2011 turned out to be a far more momentous year than expected. The Arab Spring started in Tunisia and spread almost everywhere, eventually coming home to roost in both America and Russia; The Eurozone crisis expanded to come to threaten the economy of the world as a whole; The Fukushima disaster killed the Nuclear industry’s nascent recovery and cast new questions on the future of energy; and Congressional deadlock paralyzed the US Government, producing some of the most embarrassing scenes my generation’s been witness to. We come then into 2012 a dramatically changed world, prompting us to take a moment to glance about and see where we stand.

The Economy

We enter 2012 facing a continuing crisis in the Eurozone that threatens to undo a decade’s work and realize an incredible amount of systemic risk. Coming fast on the heels of the largest recession since the 1930s, policymakers have been caught flat-footed, torn between demands for austerity from a conservative revival and persistent unemployment and slow growth. Last year ended with a bang as Britain decided to forgo a new fiscal treaty, leaving the remaining members of the Eurozone to move forward without the UK. Initially hailed as a major step forward, the new treaty proposal faces two problems: First, it’s not at all assured the rest of the eurozone members will sign it, with the Finish parliament already stating they won’t hold it binding; second, it’s profoundly undemocratic. This year in Europe will see conflict drawn vertically from the ECB all the way down to the streets to decide who will pay for the Euro’s shortfall: the ECB, the banks, the bondholders, or the people themselves.

The rest of the world faces its own economic challenges. The American economy continues to vacillate between small positive signs and a continuing overall malaise. China’s growth continues, but there are signs they may be reaching an inflection point: the rise of a middle class threatens to undermine both the tacit political agreement that’s kept the government unchallenged for a generation and the low wage manufacturing base which has driven its growth. In the long run, China will continue to grow — the fundamental strength of the economy and the sheer size of its population will guarantee that — but we’re beginning to see a change in the works.

The world now holds its breath as the three powers face their challenges: a stumble in the US, Eurozone, or China could spell disaster for the world economy. The upside isn’t great either: without a significant development somewhere, the world economy is on track for a pretty lackluster performance this year.

The Protests

If for nothing else, 2011 will be remembered as the year of the protest. Starting with the self-immolation of a vendor in Tunisia and spreading in no small part due to the proliferation of smart phones and social networking, a wave of popular protests swept the globe this year. At the start of 2012, we see a new government forming in Tunisia and Libya, ongoing strife in Egypt, protests over rigged elections in Russia, a Chinese city in open rebellion, and “Occupy” protests in nearly every major city in America. The complaints vary from region to region, but the underlying theme is anger at a political elite who’ve failed to listen to or respond to their constituency. The speed and ferocity of the protests caught the world off guard: quiescent populations seemed to erupt with a fury almost alien to recent generations; echoes of the 1960s ring throughout the world. These popular protests should continue to be a factor in 2012: while the political narratives are starting to shift, the themes driving the protests are still securely in place; the people’s work is not done.

Hacktivists, Crypto-Anarchists, and Cartels

While the emergence of Non-State Actors has been a factor for several years, 2011 was the coming out party for Anonymous, the hacker collective emerging from 4Chan. One of the stranger stories in an already marked year was the conflict between the Zeta Cartel, a non-state paramilitary narco-cartel, and Anonymous, an anarchist hacker collective: The Zetas kidnapped an Anonymous member involved in street action in Veracruz, and Anonymous threatened to make public a web of Zeta informants and agents if the Zetas didn’t release the kidnapped. The Zetas eventually relented, deciding to release the member instead of testing whether Anonymous had the resolve and skill to make real their threats. Despite the quiet resolution, this may have been the first true twenty-first century conflict: the Zetas are a private army in and of themselves, and Anonymous is a global brand. Neither one answers to any nation state, and should the two have descended into conflict, no government has the pull to stop them: a true post-national conflict, and an important signpost for the year ahead.

Rogue States and Regional Realignments

The death of Kim Jong-Il promises an interesting year on the Korean peninsula. The best summary I’ve heard of the Korean situation goes, “If anyone tells you they understand N.Korea, they’re either lying to you or to themselves.” My thoughts here should be taken with that sentiment in mind. The next year in the DPRK promises to be volatile. Rumor has it the younger Kim was responsible for the shelling of the South Korean island Yeonpyeong and the sinking of the South Korean naval vessel Cheonan, both actions taken to burnish his credentials with the military. If the military is slow in taking up the banner of Kim Jong-Un, we may see more aggression from the North. Alternatively, if he cannot solidify his power base, a coup is not out of the question. Chaos on the peninsula is not a scenario anyone wants; the outcome in the event of a coup is highly uncertain. It may be the best outcome for the North Korean people, though — it’s hard to see how things could get worse for them.

The Middle East is in transition as well. On the eve of the US leaving Iraq, the Iraqi president, a Shiite, issued an arrest warrant for the vice president, a Sunni, accusing him of terrorism. Iran is starting to play its hand harder in the region, increasing its influence over Iraq while attempting to reach out to other potential partners. With heavy investment from China, the Iranians have the sort of backing to make a big splash: the axis of the Middle East may soon turn around Saudi Arabia and Iran and their respective backers, the US and China. The Syrian president has been a historic ally of Iran; the resolution of the rebellion there will influence the balance of power in the region as well.

Pakistan has been a fair-weather friend by even the rather limited standards of international diplomacy, but the recent discovery and execution of Osama Bin Laden on Pakistani soil have driven a deep rift into US/Pakistan relations. More importantly, though, they’ve drawn bare a stark divide between the Pakistani Army and the civilian government: never on solid terms, the relationship is even more tenuous than imagined. In November, a memo came to light allegedly written by the Pakistani ambassador requesting US aid preventing a coup by the Pakistani military. Other payments promised included the whereabouts of several wanted terrorists and the disbanding of the Haqqani network, a rather severe bit of proof of what many suspected as Pakistan’s duplicity in the War on Terror. In any foreign affair, one must keep in mind domestic politics ultimately trump international demands. Pakistan’s reluctance to help the US has been apparent from the start; it’s not their war and they’ve done just fine leveraging their connections in the region. Nobody turns down a $60Bn check, especially without clear metrics for success, but we’ve worn out our welcome. In 2012, the US will need to decide whether it can continue its alliance with Pakistan or whether it needs to seek other friends in the region.

US Political Theater: Tragedies and Comedies

The US enters 2012 well positioned from a foreign policy standpoint, but from a domestic standpoint, 2011 has been an unparalleled disaster. The Republican party has turned the odd rules around the filibuster into a de-facto 60-vote requirement in the Senate, and the combination of their majority in the House and a deeply divided caucus has meant the 87-member Tea Party caucus has a dramatically outsized influence on the 435-member House. The payroll tax extension offers a small glimmer of hope that the deadlock of 2011 may give way to a more functional body, but I’m not overly optimistic. The big news in 2012 will be the presidential election. After a year’s circus of candidates that ranged from questionable to unelectable to just embarrassing, the three remaining republicans are Mitt Romney, Newt Gingrich, and Ron Paul. Republicans hate Romney, but he’s the only one who could possibly stand in a general election. Newt Gingrich has enough skeletons in his closet to stock a major anthropological study — not least of which that he was forced out in 1998 by his own party. I’ve few bad things to say about Ron Paul except that I strongly disagree with him about nearly everything and that he’s utterly unelectable to the general populace. So, Obama will probably face Romney in what’s likely to be one of the dirtiest and most well-funded campaigns on record, which should do wonders to heal the divides in America and usher in a new spirit of bipartisanship. I’d put my money on Obama, but my real interest is whether either the House or the Senate change hands — a move in either direction could portend far more for US politics than who occupies 1600 Pennsylvania.

Wild Cards

Chaotic though the scene may look, in all the above cases we’ve seen the unfolding of events far enough to be able to plot different scenarios; their visibility doesn’t mean we know how they’ll end, but we can make some guesses, and with guesses, we can assess risk. Risk in the world is fine: we know how to handle risk. We can prepare for risk. As Donald Rumsfeld said, though, it’s not the known knowns or the known unknowns, but the Unknown Unknowns that get us: the things we don’t even see coming. The Wild Cards. By their nature, the wild cards are hard to predict: if you can predict them, they’re not wild cards. There are certain developments I’ve seen this year, however, that have the signature of potential banner events for next year. My top four for 2012 are:

Russian Democracy

Russia is entering a state of transition: The election this year was blatantly rigged, and the people have taken to the street. The previously unflappable Vladimir Putin issued statements echoing deposed autocrats in the Middle East, from whom he also seems to have divined his PR strategy. If Putin stays, he’ll seek to consolidate his power further; if he goes, Russia could move strikingly towards democracy. Either way, Russia has the potential to make big waves this year — the test will be the presidential elections in April.

The South China Sea

China and the US are beginning to circle each other in the South China sea. China has been increasingly assertive in the region, and the US military is beginning to take notice. While it’s unlikely to turn into a full conflict, I expect to see increased tensions as China begins to realize its status as a superpower. As a brief aside, it’s important to recognize that the Chinese are almost entirely fenced in by American allies – events in the South China sea should be considered through the lense of a country looking down the barrel of a strong American military presence on their borders.

Al Qaeda in Africa

The third wild card is the Al Qaeda affiliates operating in Africa. Having been largely drummed out of Afghanistan and the larger Middle East, Al Qaeda affiliated groups in Africa have become more prominent, with the Yemeni branch attracting the most attention. These groups are operating in countries with even weaker governments than most of the Middle East in an area where Western powers have less reach.

The Bond Vigilantes

From Greece to Italy to Spain and, eventually, to France and Germany, spiking financing costs have been the mechanism by which the Euro crisis has spread. Reflecting market fears of a government’s solvency, they can be a self- fulfilling prophecy: Bond buyers worry that the government can’t pay its bills, so they demand higher yields from governments that now face higher costs and higher deficits, a vicious circle. So far, Greece, Italy, Ireland, and several other European nations have fallen victim to the bond market. It was alarming, therefore, to see yields on bonds from France and Germany, seen as the two strongest economies in Europe, begin to spike: a default by either France or especially Germany would destroy the Euro. This is the fear of the so-called “bond vigilantes”: if a country is perceived to be less than solvent, a vicious cycle of escalating financing costs can drive it to insolvency regardless of whether it would have survived otherwise. The problem is, the market’s shown itself so volatile that even radically unfounded fears may be enough to tip yields to the point that saner investors have to go with the flow. These tipping points can shock with their speed and set off devastating chain reactions across the globe, and given the last couple years and the increasing fears of sovereign debt defaults, I suspect the bond markets may wind up becoming another wild card for the year.

Wrap-Up

So here we are in 2012. Amid the chaos, I think it’s important to sit back and remember that stability is not necessarily good, and instability not necessarily bad. Chaos can be followed by positive developments, and instability can break bad cycles. In the Middle East, the Arab Spring has changed the dynamic from one of dictators and their wards to the potential for a government that legitimately works for its people for the first time in several generations. In the US, the Occupy movement has thrust the phrase “Income Inequality” into the popular discourse, and in Russia the protests may lead to a revitalized democracy in a country that was slumping back to authoritarianism. Above all, the chaos of 2011 and the uncertainty leading into 2011 was fueled by economic growth and an awakening middle class around the world: The fundamental thread connecting the Middle East, the Eurozone, US Politics, and Chinese transformation is the assertion of the people to their right to a good life. In this lens, 2011 was an amazing year, and 2012 has the potential to be even better.

Here’s to a great year.