According to Alicia Sasser Modestino, associate professor in the Northeast, the Bitcoin bubble could burst in 2018. Photo from iStock.
This story is part of our multi-part series that highlights some of the big stories and great ideas that will hit the headlines in 2018.
According to Alicia Sasser Modestino, Associate Expert in the Northeast, a labor market expert at the College of Social Sciences, the Bitcoin bubble could burst in 2018. “For many economists,” she says, “the question is not whether the bubble will burst, but when.” The following is planned for the economy in the new year.
Goldman Sachs predicts the global economy will grow 4 percent in 2018, up from 3.7 percent in 2017. What is your forecast for the economy in 2018?
For the first time since 2010, the global economy beats most forecasts in the most advanced and emerging economies. Similarly, according to key economic indicators, the US economic outlook is healthy. According to the latest Federal Reserve forecasts in early December, GDP growth should remain in the 2-3 percent range with persistently low unemployment and relatively low inflation. It’s what economists call the “Goldilocks” economy – not too hot and not too cold.
In view of the already tight labor market, however, the capacity reserves are rapidly declining. The question is no longer whether the output exceeds the potential, but by how much. And with the recent passage of the Republicans Tax Reform Act, which provides additional economic stimulus, that process is likely to accelerate and require action by the Federal Reserve to raise interest rates and prevent excessive overheating and greater risk of recession in the future.
I would expect the US economy to see stronger GDP growth, on the order of 2.5-3 percent, in the first half of 2018, or perhaps during the midterm elections, followed by a slowdown depending on the size and pace of the future Interest Rate Depends on Hikes – a big question mark as Janet Yellen’s term as Federal Reserve Chair ends next month.
In the US, wage growth remains weak despite an unemployment rate of just 4.1 percent. Do you expect US wage growth to stagnate in 2018?
In the U.S., Korn Ferry, the recruiting and recruiting firm, is forecasting an average wage increase of 3 percent, just like it did in 2017. Adjusted for the expected inflation rate of 2 percent in 2018, however, real wage increases would be just 1 percent – a year-on-year decline of 1.9 percent. Although proponents of the recent corporate tax cut claim that companies will use some of their tax savings to increase wages, there is no historical evidence to support such a move. There is no clear link between recent corporate tax cuts and wage growth in developed countries.
Even better counterfactual is the UK’s recent experience. The UK, like the US, has a large open economy with a solid legal and regulatory environment. Over the past decade, the UK has cut its corporate tax rate in several steps from 30 percent to 19 percent. At the same time, the US has kept its corporate tax rate constant at 35 percent. As UK corporate tax rates fell, so did real (inflation-adjusted) median wages. In the United States, median real wages rose, albeit very slowly.
Consumers and business people seem unimpressed by several geopolitical threats – from the possibility of a nuclear attack from North Korea to uncertainty over Britain’s exit from the European Union. How do you think geopolitics will affect the economy in 2018?
Certainly, some of the larger short-term risks to the global economic outlook are likely political, ranging from the future of the North American free trade agreement to Brexit to the risk of a military conflict on the Korean peninsula. While these downside risks have already been priced into the markets to some extent, the magnitude of the impact any of these events could have on the U.S. economy depends on the weight that investors and consumers have placed on the likelihood of a negative outcome. For example, an NPR commentator recently estimated the risk of nuclear war with North Korea at up to 20 percent. If the real probability is higher, we are likely to see greater uncertainty and a heavier burden on economic growth.
American politics plays an important role not only in orienting world events towards a better outcome, but also in removing as much uncertainty as possible from the current situation. Given that our President is known for changing his political positions and spreading opinions that question US actions within hours, the global economy is likely to be more cautious than current conditions would warrant, and missed the potential.
Bitcoin gained importance in 2017. How do you think cryptocurrencies will perform in 2018?
With the dramatic rise in digital token offerings, hundreds of new virtual currencies have been created, but experts say most of them have little to no value and some are downright examples of fraud. This is due to the relatively easy implementation of a token offering and the few regulatory reviews. Because of this, market watchers expect the cryptocurrency market to consolidate over the next year.
While the blockchain technology on which Bitcoin is based offers the ability to instantly transfer large amounts of digital money across any border, Bitcoin is unlikely to be viewed as purely new currency. Bitcoin’s rapid appreciation of around $ 968 in early 2017 and a surge of $ 16,700 per token from December – a jump in value of more than 1,600 percent – suggests that it is a new asset class. In fact, Bitcoin’s volatility, which fell 20 percent in minutes on a day in late November before recovering, makes it difficult to use as a major currency.
In addition, recent announcements by the Chicago Board Options Exchange, the Chicago Mercantile Exchange and the Nasdaq to offer Bitcoin futures contracts confirm that the cryptocurrency is more of an investment vehicle than a medium of exchange or store of value like the dollar. These types of measures suggest agencies like the Securities and Exchange Commission will see more regulation and scrutiny, although the nature and extent of how regulations are enforced is still unclear. And, like other assets, Bitcoin is exposed to speculative bubbles, and many investors rush for fear of missing out, as we saw last year. For many economists like Nouriel Roubini, who was one of the few who predicted the financial crisis, the question is not whether the bubble will burst, but when.