Hello to all my Frugal Friends!
Year end is the time when pundits come out with their predictions. I wouldn't consider myself a pundit, but I've seen enough to feel comfortable with some predictions.
You may not agree with everything. That's fine. But keep in mind that this is the 35th year that I've been helping people manage their money in one form or another. So I'm not just parroting someone's talking points. Rather it's based on having seen various economic cycles and events. And, hopefully learning from them.
So here we go.
The Federal Reserve desperately wants to raise interest rates in 2017. Probably by a total of half a percent. They're beginning to see a hint of inflation and also need some room to drop rates if/when the economy enters the next recession. If the economy keeps growing (likely), they'll raise rates again.
The Fed won't be the only cause for higher interest rates. Selling more treasury bonds will require higher rates. That will have a spillover effect on all borrowing.
Higher interest rates aren't all bad. They'll benefit those who have saved and invested money. It's been very hard to safely earn much on invested money since 2008. CD and bond rates are almost non-existent. Boomers and retirees especially will be glad to see their CDs actually earn something for a change.
I expect economic activity to increase in 2017. I'll probably get some pushback on this, but cutting regulations will allow businesses to spend more on their product/services and less on satisfying regulators. You can argue that those regulations are needed, but needed or not, the cost of those regulations is less economic growth.
Getting people back into the civilian workforce will continue to be a challenge. The percentage of people working has dropped from over 66% in 2006 to less than 63% today. The incoming President may be able to keep some companies in the U.S., but technology will continue to replace many jobs. We see it all around us. Self-checkout in some stores. Screens in restaurants that take the place of a server or order taker. It'll be especially noticeable in lower skill jobs.
At some point we'll recognize that we can't continue the guaranteed student loan/college merry-go-round. For decades we've been pouring more and more money into higher ed. The colleges add amenities, raise their prices and grads can't find high paying jobs. Those who drop out are in a worse position. The number of people who aren't repaying their student loans on schedule is around 40%. Young people are being financially handcuffed. And forgiving the loans isn't an option. The government doesn't have the $1.3 trillion that would take.
I don't know when, but sooner or later all the money that's flooded the stock and housing markets will leave. And prices will drop. Perhaps dramatically.
The federal deficit will continue to increase. Lowering taxes should increase economic activity (if past experience is a guide), but tax cuts don't automatically pay for themselves. Eventually those in government will need to spend less or admit they won't and raise taxes to pay for what they spend.
Could I be wrong? Of course! And I will be on some things. But typically historical patterns repeat themselves. Perhaps with a twist or two, but the general pattern stays the same.
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