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Living in a state that is especially vulnerable to economic mood swings, Hawaii residents and policymakers need to be aware of the potential risk of a coming recession, and plan accordingly.
In September, Hawaii’s State Council on Revenues reported that it had concerns “the economy may have reached the end of its current expansionary cycle during the seven-year budget window” and last month, the Council lowered its forecast for the growth rate of Hawaii total personal income for 2018 and 2019.
Throughout December, warning signs have been flashing yellow in the U.S. economy that the much-lauded financial boom may be coming to a hard stop. For the first half of the month, Dow stocks saw their biggest loss since 1931, in anticipation of the Federal Reserve’s one quarter point rate hike which came last week.
According to the recently-released Duke University/CFO Global Business Outlook Survey of 500 chief financial officers (CFOs), “half (48.6 percent) of U.S. CFOs believe that the U.S. will be in recession by the end of 2019, and 82 percent believe that a recession will have begun by the end of 2020.”
Former Fed chairman Alan Greenspan provided perhaps the most unsettling warning of all, when he told CNN’s Julia Chatterley that the U.S. may be headed for stagflation – a period marked by inflation, plus stagnation.
Over the weekend, U.S. Treasury Secretary Steven Mnuchin stirred suspicions of a crisis when he announced he had conducted calls with six of the nation’s largest banks, whose CEOs confirmed they had “ample liquidity available for lending available for lending to consumer, business markets, and all other market operations.”
On Monday, President Trump added jet fuel to the fire when he tweeted “the Fed is like a powerful golfer who can’t score,” which triggered a 650-point plunge in the Dow for the worst Christmas Eve trading day ever.
I personally believe that the U.S. economy, and in particular, Hawaii’s economy, is in a massive bubble that is over-inflated to dangerous levels when it comes to the prices of housing, energy and education to name just a few areas.
Investor intelligence is affected by changes in monetary policy. Lower interest rates cause consumers, investors, and governments to cast off fiscal restraint because one, money is viewed as “cheap,” and second, the time preference for saving is greatly reduced over fears one might miss an opportunity to buy something or invest in an asset before it gets too expensive.
Over the short term, this causes the appearance of a rally, because increased lending combined with increased spending shifts the demand curve toward higher wages and higher prices. Money chasing anything makes everything look better than it really is.
Dr. John Doukas, a professor at Old Dominion University, explains that, “More than two thirds of large company profits in Europe and the U.S. has been spent on buybacks and dividends, inflating asset prices. Low interest rates drive investors into riskier investments like equities increasing the paper value of corporate equities over their tangible worth.”
This, however, cannot be sustained, because not all investments are profitable, not all business proposals come to fruition, and not all products work, resulting in sell-offs, lay-offs, and ultimately, economic busts.
I suspect short-term deflation, followed immediately by stagflation, will occur this time around, because as the economy breaks, the Fed will likely choose to reverse its decision on hikes and go back to near-zero interest rates again. This monetary trick, which seemingly worked so well in 2008, will have terrible implications now, because overseas investors may flee into other currencies, cryptocurrencies, or even gold or silver.
No one likes to say the party is about to end, but in Hawaii, we are overwhelmingly dependent on outside money for our economy, both in the form of tourism, and in our government’s addiction to Federal dollars.
Gov. David Ige’s most recent budget proposal reflects that almost 19 percent of the 2020-2021 operating budget comes from federal funding. Even modest changes in the national and global economy can have dire implications for how that affects the way we live, work and play here in the islands.
When the economy shrinks, we’re still going to be left with the huge cost of local government, and someone’s going to have to pay for it, and I can already tell you, Hawaii residents don’t have the savings – or the income – to bail out their leaders.
The first step in bracing for an economic storm is developing healthy, frugal spending habits while the winds are still calm. Last year, according to the Department of Business, Economic Development, and Tourism, Hawaii consumer debt far outpaced the national rate, with the average debt per person being $64,642 — $20,000 higher than the national average during the fourth quarter of 2017.
The highest growth in debt occurred in bankcard loans and personal loans last year. Hawaii residents should take steps now to significantly reduce their personal debt before the economy sours, and to begin saving money to serve as a buffer in the event of serious market turmoil.
For government, fiscal discipline is every bit as important. The Legislature needs to exercise greater restraint in creating new mandates, because every policy has a price tag that someone must pay for.
House Finance Chair Rep. Sylvia Luke’s proposal to implement zero-based budgeting is a great start, but more important is reforming the belief that Hawaii can somehow expect outsiders to always pony up the costs for our government.
Taxing tourists for revenue and depending on the federal government as a sugar daddy to pay for local government places too much hope in unstable economic variables. Hawaii needs to be locally responsible for our own big government, and if we can’t afford to pay with what we have in the islands, then we need to trim back.
The second, and most critical step to preparing for economic decline is finding ways to add value to one another without spending money. One of the greatest ills of cheap money is that it gives rise to materialism and extreme greed. We need to rededicate ourselves to volunteerism, service before self, delayed gratification, and helping our family and community before we help ourselves.
I refuse to believe that the solution to everything has to be throwing a million dollars at a problem, or a billion dollars at an idea. For most of the world, people in far humbler circumstances than Hawaii have learned to place an emphasis on cooperation and sharing rather than legislating and spending.
Tough times are coming. The time to prepare is now.
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