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Bitcoin, wage stagnation, and geopolitics: the global economy in 2018

Bitcoin's bubble could burst in 2018, according to Northeastern associate professor Alicia Sasser Modestino. Photo by iStock.

This story is part of our multi-part series looking at some of the big stories and bright ideas primed to make headlines in 2018.

Bitcoin’s bubble could burst in 2018, according to Northeastern associate professor Alicia Sasser Modestino, a labor market expert in the College of Social Sciences and Humanities. “For many economists,” she says, “the question is not whether the bubble will burst but when.” Here’s what else she foresees for the economy in the new year.

Goldman Sachs predicts that the global economy will expand by 4 percent in 2018, up from 3.7 percent in 2017. What’s your forecast for the 2018 economy?

Indeed, for the first time since 2010, the world economy is outperforming most predictions across most advanced and emerging economies. Similarly, the U.S. economic outlook is healthy, according to the key economic indicators. According to the latest forecasts from the Federal Reserve in early December, GDP growth is expected to remain in the range of 2 to 3 percent with continuing low unemployment and relatively little inflation; it’s what economists call the “Goldilocks” economy—not too hot and not too cold.

However, given the already tight labor market, spare capacity is diminishing rapidly. The question is no longer whether output will overshoot potential, but by how much. And with the recent passage of the Republican tax reform bill providing additional economic stimulus, that process is likely to be accelerated and require action from the Federal Reserve to raise rates and prevent excessive overheating and bigger recession risks down the road.

I would expect the U.S. economy to experience stronger GDP growth for the first half of 2018, or perhaps through the midterm elections, on the order of 2.5 to 3 percent, followed by a slowdown that will depend on the size and pace of future interest rate hikes—a big question mark as Janet Yellen’s term as Federal Reserve chair expires next month.

In the U.S., wage growth remains anemic despite an unemployment rate of just 4.1 percent. Do you foresee U.S. wage growth remaining stagnant in 2018?

In the U.S., Korn Ferry, the executive search and recruiting firm, predicts an average 3 percent pay increase, the same as for 2017. Adjusting for the expected 2 percent inflation rate in 2018, however, the real wage increase would be only 1 percent—down from last year’s 1.9 percent. Although proponents of the recent corporate tax cut assert that firms will use some of their tax savings to boost wages, there is no historical evidence that would support such an action. There is no clear relationship between recent corporate tax cuts and wage growth in developed countries.

An even better counterfactual is the recent experience of Great Britain. Like the U.S., Britain has a large open economy with a sound legal and regulatory environment. Over the past decade, Britain slashed its corporate tax rate, in several steps, from 30 percent down to 19 percent. At the same time, the U.S. kept its corporate tax rate constant at 35 percent. As British corporate tax rates fell, so did real (inflation-adjusted) median wages. Meanwhile, in the U.S. real median wages increased, albeit very slowly.

Consumers and businesspeople alike seem unphased by several geopolitical threats—from the possibility of a nuclear attack from North Korea to the uncertainty over Britain’s exit from the European Union. How do you think geopolitics will impact the 2018 economy?

Certainly some of the bigger near-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 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 that any of these events might 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, one NPR commentator recently put the risk of nuclear war with North Korea to be as high as 20 percent. If the actual likelihood is higher, then we are likely to see greater uncertainty and more of a drag on economic growth.

American politics has an important role to play, not just in terms of steering world events toward a better outcome, but also by removing as much uncertainty as possible from the current situation. Given that our president has been known to change policy positions in a matter of hours and to broadcast opinions that call into question U.S. actions, it’s likely that the global economy will be operating more cautiously than current conditions would warrant, falling short of potential.

Bitcoin rose to prominence in 2017. How do you think cryptocurrencies will fare in 2018?

The dramatic rise of digital token offerings saw the creation of hundreds of new virtual currencies, but experts say most of them have little to no value and some are outright examples of fraud. That’s due to the relative ease in conducting a token offering and the few regulatory checks. Because of this, market observers expect that the cryptocurrency market will consolidate over the next year.

While the blockchain technology that underlies bitcoin provides a means to transfer digital cash in vast amounts, across any border, instantaneously, Bitcoin specifically is unlikely to be viewed purely as a new type of currency.The rapid appreciation of Bitcoin, from about $968 at the start of 2017 and topping $16,700 per token as of December—a more than 1,600 percent jump in value—suggests that it will emerge as a new asset class. Indeed, Bitcoin’s volatility, seen when it fell 20 percent within minutes on a day in late November before rebounding, makes it difficult to use as a mainstream currency.

In addition, recent announcements by the Chicago Board Options Exchange, Chicago Mercantile Exchange, and Nasdaq that they will offer bitcoin futures contracts confirms that the cryptocurrency is more of a vehicle for investment than a medium of exchange or a store of value like the dollar. This type of move suggest that we will see more regulation and oversight from agencies such as the Securities and Exchange Commission, although the nature and magnitude of any regulatory enforcement is still unclear. And like other assets, Bitcoin is subject to speculative bubbles with many investors rushing in for fear of missing out as we have seen over the past year. For many economists, such as Nouriel Roubini, who was one of the few to predict the financial crisis, the question is not whether the bubble will burst but when.