the event of a default. Other states, though, allow the bank to continue their collection activities even after the foreclosure by suing for a deficiency judgment.

In reality, banks rarely sue for deficiency judgments, though, since they know that foreclosure victims do not have a lot of extra cash or even the ability to borrow any money. Their credit is often so far damaged by the very recent foreclosure that they could not qualify for a credit card or personal loan if their lives depended on it. In addition, it costs the lender extra time to sue for a deficiency judgment and there is no guarantee they would be able to collect on the judgment at all, so most do not bother to waste their time chasing after money that simply does not exist.

Thus, while there may be a slight danger of being sued after foreclosure, homeowners in most cases will not have to worry about this consequence if they simply allow their home to go into foreclosure. This is often not the ideal way to stop foreclosure, though, and other methods should be examined before deciding to give up on the house. Refinancing out of foreclosure is only the most common option, although it is one of the least successful ways to avoid foreclosure. If homeowners conduct some basic research about foreclosure, they will be able to put together a more viable solution with numerous plans to save their homes, rather than passively allowing the situation to ruin their credit to fullest extent that it can.

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Even if you have a house that you can use for secured loans, you shouldn’t risk it if you only want a small amount of money. You can simply choose one of the small secured personal loans that are designed especially for those that need smaller amounts of money.

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A personal loan is a godsend for anyone who is in need of quick cash. The great thing about taking out this type of loan is that there is no need to tell the lender how or why you will be using the cash. In fact, you could be planning to use it to just get caught up on some outstanding bills. Or, maybe you need it for a vacation or to add a room to your home.

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