Declining Economy Impacts Social Change

Last month I wrote that 2009 will likely be a tough year for nonprofits as corporate, foundation and household budgets will more fully reflect a prolonged economic slowdown and lower investment values. Today I want to dig deeper into why we are experiencing a weakening economy and why it is unlikely to get better quickly. It is important in philanthropy and nonprofit management to have a macro view, just as it is in the for-profit business arena.

Consider the effect of the Iraq war. By deposing Saddam Hussein, the U.S. disrupted the supply of Iraqi oil. We also plunged an enemy of neighboring Iran into chaos. Thus, Iran has found it easier to fund terrorism and develop nuclear capability, which has created additional nervousness in energy markets. These are important factors in understanding the huge run-up in oil prices, which is powered by both supply/demand imbalances and speculation. Rapidly rising oil prices hamstring the U.S. economy and the economies of other net oil consuming countries.

The war in Iraq has further hurt our economy due to the U.S.'s errant economic policy. By failing to raise the revenue to finance the war, the U.S. has run enormous deficits. The effect of this reckless fiscal policy has been a steep decline in the dollar, which has pressured oil prices and other commodity prices higher. All imports are more expensive today due to the dollar's steep, prolonged decline. We will likely be paying a price for strategic miscalculations and financial mismanagement for years to come.

For sure, there are other issues such as the over-extension of credit and the proliferation of credit derivative instruments that now have questionable value. As the balance sheets of financial institutions weaken, the availability of credit to commercial and consumer borrowers will continue to diminish. Credit quality deterioration will not be solved quickly.

Nonprofits will be affected by these macroeconomic factors in two ways. First, they will be raising money in a difficult environment. Second, people in need of their services will increase. Successful nonprofit managers will recognize these trends, plan conservatively and treat their donors like the most valuable asset on the planet.

Givers, we have a tough, but important, job ahead of us!

Robert Thalhimer