Tuesday, December 27, 2016

A Few Questions to Ponder as we Head Into 2017

2016 was perhaps one of the most eventful years in history in terms of political events with the Brexit vote and the US Presidential election result. Despite these being potential shocks to the system, we still did not get the major financial crisis that people like Jim Rickards and many others have said they believe is coming some day. Even with all the various systemic risks that have been mentioned by both the IMF and the BIS, none of these have resulted in a new major crisis so big that the entire monetary system has to be "reset". This is what we watch for here no matter what happens in the political arena. 

The election of Donald Trump has clearly changed the status quo in politics for better or worse and only time will tell how that will turn out. While it is true that politics can impact what public policies are put forward economically and we will clearly see some major changes in some areas, this is not really what we watch for here. If all that happens is that Trump simply tweaks the existing system (changes taxes, regulations, trade policies, etc) that may or may not contribute to the kind of major crisis we watch for here. It is likely his policies alone would not. Some are concerned over his ideas on trade, but it is really too early to tell what he will actually do in that area (major overhaul or just tweak things) and how much impact he will have.

The things that are more likely to matter in terms of what we watch for here are:

- the level of public and private debt vs. the GDP of the economy

- failure of one or more "too big to fail" entities that triggers a global derivatives chain reaction (resulting in trillions in contract defaults very quickly)

- monetary and interest rate policies at central banks around the world

- sharp movements in US dollar exchange rates 

- a major cyber attack against the financial/banking system of the US or other major powers

- any geo political event that places too much stress on the global financial system (a war involving major powers for example)

- a major crash in US and/or global stock markets (a major bubble bursting type event)

- a major crash in bond markets (a major bubble bursting type event) 

While Donald Trump's policies might have some impact on some of the above items, some of these items are likely completely out his control and if they were to unfold could overwhelm him no matter what policies he tries to put in place (good or bad).

As Donald Trump takes office all of the following possible triggers for a major crisis were already in place before he is sworn in:

- hundreds of trillions in global derivatives contracts around the world

- nearly 20 trillion in US government debt (plus many tens of trillion more unfunded future obligations like Medicare, Social Security, etc)

- a US stock market at all time highs and interest rates at all time lows (what happens if these markets reverse in a volatile way?)

- a sharply higher US dollar causing stress on foreign debt (estimated 9 Trillion) held in US dollars and borrowed at very low interest rates

- very high debt to GDP ratios in many advanced economies around the world and the US

- an interconnected global banking/financial system where a failure at one or more major institution (or sovereign power) could quickly lead to global contagion

- systematic hacking and cyber attacks by foreign governments intelligence agencies


So, these are the big questions for us here heading into 2017:

1- Will one or more of the potential triggers in the list above go off during 2017 or sometime during Trumps first term of office?  (Jim Rickards has predicted this will happen)

2- Is Donald Trump walking into a "setup" (planned or unplanned) for economic failure no matter what policies he puts forward?

3- If a crisis does unfold in 2017 or during his first term, how will Trump deal with it? Would he agree to a "solution" from the IMF that included replacing the US dollar as global reserve currency with the SDR? 

4- If no crisis unfolds during his term, will his economic policies really stimulate true growth, increase better paying jobs, continue to boost markets, etc.? Can he "outgrow" the expanding future US debt obligations? Will most people feel better or worse off financially in four years? If he succeeds, the main purpose of this blog will disappear since major monetary system change would be very unlikely any time soon. (In this new interview on CNBC, Jim Rickards says he thinks Trump will not be able to get the results he is looking for in 2017)

We don't know the answers to the above questions. But we can get some idea from the economic team Trump has selected. 

His early picks suggest he is much more likely to just tweak the present system than to radically reform it unless the kind of major crisis we watch for here hits him during his term. If that happens, his picks for his economic team (very much establishment types) suggest he would likely go along with whatever they tell him has to be done including accepting the IMF as lender of last resort. There is nothing about his economic team that suggests they would resist an IMF plan if they were told it was the only viable option. Of course, it was never discussed during the campaign and Trump simply assumes it will never happen on his watch when he talks about his plans to the public. 

In fact though, he could ironically end up becoming a salesman for such a plan to many of his followers who would be skeptical of such a plan if someone else presented it to them. Trump is much more pragmatic than many people believe and can switch his perceived position at any time if he thinks he needs to (see Art of the Deal).  All of my best sources here are also watching to see how Trump might react to a new major crisis and none tell me they know for sure.

It will be interesting to see what actually happens in 2017 and beyond. We'll keep an eye on it here until at least early 2018 to see if there is any further purpose for this blog. I guess I should hope there isn't.

Added note of interest: I got this interesting bullet point list of questions/comments for 2017 below in an email from a highly respected and well connected blog reader that I view as a highly credible source.

What does 2017 have in store for us?

  • A US stock market crash? 
  • Or further boom?
  • A recession - 
  • or stronger growth?
  • Property market crash
  • China bubble crash
  • A trade war US-EU- China?
  • Collapse of Euro?
  • Brexit-related flight of banks from the City of London?
  • War - where? - Africa, Asia, Mid East, the Balkans, Baltics?
  • If the euro falls apart, that might restart debate on the international monetary system.
  • The dollar has medium-term strength but weak fundamentals…

And then we have the Economist 2017 magazine cover which always prompts massive speculation as to what subliminal messages the magazine may be attempting to convey (or not). This year they use tarot cards and feature Trump prominently. As you can imagine, these cards are prompting all kinds of speculation as to what they are supposed to mean. This has been going on ever since the Economist cover predicted a new "world currency" way back in 1988 supposedly to arrive around 2018 (the date on the golden Phoenix coin below). The cover appears to show the new global currency arsing from the flames (destruction?) of the various world fiat paper currencies.

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