This is the first in a series of articles on economic issues by Kathleen Rogers, a member of the Board of Directors of Women’s Voices for Change.
As I talk to various business owners, from travel companies to retail shops to general contractors, I hear a common theme: Business is spotty. When the outlook appears especially bleak, they tell of a few new buyers suddenly showing up—but then, if business has been steady for a few weeks, the phone seems to stop ringing again. Notwithstanding Friday’s stronger-than-expected jobs report, company managers are finding it hard to predict sales for the near future, which makes them hesitant to expand capacity by hiring or investing in new plants and equipment.
With the economy struggling, the U.S. has taken drastic steps, in the form of “Quantitative Easing,” to try to perk it up. Basically, the U.S. Federal Reserve Bank is committed to driving interest rates way down, essentially to zero, in the hope that cheap loans will impel businesses to expand hiring and entice consumers to purchase larger homes. This “zero-interest-rate policy” perfectly fits the standard Econ 101 lesson we all learned: Low interest rates make it more attractive to borrow money for housing, infrastructure, and new equipment, increasing economic growth.
But rates have been at record low levels for almost four years now: Why hasn’t the economy taken off? One big problem now is that homeowners cannot trade up to new, larger houses, because many now owe more on their home than it is actually worth. About one in four homeowners are “under water” on their mortgages. Because so many now have negative equity, they cannot sell their current home without taking a big financial hit, which few can afford. Most cannot even take advantage of current low rates by refinancing their mortgages, because they don’t have the cash required. Also, companies are not inclined to take advantage of low borrowing rates because they are already flush with record levels of cash. Yet they are loath to spend it on new workers because they feel uncertain about future growth.
This predicament puts the U.S. in an unfamiliar position. We enjoyed heady growth for decades, with occasional mild recessions. Governments and consumers piled on enormous debt, confident that future growth would enable easy repayment. But since ’08 we have needed to retrench, pay off debt, and pull back on spending. And it’s not over; there is still more debt to be worked off, including residential real estate loans and bulging government debt.
This austerity will continue for some time—we will just have to get to used to not buying things we cannot afford, both at the individual level and at the federal level. The “new normal” economic asceticism we are experiencing will take some adjustment on our part, given the excesses of our past.
Next week, in the second article in this series, I suggest how to take advantage of the investment opportunities that will arise from this economic uncertainty.