As we usher in a new year, it’s time to reflect on hopes, aspirations, and even the uncertainties that lie ahead. With the arrival of 2017, we have an opportunity to reset and embrace fresh beginnings.
In this year, what awaits us? The future holds both challenges and opportunities, but the answers may be less clear than we hope.
By taking a moment to pause and center ourselves, we can visualize the possibilities that the coming months may bring. What can we anticipate for financial markets? Will the global economy expand or face downturns? And what about the intricacies of our world, from geopolitical tensions to sporting events?
These are the pressing questions we seek to explore. While forecasting can often feel like an art, we find it’s not so different from the tactics used in monetary policy.
Before diving in, let’s heed the wisdom of ancient Chinese philosopher Lao Tzu: “Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.”
This reflection reminds us that our insights stem from an overall lack of certainty. So, with that in mind, we present a collection of lighthearted predictions for the year ahead…
Global Recession
Initially, the enthusiasm sparked by Donald Trump’s election victory will likely fizzle soon after his inauguration. Without a significant economic crisis, stimulating a $2 trillion spending bill from Congress will be a daunting task. Even should such a fiscal stimulus be approved, its impact on the economy may be delayed, taking four quarters or longer to materialize, if at all.
The 2009 American Recovery and Reinvestment Act revealed that funding infrastructure projects is often more complex than many realize. The notion that “shovel-ready” projects truly exist is misleading. Significant infrastructure developments that generate high-paying jobs require much more than a newly inked stimulus bill.
This vital lesson was all but forgotten once the economy showed signs of recovery following the Great Recession. However, it will soon resurface. As the understanding dawns that stimulus spending won’t provide an immediate boost, the fervor in markets will begin to wane.
Meanwhile, the Federal Reserve’s attempts to “normalize” interest rates will likely also stall, as the economy may not sustain higher rates. This predicament isn’t solely Trump’s doing; he inherits a severely weakened economic landscape.
Fixing it is a formidable challenge. Years of economic decline have left deep scars, and introducing new debt-fueled stimulus will only exacerbate the growing divide between debt and GDP.
Specifically, as debt climbs, GDP is projected to lag behind. Additionally, larger deficits may later trigger inflation levels resembling those last seen in the early 1980s. Ultimately, a scenario characterized by slow growth alongside rising consumer prices is anticipated.
However, before we reach that point, a pivotal moment will occur. By mid-year, it will likely become evident that economies worldwide—including those of the U.S., Europe, China, and Japan—are in full-blown recession.
The Fed will revert to a zero-interest-rate policy, with Ten-Year Treasury yields dipping below 2 percent as investors flock back to “the safest investment in the world” when risks may be highest. The S&P 500, which is currently near its peak, could tumble to around 1,200. It is only when fear reaches its pinnacle that Congress may finally support Trump’s extensive fiscal initiatives.
Other Visions for 2017
At that juncture, chaos may reign. Infrastructure stimulus effects could be deemed insufficient to salvage the economy, prompting calls for immediate action from influential figures like Larry Summers, who may seek to replace Janet Yellen as Fed Chair.
There could be direct debt monetization in the form of “tax rebate checks” sent to every working-age citizen, irrespective of taxable income. While this might provide a temporary economic boost, it would likely be overshadowed by an inflationary tide and rising interest rates.
The appreciation of the dollar is expected to reverse by the second quarter, rekindling interest in gold. Consequently, the first quarter presents an optimal opportunity to invest in gold, with prices projected to rise above $1,350 per ounce by mid-April.
This upcoming year is likely to be fraught with distress. As the global economy falters, political leaders may attempt to deflect blame from their missteps. Looking for scapegoats, they could resort to diversions that channel their populations’ frustrations elsewhere.
Emerging global tensions may lead to conflict; territorial disputes in regions like the South China Sea, involving countries such as China, Malaysia, the Philippines, Taiwan, and Vietnam, are likely to escalate. Similarly, longstanding disagreements between Japan and China over certain islands may grow deeper, providing distractions as their economies struggle.
On a positive note, we enter the New Year with hope for a ceasefire in the ongoing Syrian proxy war, despite the shortcomings of global diplomacy. There are numerous reasons to feel optimistic as 2017 unfolds.
Across the world, inventive minds—operating outside the conventional bounds of scientific propriety—are on the brink of a transformative energy breakthrough, one that humankind has awaited for over four decades. This discovery, contrary to what one might expect, may arise from a small team of visionaries working from a garage.
As the late Gordon MacKenzie once said, “Orville Wright did not have a pilot’s license.”
In the realm of sports, the Dallas Cowboys are poised to claim victory in the Super Bowl.
Wishing everyone a prosperous New Year!
Sincerely,
MN Gordon
for Economic Prism
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