I don’t like making predictions, particularly when it comes to economics and investing.  The problem is that there are too many variables.  The economy (and hence investments) are dependent upon human action.  The market is made up of billions of people acting according to their own needs and wants.  In addition, in a somewhat government controlled economy, we are also dependent on the actions of public figures and politicians.

I will not make a prediction for 2011 except that I think there will be more interesting times.  I think we will see gold cross well over $1,500 per ounce OR we will see the stock market drop by 20% or more.  It will mainly depend on the Fed and the banks.  Will the Fed carry out its QE2 (money creation) like it said?  Will it do even more?  If so, will the banks lend out this money or continue to increase excess reserves?

At some point, the Fed will have to choose between inflation and depression.  If it chooses more inflation, it will eventually have to choose between hyperinflation and severe depression.  I don’t think the latter choice will have to be made in 2011.  The Fed will try to string things out for as long as possible.  It is much the same way that Congress deals with Social Security and Medicare.  Everyone tries to kick the can down the road so that the tough decisions have to be made by someone else.

The situation of state and city governments will grow more interesting.  These governments do not have the luxury of printing money.  Their day of reckoning is closer at hand because of this.  States like California, Illinois, and New York are in real trouble.  If DC bails out these states, it only pushes up the day of reckoning for DC and the Federal Reserve.

These state governments will have to default on at least some of their promises.  The sooner this happens, the better.  In Florida, there is a pre-paid tuition plan that parents can pay into when their child is young.  It is then promised that the child can go to any state university at no cost later on.  If you are a participant in such a plan in your own state and there is any hint of financial trouble for your state government, you should seriously consider pulling your money out if you can, particularly if your child is still young and years away from college.

As far as politics, 2011 will also be an interesting year to watch.  It is doubtful that Obama will get any serious challenge for the Democratic nomination, but the Republicans will be in campaign mode fairly soon.  The most interesting person to watch is Ron Paul and whether he runs for president.  Any other Republican will most likely be a typical establishment politician.  The only other exception may be Gary Johnson (former governor of New Mexico).  I would have to hear what he would say to see if he is worth supporting.

We will continue to watch the monetary base and excess reserves in 2011 to see if you should worry about a stock market crash or massive price inflation.  We will see how Ron Paul does chairing his subcommittee and we will see what kind of answers Bernanke provides to him.  We will see if this calms Bernanke down or if he will live up to his nickname of Helicopter Ben.

Pay attention to what is going on in the world, but remember to focus on things that you can control.  Do something good for you and your family.  Happy New Year to everyone and I wish you a safe, healthy, and prosperous new year.