With a new year come new opportunities as well as new issues to take into consideration. Here are the five most important issues to keep an eye on in 2017.
1. Trump Presidency
The most important issue facing monetary policy, at least in the United States, will be the incoming Trump Administration. The Federal Reserve Board of Governors is currently operating with two vacancies and has been for quite a while. With majorities in both the House and Senate, it is highly likely that President Trump will be able to successfully nominate two candidates to the Board. Depending on who he picks, that could put additional pressure on Chairman Janet Yellen to continue to raise the federal funds target rate throughout 2017.
2. Ongoing Weakness in Europe
The PIIGS are returning. The Greek debt crisis is still unresolved, the Italian banking sector is weakening with Monte dei Paschi likely facing a bailout this year, and Portugal is showing signs of a weakening banking sector. Add to that the difficulties continuing to face Deutsche Bank and 2017 could be a perfect storm facing the Eurozone banking sector. The big question then would be to what extent bank failures and bailouts in Europe would cause spillover effects in the United States and worldwide.
3. China Is Still a Wild Card
While the yuan continues its march towards becoming a global reserve currency, the Chinese economy faces continued difficulty and slowing growth. Private sector debt loads are high, the insurance and banking sectors are built on matchsticks, and the government is beginning to sell off some of its foreign exchange reserves to defend the yuan. 2017 could be a very interesting year for China, and for the rest of us if a Chinese collapse spills over to the West.
4. The Relentless War on Cash
As India’s demonetization demonstrated, the war on cash is ramping up around the world. While there likely won’t be major moves towards eliminating high-denomination bills in the United States or Europe, there will be continued actions that chip away at the use of cash and the financial privacy that cash affords. Expect more legislative and regulatory action against cash transactions under the guise of fighting against money laundering, terrorist financing, and tax havens as governments continue to try to squeeze as much money as possible from taxpayers.
5. A Coming Financial Crisis
The most important thing to watch for in 2017 is the possibility of another financial crisis. With the trillions of dollars of new money pushed into the financial system over the past several years by central banks around the world, financial bubbles growing, popping, and leading to financial crises are inevitable. Contrary to the thinking of Ben Bernanke and others of his mindset, it doesn’t take a central bank actively removing liquidity from the financial system to pop bubbles or create financial crises. All that is required is for the central bank to stop or slow its monetary easing and the effects of the newly created money will soon be evident.
As the reality sets in that massive amounts of resources have been malinvested in unproductive sectors of the economy, the bubbles that were blown will inevitably burst. While monetary policies around the world remain historically loose, the Federal Reserve’s raising of its federal funds rate target has been accompanied by talk in other countries about raising interest rates. Given the anemic recovery in the aftermath of the 2008 financial crisis and continued low interest rates, central banks don’t have much room to maneuver when the next crisis hits. It’s always tricky trying to predict when a crisis will occur, but given economic data in various sectors that show similarities to the last crisis, it’s not out of the realm of possibility for 2017 to be the year of the next crisis.