Despite sluggish economic growth in the U.S. and much of Europe outside Germany, and low low interest rates coupled with a weak dollar, economic and population growth in Asia continue to push up commodity and energy prices. Looking at some critical commodities: oil, coal, corn, wheat, copper, these are all hitting two year (post collapse) highs and trending resolutely upward back toward prices not seen since the pre collapse peak. Economists expect continued phenomenal growth in energy and commodity demand from China and India over the next decade. JP Morgan is predicting a return to $120 oil by 2012, with the caveat that the U.S. economy cannot grow under $120 oil. Relentless Chindia demand has decoupled commodity prices somewhat from the U.S. economy, meaning that economic growth elsewhere will be bidding energy, food and other critical prices up for Americans and Europeans at a time where Americans and many European economies, several of them in the midst of national austerity programs, have no reason to expect healthy economic growth over the next 3-5 years. So, What Can We Realistically Expect? Caught between the rock/hard place and, er, third hard place of supply-side inflationary pressure from commodity prices that steadily return toward, and in some cases exceed, the record levels of pre-crash 2007-2008, ongoing sluggish economic growth, and the liquidity trap resulting from the last bailout, the U.S. will absolutely, unequivocally have to vent additional GDP. Unemployment may double from current rates and the financial system may crater again without any hope of a bailout. The U.S. government simply cannot afford to repeat the 2008 bailout exercise. Conservatively, this is what we can expect to see: - A second recession for the U.S. and most of western Europe, beginning no later than 2012, but perhaps as early as mid 2011 - A round of international bank collapses. This time, big banks will be allowed to fail. Instead of bailouts, the government will be forced into increasing the numbers of FDIC takeovers and restructuring. - A second round of housing price collapses. This time, home prices will fall back to 1990s levels. - In Europe, the paradigm will shift from bailing out indebted nations to allowing those nations to directly default on debt. This will induce a tertiary wave of bank failures. - global stock market crash, take two. The markets will crash to 20-30% below the 2008 trough. - rising unemployment across the U.S. and most of western Europe will begin to affect the Asian economies as well. - Within the U.S., state governments will be pushed into debt default and draconian levels of service reduction. Many states may lose an additional 20% or more of public employees. The great recession is about to shift into Great Depression II, at least for the western world. There is literally nothing that can stop it.