It could be up to two years before economists officially brand the period we are in right now a depression. But when they do–I fear that is inevitable–there will be no disagreement on the start date.
President Trump has irresponsibly set the expectation that we can have a “V-shaped” recovery, whereby the economy bounces right back to pre-Covid-19 levels and beyond. This idea is utter nonsense. It is, in my unqualified opinion, impossible. It should be aggressively and relentlessly challenged.
This is how I fear the story unfolds: Democrats retake the presidency and Senate (neither at all a certainty) in November. The recovery, after an initial surge, for reasons below, bogs down. Republicans once again wrongly blame Democrats for a sluggish recovery. The 50% of the electorate that are intractable ideologues, hopelessly gullible, and/or stupid as tree bark will believe it. Republicans retake at least the presidency and Senate, maybe the whole shebang, by 2024.
Here’s why the imaginary “V-shaped” recovery won’t happen (not necessarily in order of importance):
The Federal Reserve is predicting that very shortly we will see 32% unemployment. That is higher than any point during the Great Depression. The economic shutdown we are currently in is going to linger long enough to devastate our economy. Businesses are going to close permanently. Unemployment is going to remain in the double digits for an extended period of time. There likely will be, as Dr. Fauci has predicted, a resurgence in the virus in the fall. This will temporarily blunt the nascent economic recovery, and cause further long-term damage.
We are going to have another financial crisis. The housing market will tank, home and stock equities will experience enormous losses. Individuals and corporations, both saddled with record debt, will be defaulting on everything–mortgages, car loans, credit cards, rent, utilities, corporate bonds, etc. Bankruptcies will increase exponentially. The already catastrophic homelessness problem will likely explode to nightmarish levels.
Consumer spending is 2/3 of our economy. The federal government cannot prop that up with magical money pulled out of thin air for an extended period of time. Even during the period of emergency government payments, consumer spending will substantially weaken. People are going to be reluctant to use their unemployment benefits or government checks to buy cars, appliances, luxury items, or most anything that isn’t absolutely necessary. Everyone is scared. Even the financially well-off are experiencing economic anxiety. Self-imposed austerity and fiscal discipline will be the new norm. We will learn to waste less, buy less, and forego discretionary expenses. That won’t immediately reverse itself once the economy is re-opened for business. Americans aren’t all suddenly going to return to $5 Starbucks coffees every day, movies once a week, eating out at restaurants several times a week, let alone book cruises and European vacations at anything close to 2019 levels.
The Federal Government was already precariously mired in debt and greater than trillion dollar deficits. Congress just added trillions more, and they aren’t done yet. Increased spending is only the half of it. Federal revenues have suddenly fallen off a cliff. Nine million people filed for unemployment in the past two weeks, and we are just getting started. That is nine million workers not contributing 7.65% of their pay to Social Security and Medicare. That is nine million paychecks that employers aren’t matching with a 7.65% FICA contribution of their own. Personal income and business profits have plummeted, as will IRS revenues, as will state and local government tax receipts.
Our economy will likely hit bottom in the coming months. There will be an initial surge in economic activity after we re-open for business, and then I expect governments (federal, state, and local) to flip the switch from “stimulus” to “austerity”. This may or may not be the best course, I don’t know, I just anticipate that austerity is coming, especially if Joe Biden is president. Even if in the minority, Senate Republicans will all the sudden be screaming bloody murder about the deficits and debt again, and demanding “pay-fors” for every nickel of spending, and have the filibuster power to extract it. Additionally, state and local government budgets are completely destroyed. They don’t have the same ability as the federal government to run deficits. Taxes will go up, government spending will go down. All of this will further stymie any possibility of a quick, robust economic boom. Let’s call it a flattening of the recovery curve.
Boeing and car manufacturers have ceased production. Boeing in particular was already experiencing a dearth of orders due to the colossal 737 Max-8 debacle. All the major airlines have stopped flying most of their planes. There is going to be a glut of unsold automobiles. Prices will be great, but that bodes very badly for auto workers and car manufacturer revenues and bottom lines.
After finally creeping up just a little bit due to tight labor markets and a smattering of state and local minimum wage increases, wages at all levels are going to fall. The $1-$2 above minimum wage jobs will become minimum wage jobs, exacerbating the negative consumer spending trend and reducing tax revenues at all levels of government.
I’m especially worried about inflation, and stagflation. Treasuries and central banks the world over are already dramatically increasing the money supply by means I mostly don’t understand. I see a potential for diminished values of currencies, which are based on essentially nothing, and the possibility of widespread hyperinflation. This is a point that I’m pretty fuzzy about, and likely wrong. But what I can say with confidence, is if the United States and it’s trading partners enter a period of hyperinflation, it’s game over. All of the major economies of the world will go up in flames, and it will be many years, even decades before we recover.
The situation is dire. The negative economic impacts are poised to be long lasting. I’m not an expert (although I do have one more economics degree than Larry Kudlow). I’ve been wrong before. There is more than a decent chance I’m wrong here. Let’s hope I missed by a million miles.
