Who will do some heavy lifting?

When the financial crisis hit big in 2008 and 2009 there were some painful adjustments in the world economy. But despite the pain for Western economies most of the hard work was not done by Governments at all. For the most part spending and borrowing carried on at high levels, and the really hard work was done by central banks.

In most countries pensions carried on being paid, deficits carried on being borrowed for and consumers carried on with credit card splurging. It seems to me that 2018 could well be the year when the tab stops being run up as the central banks are shutting off the tap and starting to take liquidity back out of the world’s finances. Governments and citizens will need to step up and do some heavy lifting.

How this plays out could have far-reaching consequences. For example, Trump’s tax cuts could end up looking like folly and our country’s half-baked Brexit plans could be put under a lot of pressure. Something just has to give somewhere in the system. Governments took relatively small steps compared to central bankers, creating big imbalances which at some point must be wound back. To balance his books Trump needs more taxes not less, it really is that simple I am afraid.

The most positive thing about the world economy is that so many economists and investors are worried about it! It is when everyone is agreed that the way ahead is plain sailing that disaster is most likely to strike. That’s when people start to believe their own hype and make silly decisions they would not normally make – think Royal Bank of Scotland in 2007 and 2008.

Overall I am cautiously optimistic for 2018, for no other reason than the risks we have to navigate are staring us in the face. The lookouts are shouting “Icebergs ahead, Captain!” Hopefully, unlike the Titanic, the Captain is steering with care and not full steam ahead regardless.

Thursday 4 January 2018