What would you do if your annual income was suddenly chopped by 20%? This is not an unlikely scenario in the next five to ten years. It has already happened to some families and to some non-profits.
Recognising that the world is fast changing and funds are becoming harder to come by, many non-profits are looking for strategies that will help them overcome what they see as a rough financial patch.
But some authors contend that this might not be a rough financial patch at all. What we are experiencing today might be nothing less than a fundamental and potentially long-lasting change in the world economy brought about by a series of bursting “asset bubbles”. Rooted in the US and Europe, but likely to spread further afield, the asset bubbles might include real estate, currencies, financial investments like stocks and bonds, personal, corporate and national debt, and so on.
Asset bubbles are not sustainable. Eventually they burst and some folks get hurt. The real estate bubble in the US has already burst and national debt in the US and several European countries are not far behind. If more burst, history will offer little to guide us. Uncharted waters indeed.
Did you realise that the US now has a $15 trillion debt and they are borrowing some 40% of their total government expenditures every year. If they could stop borrowing today and pay off their debt over 30 years, they would have to find $500 billion a year in addition to the current annual deficit of $1.5 trillion. That’s an extra $2 trillion a year.
How on earth can they do that when their total government revenues today are only $2 trillion? Increase taxes by 100%? Hardly likely. All they can do is to print money to pay their bills (as they are doing already), let the US dollar slide in value against other currencies (as it is already), allow inflation to increase (it’s beginning), and hope for the best.
What will this mean to Canada? When your biggest customers are in trouble, so are you. Here are some possibilities. If even only a few of them were to occur it would be serious. All of them together – not out of the question – would be catastrophic:
- – Increasing inflation across the world – higher costs for almost everything;
- – Reduction in the net worth of most individuals and corporations;
- – Increased nominal interest rates due to inflation – but little change in real rates;
- – Reduction in stock and bond market values;
- – Reduction in value of the US dollar and some other currencies;
- – Reduction in other “safe haven” asset values, but perhaps not gold;
- – Decline in the capital goods sectors – cars, machinery, housing, construction;
- – Decline in the discretionary spending sectors – travel, eating out, entertainment, philanthropy;
- – Smaller decline in the low-end necessity sectors – education, health care, food, basic needs, government services;
- – Less “discretionary” spending by governments, philanthropists and donors; and
- – A difficult operating environment for all of us – particularly for non-profits.
Not a pretty sight but what are the chances of these happening? Impossible to say and Canada might be less affected than many countries – but it won’t escape unscathed. Almost everyone will have less money to spend, including non-profits and all those organisations and individuals who help to fund them. Even governments – perhaps especially governments.
Canada has a huge shock-absorption capacity – we are over-housed compared to almost anywhere else in the world; our governments are in a reasonably good financial shape; and some would say we have far too many things we could manage without – big SUVs, ski resorts, fancy restaurants and granite counter-tops, for example. Nonetheless, if we stop our spending on these, where will the jobs of all the folks who make and operate them go?
But if there were even a 10% chance over the next few years (and I personally believe it could be greater) maybe we should be planning for it as a contingency? So, as part of our routine planning process, shouldn’t we be thinking about a contingency plan for what we might do if our income should suffer a 20% decline – and the value of the assets we own did too?
If it never happens we are none the worse off. If it does, forewarned will be forearmed. And I sincerely hope I’m mistaken!
Author Chris Jones MBA FCMC is a management consultant, teaches non-profit management to MAs at Royal Roads University and writes regularly for several management publications. Contact him at firstname.lastname@example.org