Saying “Happy New Year” is a reflex for many, though I am sincere when I do. But my personal outlook this year follows my mother’s advice to “hope for the best and expect the worst.” “Ominous” is the word I would use to describe what we face in 2018.
I recognize that I am not objective. I had my 50th high school reunion this past summer, and crotchety pessimism is a common in geezers. Nearly 2,100 years ago, Cicero was bellyaching “O tempora, o mores!” (Oh what time, oh what customs) because things seemed so bad. Rome survived a few more centuries.
It may be memories.1968 was a rough watershed year for our country. I experienced much of it. I was training in light-weapons infantry training at Fort Lewis, Wash., when North Korea seized the U.S. intelligence ship Pueblo. For weeks, heavily loaded C-141 transports roared over us 24 hours a day out of McChord Air Force Base, reinforcing defenses in South Korea against open conflict. I was in the 82nd Airborne when Martin Luther King Jr. was killed that April and personally saw smoke drifting from burning buildings in our nation’s capital.
In June, with other military language students, I stood silently behind our barracks at Fort Meyer, Va., to watch Robert F. Kennedy’s funeral cortege drive past us to the eternal flame just up the hill at Arlington, where his brother was buried.
That August on my way home on leave, my Chicago aunt dropped me at the Greyhound terminal just as the Democratic National Convention was gaveled into session a couple of miles away. Even a casual observer of history knows what happened there.
And at year end, I was ready to head to Brazil, to join some 2,000 other American civilians and military in the ongoing Cold War.
So as a young man, I experienced one very pivotal year. I don’t relish another 50 years on.
At least three problems loom over the U.S. economy as we enter 2018. One is directly economic, one involves domestic politics and the last foreign affairs.
Start with U.S. markets. We are not yet through the financial and economic debacle that came to public attention in the Wall Street/housing crisis of 2008. Many now see that as a closed chapter. This has been particularly evident in people commenting on the success or failure of Federal Reserve policy as Chairwoman Janet Yellen steps down, or in exultation about this year’s successive stock index records.
This is all premature. Americans take much shorter views of history than some others. Henry Kissinger relates how, in a casual discussions of long-run effects of the French Revolution on history, Chou En lai, Mao’s right hand man, commented almost 200 years later: “Perhaps it is too early to tell.”
That may be excessive, but one should never write the obituary for an economic crisis until a couple of business cycles later. In the fall of 2008, as Lehman Brothers failed and panic was in the air, the world stood at the edge of an economic abyss. Ending up where we had been in early 1933 was not out of the question. The Fed pulled us back with extraordinary measures, but such strong actions often have large side effects. And they often don’t solve underlying problems, just delay the inevitable.
We economists agree that we are lousy at predicting future asset prices. But I am convinced that current stock prices, as evidenced by a Dow near 25,000, are not sustainable. And they are not just a reaction to Fed-driven low interest rates, that will unwind gradually, neatly and painlessly as the Fed slowly tightens.
We are in a classic bubble as described by Hyman Minsky, an economics maverick. He explained why, as economic history repeatedly shows, financial bubbles take on a life of their own. Prices can vastly overshoot sustainable value levels over the long run.
German-American economist Rudiger Dornbusch, who died young in 2002, observed that “when you know something cannot go on forever, it often takes longer than you would think to reach the end. But when it does, events go much faster than you might expect.” That will happen with this market. Exactly how or when I won’t guess.
Minsky describes a process like Wile Coyote realizing he has chased the roadrunner over the edge of the cliff. He looks down, sees nothing but air and plummets. In market bubbles, people start looking down and when enough of them do, the market plunges. That is one scenario.
Another involves a serious domestic political crisis that poisons business and financial market confidence. Special counsel Robert Mueller, now investigating the Trump presidential campaign, might precipitate one. He is smarter and abler than anyone in the White House. Odds are highly against him continuing for more months only to report “Well, nothing happened.”
Yes, as with the stock market, making political predictions is inherently speculative. But I am convinced that there will be a major political, and perhaps constitutional, crisis before this ends. And that will hammer business confidence.
Yes, historical precedent is mixed. Bill Clinton’s impeachment did not derail the strong economy of the 1990s. And so many things were going on during Watergate, including a war in the Mideast, the first oil embargo, the winding down of Vietnam war and Apollo program spending, then Fed chair Arthur Burns’ mendacious goosing of the money supply, and the collapse of the Bretton Woods system of fixed exchange rates, that it is impossible to isolate or rank the effects of any single one. There were complex interactions and feedback loops. But the drawn out political crisis in Washington certainly sapped confidence and made things worse.
Then there are international perils. From 10 to 25 years ago, open warfare around the Persian Gulf loomed largest. Now it is North Korea.
Many months of bombast from both sides have lulled immediate fears. But the warning of U.N. Secretary General Antonio Guterres and similar statements by several U.S. military leaders should be heeded. The fraction of the U.S. population rooting for war is mostly young, white and poorly-educated, but many more are blind to the dangers. North Korea is not Grenada. Pre-war planning is always over-optimistic and events usually veer out of control quickly.
Both nations are headed by bombastic, egotistical and inexperienced leaders. The current occupant of the Oval Office has a temperament diametrically opposite from that needed in a crisis. The potential theater of conflict is geographically close-flanked by two of the world’s most important economies. And the possible use of nuclear weapons threatens the most momentous watershed in global history since the assassination of Franz Ferdinand in 1914 or the fall of the Bastille in 1789.
Many Americans apparently like delusions of a quick SEAL team raid or one well-guided smart bomb magically ending all problems. That is fantasy. Once a few rounds are fired, the odds that matters will mushroom to a level that trips up the global economy are high. The U.S. stock market is overvalued and the economic expansion has had a long run. It would not take a lot to turn both in a negative direction.
Those are my reasons for entering 2018 with a level of pessimism that is unprecedented for me. I am no expert. These opinions are based on undergraduate and recreational study of history and a few decades of active and reserve army service. I never got past major and didn’t quite finish my reservists’ Command and General Staff course. So feel free to disagree. I hope that I have to eat crow this time next year. But my mother’s maxim rings loud in my ears right now.