Holding Everything Else Constant
I love the very first thing you learn in economics: holding everything else constant, we can study the reaction of one with the other. It gets more complicated as you add other variables (or relax some of the constraints), and it doesn’t get any easier when trying to apply economic theory to the real world. To date, even the most sophisticated models cannot take into account all the vastness of an infinite universe, which would also explain the utterly disastrous track record in using macroeconomic analysis to make predictions.
What is the point of it all? No one knows, but what we do know is that it is almost Christmas. Apart from being a time to get together with the family, eat a lot of good food and bestow presents upon our loved ones, Christmas also marks the end of yet another year. So, it is also a time to reflect on the bigger things, take heed from lessons learned and prepare for yet another year of utter randomness. Taking it all into account then, here are my predictions for the future, using simple economic analysis and leaving everything else constant:
1. Brexit will be a fudge and leave the UK firmly part of the EU in all but name. There cannot be a hard Brexit, as threatening to shoot yourself and doing so are two different things. There also does not seem to be a way back for many that have gone too far, which leaves only one possible outcome: we go half pregnant.
2. Trump will be a one term president. If you piss off enough people, sooner or later it will come back and bite you in the behind. That’s true for everyone, and not even the most spectacular spin machine can protect you forever, when you make yourself a target this large.
3. Europe will become more integrated. Even the gentlest (or inept) of giants eventually develops a way to stop from getting hurt. Or, do you think after Grexit, Brexit, Italy, Poland and Hungary, the EU is really going to keep going through this ad nauseam? At some point, the EU will tell everyone how it is and if you don’t like it, they are going to turn off access to the secret sauce (read: free lunch) that comes from membership and wanting to do your own thing.
4. The markets will see more volatility. The crisis of 2008 never really ended, and in many ways, things are worse now than before. The global financial markets in contrast have made huge gains in the last 10 years. Maybe this is a new paradigm and things are different this time, but maybe it is not, and we revert back to the means. Either way, there will be uncertainty until we figure out in which direction we go.
And finally, Liverpool will win the Premier League, the Dallas Cowboys will win the Superbowl and Roger Federer wins one more Grand-Slam title before calling it quits. Probably wishful thinking, but it is Christmas and there is always hope. Happy New Year to everyone and all the best for the family!