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.”