It’s worth considering the root causes, possible consequences and strategies to deal with the recent U.S. government shutdown.
The International Monetary Fund’s (IMF) latest assessment of “more sluggish growth” for the global economy in part rests with the events in Washington, D.C. The U.S. government shutdown forced us to reconsider the strength of the economic recovery. Should you be worried and should you be altering your business strategy? Let’s consider the underlying causes of the stalemate, what the possible effects could be even now that there is a temporary solution in place, and discuss what to do about it.
The root cause of the shutdown was the ongoing debate between politicians and other American on the right who believe the U.S. government is too big and can’t afford to spend consistently more than it earns, and those on the left who believe that problem can be resolved in the future. In the meantime, they believe more urgent problems, like affordable health care, need to be addressed.
It is easy to dismiss the Tea Party as extremists. However, the hard fact is the U.S. government now spends $1 for every $0.70 it earns. According to the Heritage Foundation, a right-wing think tank, if the U.S. government were a family making $51,360, it spends $73,319 and each year adds $21,959 to its debt of $325,781. It relies on loans to survive.
But the U.S. government is not a family, and it’s not insolvent because it can access credit. It is vastly too big to fail, and investors all over the world know that.
U.S. treasury bonds are still priced at rock bottom levels: one-month T-Bill yields moved from zero to just 0.3% on the eve of the default. The $16.7 trillion debt ceiling can be kicked down the road, but eventually the burden of debt will affect all our lives. In some future election cycle, whether 2016 or later, a politician will convince the public that ”enough is enough” and begin to make the necessary changes. When that happens, revenue will have to increase and spending will decrease because growth alone will not solve the problem. Austerity might alleviate the long-term deficit, but it will be a drag on the economy’s growth.
In the near term, the more ominous effect of the shutdown and the ongoing political conflict in the U.S. is the sapping of consumer and investor confidence, which will stall growth. The result is that unemployment will be higher and inflation will be lower. The Federal Reserve, with its duel mandate of full employment and low inflation, will continue to keep interest rates low and possibly extend quantitative easing longer than was previously thought in order to drive economic growth and employment.
In Canada, we are closely linked to the U.S. economy and will likely experience similar outcomes. Our interest rates tend to follow the trend set by the Fed because the Bank of Canada closely watches developments in the U.S. and is careful about tightening ahead of the Fed in case the exchange rate rises. With choppy growth, some waves will rise and some will fall. On either side, there are business opportunities.
If you are a borrower, enjoy those low rates. Use debt to expand your business or build equity in real estate if you can afford the payments. If you are a saver, low interest rates are a challenge, but alternative asset classes, such as private equity or mortgage investment corporations, may provide opportunities.
If you are in a mature industry where growth is limited, consolidating competitors and complementary companies can be an added-value strategy. Lacking high growth, your levers are efficiency, cost synergies and price power. You can obtain all or some of these by buying a maturing competitor. With baby boomer owners approaching retirement, buying out a competitor, realizing synergy and building critical mass can build value for your business and a higher exit when you decide to sell.
