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Runaway inflation may follow the economic downturn if the United States and other developed nations aren’t careful. That’s what Thunderbird Professor F. John Mathis, Ph.D., sees when he looks into the future.
“At that time there will be so much liquidity in the economy that we’re going to be running an inflation risk,” he said Nov. 26 from his office at Thunderbird School of Global Management in Glendale, Ariz. “After months of pumping cash into the economy, the Federal Reserve and U.S. Treasury will face the opposite challenge: How do we get this excess liquidity out of the system before we have another bubble?”
Mathis spends much of his time studying economic trends as director of Thunderbird’s Global Financial Services Center. He said things will get worse before they get better, and then the United States and other developed markets will emerge leaner and meaner with plenty of cash to spend.
Governments will swell in these markets with added regulation. And Eastern Europe may go cold, shifting attention to other potential growth areas.
First the bad news
That’s the future. Mathis said corporations, entrepreneurs and consumers first need to worry about surviving 2009.
Many governments call the downturn a recession, but Mathis said the term falls short as a descriptor.
“This is way beyond a recession,” he said. “Nobody is even thinking about long-term investment. Business investment is dead. Few companies are getting money. That means the problem is going to be long lasting because business investment supports the construction of plants, tools and machinery, which results in job creation, income creation and continued growth.”
His advice for survival is simple: Be conservative. Stay liquid. Don’t retire.
“Don’t buy anything you may not absolutely need,” Mathis said. “Nothing. You’re going to be tempted because low prices will be offered. People are giving you desperation prices because they need to move things to stay alive.”
Mathis said hidden problems with the economy will emerge in 2009, and consumers will gradually come to understand the scope of the downturn. “They’ll understand once they get laid off,” he said, “or once their credit limit gets trimmed.”
The cost of regulation
Once the dust settles on the downturn, Mathis said some things will return to normal. One change that will be permanent, at least in the United States, is the expanded role of government in business.
Mathis said the Federal Reserve and U.S. Treasury have acted quickly and responsibly to stave off depression, but their intervention has come with a cost.
“Increased government regulation will raise the cost of financial services,” he said. “Banks will pass along these costs to consumers, which means higher prices for everybody.”
Increased government involvement in business also will mean added scrutiny for highly paid executives -– especially those who accept public handouts. Mathis said this will require senior leaders to use discretion.
“Don’t fly to government hearings in a corporate jet,” he said. “And don’t have big parties at spas in California when you’re getting bailout money.”
Trouble in Eastern Europe
Mathis said one region that might take years to recover from the downturn is Eastern Europe.
He said countries in Asia and Latin America paid down their debt in the months before the downturn, but Eastern Europe did the opposite. He said the region was the most leveraged of any transitional or emerging market, and the penalty will be severe.
“Eastern Europe may go into hibernation,” Mathis said. “It’s a huge default. Banks in Europe will be hit badly.”
December 11th, 2008 at 6:44 pm
Statement about Eastern europe is too redundant> I suggest Eastern europe in text above you are meaning new members of Eu.
As for Eu new member Bank situation is here more stable than in old Eu members and only exeption is Baltic republics…but they represent only 4 milion people togethe.> Also new Eu members has more capital aviable (EU funds, free capital within EU, new EU economies are much more develloped. In this regard I think that new Eu member wil have slover GDP grow within a year but hybernation is I say to strong word :-)
December 18th, 2008 at 10:20 pm
thank you professor.
i love this “be conservative. stay liquid . do not retrie.”
it is exactly that always have been in my mind and it looks that you just spoke out these words out of my mind.
but i have some worries about this.
firts : be conservative”
if we all do this a lot of may be million of companies producing and selling ” GLam items” which do not appear a necessity, for example a Personal computer at home., will either go out of buisness or reduce out put cut plant and equipment and employees.
now second point.
stay liquid. it means that we may not put money into long term or medium term capital ventures or no plant and machinery purchases, so no new production and no employment.
secondly, abnormal amount of liquid cash with little growth will also reduce and loose the importance of paper money (fiat) as a store of ” value”.
NOW comes third point. in the situation of above two point, we all will be retiring too soon.
i appercaite your concerns about a run-away infaltion, but this can not be killed in ” one below” we all should adopt a structured approach.
1) all countries should review the ” Glam industries” and seek or regulate a consolidation plan without cutting employment, rather adjusting them through an organised effort into Essentail industries, whose out put is low or non-existent (say agriculture and other manaufacturing like housing, education or medical, the four sectors which are most essentail).
BUT THIS WILL REDUCE TRADE ARBITRAGE forcefully AND INTERNATIOANL MONETERY FLOW WILL REDUCE. AS WE ALL WILL BE TRYING TO BE SELF SUFFICIENT. IN THE ESSENTAIL GOODS. SO NO TRADE OPPERTUNITY WILL APPEAR FOR THESE ITEMS, EVEN IF WE CONSDIER COMPARITIVE ADVANATGE. THIS WILL MEAN WE BUILT COMPUTERS AND YOU WILL COOK OUR FOOD???nNo.
WITH THE RESTRICTION ON glam INDUSTRIES ALL INTERANL CAPITAL FORMATION WILL CLUSTER INTO ESSENTAIL INDUSTRIES MAKING THE COST OF CAPITAL ( AND THE RSIK) LOW FOR THESES INDUSTRIES AND HENCE ACCOUNTING AND ECONOMIC COST WILL ALSO REDCU E FOR THESES INDUSTRIES BRINING AN EQUILIBRIUM AND ELIMINATING COMPARATIVE ADVANTAGE??
I AM TOO MUCH CONFUSED NOW , PLEASE EXPLAIN WHAT TO TO DO NOW???.
December 19th, 2008 at 6:19 am
Fearmongering. Excellent way of grabbing the highlights but you’re missing several important points.
1. Fine, tell everybody to stop buying and your vision will be a self-fulfilling prophecy.
2. Greater liquidity in the market might result in inflation if productivity gains aren’t made. However, the impact on the average world citizen depends on how investors and consumers behave in 2010/11. Most likely, they will be scared into saving more. As banks’ balance sheets grow they will lend more money, and when they lend more money growth will pick up. Your inflation assumption is based on the premise that consumer and investor spending patterns will stay the same as pre-bust, which is highly unlikely.
3. A collapse in expansions is a blessing in disguise for most of us. Yes, you’re right, it will cause inflationary pressures going forward but it is also likely to ensure a rather sharp V as far as the downturn goes. You would be surprised how many companies in my industry (hard commodities) are eager to borrow but can’t get good terms. It would be a whole lot worse if banks were willing to lend but companies wouldn’t take the money.
What the economy needs is greater confidence. Confidence that hard work and clever ideas will succeed even in a downturn. By pulling the plugs and lowering the rates as the US government has done, one does not instill confidence, and one is quite likely to fall into the same investment trap as the Japanese – where they have been stuck over the past 15 years. What we need is government direct investment as long as it is not anti-competitive. Build infrastructure, build schools, build things for the future.
Educate, nourish, compete and prosper. This is the way that all successful economies stay fit and sustain abnormal growth in the long term. Stop the fear mongering; it’s not as if the economy is a monster which can’t be controlled, it’s the aggregate results of everybody’s economic interactions and it’s within the grasp of any and all of us to change our fate.
December 19th, 2008 at 9:13 pm
Dear professor
thank you for prompt clarification. meanwhile wishes you a happy new year and merry christimis. i will be back soon after my Exams for more detailed discussion on a viable economic solution for the globe. breifly what i graps from you point of view that from now on all nations must abandon thier private luxury for the sake of public necessaity.
thank you very much.
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