A new beginning.
According to the National Forest Service, in every forest fire there is an element of new beginning. Certain species of pine trees develop very thick, nearly fire-retardant bark that protects the living tissue of their trunks. Lower limbs drop off over time, making it less possible for fire to climb to the more vulnerable tops of these trees. Serotinous cones, often hanging onto the trees for years, seal seeds for future forests inside thick layers of resin that are only released when fire melts the hard substances and seeds are spread by the high winds of the inferno. Unlike the seeds protected in serotinous cones, some seeds necessary for new forest growth need the direct application of fire to activate their capacity to bring new life to the devastated area.
Similarly, a devastated economy has in it the seeds for recovery and future growth. One factor in the recent and historic collapse of stock prices was the significant decline in the price of a barrel of oil. Oil dipped as low as $22 per barrel, a price which is nearly unfathomable. There are many reasons oil prices declined so much, but the reality is that prices this low destroy the profits of virtually every company engaged in the production of oil. Those companies, many of which have bank loans, are likely to fail unless the price of a barrel of oil soon recovers. Thus oil company and bank stocks were slammed.
An economy put on lockdown has also driven interest rates to their lowest levels ever, another hit to the banks. Rates this low destroy the margins banks need to loan money. Banks earn their income on the “spread” between what they pay savers who deposit funds and what borrowers must pay for the privilege of using those deposits temporarily. When that spread narrows as it does when interest rates are historically low, bank profits decline. This is what happened in the financial crisis in 2008.
Now for the good news: Just as the recovery of a forest is resulting from the fire that destroyed it, the seeds of a recovering economy can be found in the conditions that drove it to its knees. Lower oil prices will push already low gasoline prices lower. The national average for a gallon of regular gasoline has dropped to $2.08. In our community we’re below that level.
Low interest rates mean the cost of money is reduced. The cost of money is the rate that borrowers pay on loans. Those lower rates mean it costs less to produce products and provide services. This stimulates economic growth. Low gasoline prices will save consumers money that can help them better recover from this economic downturn. Low interest rates fuel economic growth.
In nearly every disaster, financial or natural, there are seeds of hope and reasons for optimism. When storms destroy communities as recent tornadoes did in Tennessee, the morning sun brings neighbors together, helping one another recover their lives. Volunteers and contributions combine to start the rebuilding process. Shattered lives are recovered. Those lost are remembered. Life goes on.
We can now see that the peak has been hit in China and people are once again engaging in economic activity and getting fresh starts. Nike reported in today’s Wall Street Journal (3/26/2020) that its Chinese business had returned to pre-crisis levels. Soon supply lines to Asia will start to fill. It will get better.
Damage has been done. We won’t recover smoothly. Our economy has taken a body blow that knocked us into a recession. How bad and how long this economic downturn will be, we don’t know. My experience is that we are resilient people. Like the pines with thick bark and high limbs, we have protections that make us hard to burn down. I’m certain we’ll get through this together, and we’ll soon be neighbors helping neighbors. We will restart lives that have been buffeted but not weakened. After all, this is America. We’ve experienced and recovered from much worse.
