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Is Your Business Ready for Another Recession?

On October 13, 2016, The Wall Street Journal reported that a majority of economists rate the likelihood of another recession as a 60%, regardless of whether Donald Trump or Hillary Clinton becomes the next president. For many businesses, the 2008 Great Recession never completely ended, and many are still dealing with its continuing aftereffects.

Since 2009, when the economy, according to the government, began to grow again, it has expanded at a rate of 2.1%, the slowest growth rate to follow any recession since WWII. This barely limping economic expansion is the fourth longest in duration, dating all the way back to 1854. No economic expansion lasts forever and neither will this one. At eighty-eight months in duration, this recovery has become a ticking time-bomb which we should expect to go off sooner than later

There are many factors external to the economy which can at any time and without warning trigger another ‘economic shock’ which would immediately send the economy reeling. A major terrorist attack, which grows more likely with each passing day, the collapse of one or more major banks, Deutsche Bank of Germany seems to be one of the likely contenders and with its global ties to almost every major bank in the world, its collapse would reverberate worldwide, the China banking bubble, etc. However, there are a myriad of other less sensational factors which could provide the impetus for the next recession, such as the regulatory and tax increases proposed by the Democrats, should they win both the white house and the congress.

Causes of the 2008 Meltdown

The 2008 meltdown is generally attributed to banks playing games by granting mortgages to unqualified home buyers, but that is only part of the real story. In itself, this could have precipitated the recession, however it would have been far less severe than it became. The other primary factor that turned it from a recessionary downturn into the ‘Great Recession’ was the large banks and brokerage houses high stakes gambling on ‘Derivatives.’ Derivatives value are “derived” from an underlying asset, for example stocks, bonds, contracts, swaps, or measurable events such as weather, but the key here is that although based upon the value of some other asset, they have ‘NO intrinsic value’ of their own. In other words, the derivative itself is not a tangible or real asset, as is a stock, bond or other hard asset.

Today, following Dodd-Frank and all of the federal government’s new regulation of financial markets, aimed at preventing a recurrence of the Great Recession, the derivatives market is now more than three times what it was in 2008. Deutsche Bank’s balance sheet alone contains $75 Trillion in derivatives, more than any other bank, which is 20 times Germany’s GDP and roughly equal to the world GDP. U.S. banks are carrying over $200 Trillion in derivatives on their balance sheets. The global derivatives market stands at more than $600 Trillion.

What’s more, no one, no economist or government knows the true size of the global derivatives market, because derivatives are available and being traded every day on virtually every type of investment. There is enough explosive power there to create a ‘Nuclear Recession’ — a return to the Great Depression, or even worse. Throw in a $19.5 Trillion U.S. national debt, that is 107% of GDP and you have the makings of a truly ‘Perfect Economic Storm.’

You Couldn’t Operate Your Business the Way Our Congress Does the Government

A year ago, at the end of federal government’s prior fiscal year (September 30, 2015), its finances included, in addition to the $19.5 trillion in current debt:

• $8.3 trillion ($8,279,000,000,000) in liabilities, such as federal employee retirement benefits, accounts payable, and environmental/disposal liabilities.
• $26.7 trillion ($26,661,000,000,000) in obligations for current Social Security participants, this is above and beyond projected revenues from their payroll and benefit taxes, certain transfers from the general fund of the U.S. Treasury, and assets of the Social Security trust fund.
• $28.5 trillion ($28,500,000,000,000) in obligations for current Medicare participants above and beyond projected revenues from their payroll taxes, benefit taxes, premium payments, and assets of the Medicare trust fund.

In total, about $76 TRILLION ($76,000,000,000,000) plus change! To look at it another way, about 2,200% of annual federal revenues! What would happen to your company if its unpaid obligations equaled 22 times its annual revenue? It’s called a debt CRISIS!

We May Already be on the Verge of The Next Recession

Donald Trump has publicly stated during the debates that he believes that we are already on the brink of the next recession and there are a number of economists and business leaders who agree. A new and even more painful recession could be just around the corner.

For business leaders, whether small or Fortune and all those in between, the question should not be if the next recession will occur, but how soon and will they be prepared when it does. No can foretell the exact timing and severity, but it is possible and prudent to prepare.

How to prepare becomes the question every CEO should ask? There are basically two ways. The first is to cut costs, save and hoard cash or cash equivalents and hunker down. The other and opposite, is in believing, as I do, that the best defense in any situation is usually an aggressive offense. Which in business equates to ‘grow the business rapidly and capture market share.’

Strength is the Best Defense

In any economic downturn, it is the strong who survive and the weak and marginal who perish. Strength, is your best defense. So how can you maximize profitable business growth acceleration? There is only one means.

Strategic Open Innovation! It is the ultimate business accelerator. Strategic open innovation enables your organization to not only grow profitably, but to become a market disruptor. Disruption strengthens the the disruptor’s market position and weakens the competition. It provides the ideal avenue to prepare for whatever the economic future holds.

by John Di Frances

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