‘This is the dress rehearsal for the bigger deal’

Maya MacGuineas

Denver south economic breakfast preceded market plunges

BY JAN WONDRA
STAFF WRITER

Put 850 Denver-south businesspeople together in a room focused on the 2018 economic forecast and you’re going to have a dynamic atmosphere.

Given that the event happened only a few weeks before the recent heart-stopping plunge of the stock market, one could reasonably ask, can business remain optimistic? After years of upward economic activity, is this the inevitable correction that we were told must be coming?

The 1,175-point Dow Jones plunge on Feb. 5—after briefly falling 1,500 points—rattled nerves across the financial sector.

Here along the Corridor, called by many “the Wall Street of the West,” the effect of the sell-off is being seen as more psychological than economic. This week’s action was a continuation of the steep sell-off seen in the Feb. 2 session, wiping out most of the gains that had been seen so far in 2018.

It was the worst day in six years for the Standard & Poor’s 500 (an American stock-market index based on market capitalizations of 500 large companies with common stock listed on the New York Stock Exchange or NASDAQ), which lost 7 percent of its value.

On the morning of Feb. 6, on news of steeply falling global stock markets, the NYSE opened sharply lower, officially putting it into correction territory.

Experts say a primary cause is a rise in interest rates, a reality pointed out during the recent 2018 Economic Forecast Breakfast of the South Metro Denver Chamber. Consensus is that inflation was one of the predictors of the 2008 recession. Nationally, inflation rates are around 2 percent, but housing inflation has risen more than 3 percent.

In the Denver metro and Boulder areas, housing inflation is outpacing the national average, sitting at 3.4 percent year over year. National costs for food and shelter have risen 5.5 percent over the prior year. 

“At some point, the uncertainty from Washington is going to affect us,” said Maya MacGuineas, the president of the Committee for a Responsible Government and the head of the Fix the Debt campaign who spoke at the Jan. 19 chamber event. “This country is the biggest economy in the world regularly operating without a budget. We need a comprehensive growth plan. A federal budget is a plan for the country. Remember, we are more than one third of the way through the fiscal year, which began Oct. 1, and we don’t have a budget.”

According to MacGuineas, “This is the dress rehearsal for the bigger deal. If we don’t raise the debt ceiling, then it would affect the health of the country. We flirt with it and it has massive implications for the global economy. That we fight about the budget and mess with whether to raise the debt ceiling is a dysfunction reflecting a bigger political problem. It ends up trickling down, meaning we cannot plan for a sustainable economy and a stable country. This is a basic piece of governance.”

MacGuineas says that in budget terms, things tend to move in 10-year cycles and that the country is much closer to the next recession than the last one, which occurred in 2008. She said the country is not in good shape to face recession because of the debt load.

“Our national debt is 77 percent of gross domestic product, twice what it was when the 2008 recession hit. Our debt is at the highest level since World War II—and then we just fought a war,” MacGuineas said.

Personal-savings rates are dropping as well. One year ago, the U.S. personal-savings rate was 5.1 percent.

“As of December 2017, it had dropped to 2.9 percent, right back where it was when the 2008 crash occurred, and we’re starting to see revolving debt go up,” MacGuineas said. “The trend to consider your home as your bank is concerning, but [we are] nowhere near the levels we were at then.”

According to MacGuineas, the country has two ways to fight recession: Monetary policy and fiscal policy, but higher debt makes managing a recession difficult.

“We have higher debt. … We’re having more natural disasters, and personal savings is down,” she said. “Next year, the U.S. is planning to borrow $12 trillion—a fiscally unstable situation. When debt is growing faster than your economy during a time of prosperity, this is completely self-inflicted.”

MacGuineas said being a political independent is a lonely place in Washington, D.C., but she said her role is to point out that the country has to deal with this.

“Frankly, President Trump inherited the worst fiscal situation—debt as share of the economy—and has made it worse,” she said. “But the former administration inherited the worst economy since the Great Depression, which required government stimulus. The big challenge now is our debt. It’s 77 percent of GDP, twice what it was when the 2008 recession hit. The solution is that tax revenues have to go up, not down. But the recently passed tax-cut bill will lose $1.1 trillion [out of the] our national [revenue].”

MacGuineas had one big piece of advice for area small-business owners.

“My gut advice for a small-business owner is to look at what they should be doing to prepare their own business for this business climate,” she said. “What we have now is cognitive dissidence. We’ve had 108 straight months of growth, and it’s not going to go on forever.”

Her advice to the policymakers in Washington was just as direct.

“My one ask of the folks in Washington is the rule of holes,” she said. “The first thing you do is stop digging.”

Next week: Tax policy and the dark clouds on the horizon

Editor’s Note: Wall Street of the West SM is a Service Mark owned by Villager Media Group.

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