What lies ahead for our global economy this year? The uncertainty is disconcerting. From the global financial markets dealing with USA post-election Trump rally, to the political instability in Europe, it seems everyone is second-guessing what comes next. As tensions rise between the USA and North Korea, as China tightens sanctions and the threat of nuclear war looms upon us, it becomes more evident that 2017 may well go down in history as the year of hope, but higher uncertainty.
So, in an unsure world, how do investors determine what is the best for them going forward? Every day it seems our world is getting smaller, and as access to real-time events occur through the social media channels, it proves we are more interconnected now than at any other time in history.
Throughout the world, we are seeing mixed messages everywhere. For every economist who believes we will continue the bull run, you find two more who believe we are headed for a crisis or recessionary period. Many of these analysists believe it’s the case of a delayed ‘7-year itch’ and we are due for a market downturn soon citing stock prices globally are overvalued, housing markets are in bubbles and we have a credit crisis brewing.
Historically the 7-year theory rings with a level of truth to it. Just look at the last 30 years; 1987 saw Black Monday stock market collapse, 1994 Bond Market crash, 2001 Dot Com bubble burst, and finally in 2008 the Global Financial Crisis was caused by the sub-prime meltdown. We have a lot to learn from major economic events and being placed every 7 years roughly gives us a reason to not ignore the current red flags.
The USA debt situation is an increased financial risk to global markets, but no-one seems to be talking about it. The USA federal debt is sitting around $US19 trillion and Federal Reserve Chairwoman Janet Yellen has alluded recently to interest rate hikes (possibly 2) before the year is out. If interest rates on USA government debt rose by 1%, the servicing would increase approximately $US200 billion. Many economists believe the answer lies in the new US administration to stimulate their economy and make America great again. It seems ironic however, given their enormous debt, that even if President Trump managed to get his proposed changes to legislation through a slow-moving Congress, the tax savings he has outlined would be offset by the huge increase in the cost of debt servicing if rates increased too.
In addition, if trouble escalates for USA in North Korea, it’ll cost the USA as much as $14 million per day. According to the US Budgetary Costs of War paper 2016 by Watson Institute International & Public Affairs, the wars in Iraq and Afghanistan cost more than $US4.79 trillion dollars. With USA currently in debt (and about to reach their debt ceiling again) to the tune of $US19 trillion, and no foreseeable generation in the future that can pay it down, to be staring down the barrel of another confrontation seems unsurmountable in terms of funding the conflict.
Jodie Nolan is an economist and an author. You can access her e-book ‘Surviving The Storm’ for FREE with a 2 year subscription to YTE.