by Zain Jaffer
As you may have heard by now, war has erupted in the Middle East between Israel and residents of the Gaza Strip. It is possible if this is not handled well that this conflict can spread to more countries in the region, threatening the planned agreement between the U.S., Israel, and Saudi Arabia. Aside from the massive loss of life and limb, wars have a tendency to impact economies negatively. For the US, that means a further increase in the current $33.7T national debt.
Unfortunately, budgets for nonprofits often become tighter when their sponsor businesses make less money. With higher government debt, it also becomes likely that government grants to nonprofits will get cut as well.
Crude oil prices have already started to rise because of possible supply issues, which will likely push up inflation further. However, the only good news, if you can call it that, is that oil demand is self-limiting. When energy prices rise, we tend to reduce our usage/demand for it. Like when we cut back on gasoline purchases and stay more at home if we can’t afford it.
Not to discount the tragedy of human loss in the current conflict, but if it spreads to include countries like Iran, Syria, Lebanon and other moderate Middle East countries then all bets are off. We will be living in a world with several major conflicts, there and in the Ukraine.
November 2024 is the US Presidential elections. The party in power is running on a track record of a botched Afghanistan withdrawal, a massive influx of illegal immigrants in the Southern border, increased crime in the big cities, high interest rates leading to high mortgages, car loans, credit card debt, and low savings for many families, and other negative news.
While the Fed should be independent of government pressure, it is looking feasible to expect a reverse of high interest rates later next year before the elections, and the return of quantitative easing to put money into the economy. Unless the current party in power wants to lose big in the elections.
However, the US cannot really afford to lower interest rates and to do quantitative tightening, so expect the Fed to push back against political pressure. America already has a huge $33.7T debt that keeps growing, and with war in the Ukraine and the Middle East, and a possible flashpoint in the South China Sea will increase that further. However given the stakes involved in an election, it is very likely that the Fed will again be a money printer despite their objections. In reality though, we do not know what the future holds for us.
So what does that mean for nonprofit donors, the lifeblood of many foundations? The larger corporations can take care of themselves, with their close relationships with Wall Street and Washington. But what about small companies and businesses?
Nonprofits give for-profit businesses some tax incentives if they donate, but what if there is nothing to tax? That is the problem.
If the situation now is already tight, it will even become tighter. Right now, banks and other loan sources are really careful in issuing debt, since the high interest rates increase the possibility of default and foreclosure. The banks do not really want to issue loans if the probability of default is high, because they themselves are already holding treasuries that yield less than the current ones being sold, and foreclosed and delinquent properties that are empty because project developers have abandoned paying the amortizations for those.
In this situation, companies are operating in a lean manner. All non-essential expenses are being cut, or at least minimized. While keeping jobs that are hard to hire is important, at some point when cash flows plunge, layoffs may be unavoidable. Donations to nonprofits are the least of their worries right now, unfortunately. If the Fed does print money again, maybe there will be a temporary respite. Beyond that, no one knows.
All nonprofit leaders have to set the tone for how they conduct themselves at this critical point in time. Those who know how to steer their foundation ships past the rocks and shoals will live for another day and survive into better times.
