Our latest economic crisis has inflation raging throughout the global economy. While foundations respond to reductions in their asset values and damage done to stakeholders, this crisis could yet wreak more havoc — a lot more. And that means the nonprofit sector faces a sliding scale of potential outcomes, from a strong recovery to a perfect storm, when parts of the global economy that are too big to fail, fail.
Some readers might dismiss this and what follows as alarmist nonsense. To be fair, that’s my default setting, so I get it, but challenging assumptions is a best practice, especially when so much is at stake.
A Similar Fate
The current mess ramped up when the U.S. Federal Reserve (Fed) decided not to act despite concerns from credible critics that inflation was mounting and interest rates were too low. Chair Jerome Powell initially even told us the Fed was “not even thinking about thinking about” raising interest rates to fight inflation.
History will not be kind to this decision.
Foundations can avoid a similar fate by thinking through contingency plans with the hope, of course, they are never needed. In this post, I’ll expand on what foundations should consider, what a perfect storm could look like for nonprofits, what obstacles stand in the way of contingency planning, and how a deep crisis could test foundation commitments to diversity, equity, and inclusion.
Rinse and Repeat
Economic disasters tend to unfold gradually, then suddenly, when contagion kicks in from the daisy chain of second and third order impacts. This gradual aspect is a sinister obstacle because it allows time to rationalize a lesser degree of damage or reject further planning through false hope in a recovery.
For example, stock and bond markets have experienced significant downturns across the globe — an historic one in the case of “risk-free” bonds — and leading economic indicators are concerning, to say the least. Yet, there will be foundation staff and boards who gravitate to riding out the crisis with marginal, if any, changes to their grantmaking aside from reduced funding levels from the decline in assets.
And why not? We’ve seen this movie before. Economic bubbles burst, recessions follow, and just when epic disaster looms, the Fed saves the day. Rinse and repeat.
So this crisis will probably play out the same way — unless it doesn’t.
Here are several reasons why this time might be different and, historically, only one or two would be enough to cause severe damage:
- Central banks could fail to get it right or their cure could set the course for a deeper crisis to come.
- The Fed has never fought inflation in the U.S. after such an unprecedented amount of money printing.
- The global economy has never entered a crisis with such extreme levels of debt.
- The war in Ukraine could escalate to involve others and, even if contained, the economic war Putin triggered by weaponizing oil and natural gas supplies has led to deep and potentially long lasting global impacts.
- The interconnected modern world economy has never faced a global pandemic. China’s commitment to lockdowns will continue to roil global supply chains and variants continue to emerge, which means the most lethal and contagious one remains possible.
These are some of the known challenges and unknown challenges could still come. In short, we are well into uncharted waters.
Read the full article about a perfect storm by William Keator at The Center for Effective Philanthropy.