15 Mar The Times They Are A’Changin’*
The Times They Are A’Changin’
Most of us have not lived through a “force majeure” event: a hot war … or a horrific natural disaster … or an epidemic … yet alone a pandemic. There have been at least three cataclysmic economic Crashes over the past 33 years – the Stock Market Crash of 1987, the Dotcom Crash of 2000, and the worst of them all, the Subprime Crash of 2008 ÔÇö, yet none in which a massive death toll was expected. Today’s generation (which has never had to deal with life-and-death issues as did WWII’s Greatest Generation) therefore is having difficulty coping adapting to the projected human horror. There are no modern analogues. This time indeed is different (a subject discussed in several TLRs and from a variety of perspectives). In fact, this time is not only different, it is worse. The world will never be the same.
Although we are at the beginning of a profound, multi-year health economic crisis, each person’s focus, quite naturally, has been on the personal health impact of Covid-19: “Will I or my loved ones become infected?” “Should I self-quarantine?” Although these are appropriate first-line questions, global pandemics – likes world wars – portend broad, long-term consequences. They change the world. The effects of Covid-19 will last well beyond 2020. From a numbers perspective, the WHO, the CDC, and a variety of governmental agencies have estimated that 30-70{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} of the world’s population will be stricken with the new Virus. If so, the toll on humanity (and on each nation’s healthcare system) will be enormous … and that will be true even if the fatality rate is as low as the 0.7{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} reportedly experienced in South Korea (0.7{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} of 30{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} of the world’s 7 billion human beings would mean 150,000 million deaths). Unfortunately, the economic and political consequences that will follow the Covid Crisis, as well as the compounding health effects, may well be even more horrific ominous significant.
One thing that differentiates the Covid Crash of 2019 from prior economic/stock market Crashes is the unique confluence of pre-existing – and adverse – factors, no one of which, in itself, would trigger an economic or political debacle, but all of which, when ignited by the Covid-19 health crisis, combust and create a lifestyle-and-livelihood-destroying economic and political bonfire … with ever-spreading fallout.
We began 2020 with a slowing global economy, one that has been underperforming for the past several years (as summarized in the December 12, 2019 TLR). What has kept it going has been the Fabulous Federal Reserve Central Bankers who, in order to prevent the 2008-09 Great Recession from spiraling into a Second Great Depression, goosed the global economy with historically-unprecedented stimulative measures, including virtually unlimited money-printing, and then, when their efforts didn’t have the desired impact, continued with a combination of more-and-more-and-more-and-more money-printing and lower-and-lower-and-lower interest rates – in short, doing “whatever it took” to assure accelerate stimulate anemic growth. Massive over-spending by governments, which created now-unmanageable budget deficits, added a governmental imprimatur … and a further overhang on the markets. To achieve pursue its goals, the Federal Reserve cobbled together a broad coalition of global Central Bankers who worked tirelessly from and after 2009 in an effort to generate robust economic growth and a targeted level of inflation. They failed … despite massive efforts. As a result, the world has been awash in paper money …, but with few productive places for it to go. A chunk went to the purchase of bonds, grossly inflating their value. Most of the rest went to buy stocks, grossly inflating their value as well. Meanwhile, goods and services, from agriculturals and natural resources to wages, were mostly unaffected … or, more accurately, many of their prices declined due to productivity gains largely attributable to technological advances (discussed in “Is this Time the Same” in the August 22, 2019 TLR).
The result has been sub-par inflation – “unflation,” to coin a term, that has threatened to but has not tipped over into deflation – and mediocre GDP growth. Some economists have labeled it “secular stagnation,” which is an economic theory first expressed in the 1930s to describe the tendency of mature economies to become unstable in the absence of large amounts of government investment and spending. Former U.S. Treasury Secretary Larry Summers, a proponent of that theory, believes that the American economy has been “stuck in neutral,” economically moribund with too little investment, epically low interest rates, and unsustainable budget deficits. The huge injection of money by the Federal Reserve and its ultra-low-interest rate policies have served to fuel merely tepid growth in an under-utilized economy. Unfortunately, it now appears that the Fed has run out of effective tools and, were it to continue its stimulus measures, would be pushing on a string. In short, the U.S. economy, like that of most of the rest of the world’s, has been running on fumes. TLR asked on November 26, 2019: “Is there a point at which the Fed will run out of economic bullets … and, if so, how close are we to that point?” We were close then …, and we are there now.
Until late February, the stock and bond markets continued their wild run despite a weak and vulnerable economy. Where else were people to put their money? Most believed that the momentum of ever-increasing stock prices could only continue. TLR noted that sentiment on November 13, 2019 in “Expiring Canaries,” commenting that investors had concluded “that the inevitable a forthcoming recession isn’t imminent.” But it was. [Your Lonely Realist should have realized that the game was over when he had a “shoeshine boy” moment with an Uber driver on the morning of February 26th, who told TLR that the then-minor market correction was over because every other correction in his adult life had been just like this one: “The stock market cannot go down three days in a row. It’s not possible” … and proceeded to provide three hot stock tips, one of which was Tesla.]
It was in this economic environment that Covid-19 made its appearance. As it worked its way through China and stowed its way abroad, it gradually became clear that Covid-19 was destroying both demand and supply. This wasn’t like a sovereign debt crisis or a credit crunch or a geographically-isolated earthquake. Production ground to a halt. So did consumption. If businesses don’t have customers, they are unable to service their debt or pay their rent. If workers don’t get paid or can’t go to a store, they can’t consume. Covid-19 created a vicious circle with ripples that have rapidly turned into waves.
Initially, the Covid Crisis appeared to be a China-only problem … until it wasn’t … and it began to dawn on the markets that Covid-19 would become the first a 21st Century economic pandemic.
And then the other shoe dropped. Saudi Arabia on March 8th unleashed an Oil Price War, declaring that it would flood the market in order to bankrupt its balky Russian oil partner and American shale oil producers its competitors. The price of crude dropped by >30{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} … and stock and bond markets around the world reeled. A great many oil producers will go under. Too many are over-leveraged.
These factors have set-up the global economy for long-term pain turbulence: (1) Central Bankers no longer have the firepower to “fix” economies … or markets. The Federal Reserve’s announcement on March 12th that it would inject $1.5 TRILLION into America’s financial system, and the contemporaneous lowering of interest rates by Central Bankers around the world, had virtually no effect; (2) there is an increasing awareness that the supply and demand effects of Covid-19 necessarily will snowball and that the Virus will spread … as it already has throughout Europe, the United States and Canada, East Asia, Africa and South America. Medical experts nevertheless hope believe that, if draconian steps are now taken, the epidemic in the U.S. will peak in early May (and later globally), at which time new cases should flatten out, and that the Virus could abate during the Summer months …, but that the pandemic will not end until a vaccine is discovered – which they suggest will take between 12 and 18 months. Even so, the near-term continuation of supply-and-demand destruction is likely to cause severe long-term damage, especially as countries move to adopt more-and-more restrictive quarantine measures to stop the spread of the disease …, and the economic impact thereby increases exponentially; (3) crude oil prices have crashed. This portends painful readjustments in oil-producing countries like the U.S., Canada, Iraq, Mexico and Nigeria, as well as for Russia, Venezuela and Iran; and (4) the failure of the world’s leaders to offer leadership acknowledge and prepare their citizens for Covid-19 has exacerbated the problem. The fact that governments only belatedly have presented plans for containment, financial stimulus and humanitarian aid means that the consequences of the Covid-19 Crash will be deep and long-lasting.
What might some of those consequences be?
Although it’s impossible at this early stage to predict long-term consequences, it is possible to point towards some potentials.
Widely-publicized studies have reported that more than 50{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} of Americans are in poor health. Fully 40{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} are obese. Numerous others are addicted to drugs or have heart disease. Shockingly, the U.S. ranks 33rd in the world in terms of health. If only 30{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} of the U.S. population becomes infected and only 50{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} are in poor health (or simply old), it is likely that 1{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} or more of them will die – upwards of 500,000 Americans! The consequences to the nation, as well as the costs, would be enormous and would include a crippled and minimally-functioning healthcare system to care for those not infected by Covid-19 … leading to additional deaths. Although the long-term economic effects would include a reduction in Social Security liabilities and national health costs (including for Medicare and Medicaid), a reduction in local and state-wide budget and retirement obligations, reduced housing costs, and higher wages for survivors, these would come at a shockingly high human cost.
President Trump on Friday acknowledged that the health + supply-and-demand blows to the economy may well be severe. They require a stimulus of unprecedented size and scope. The steps taken by the President on Friday are a good beginning, although Republicans and Democrats understand that far more is needed … and they are working together to do more. While the Covid Crisis is different in its origins from prior Crises, it nevertheless is following a self-reinforcing pattern of collapsing confidence and a spiraling down of demand, growth, business activity, employment and incomes. With Central Banks impotent, a novel approach is needed. The President previously had proposed such a novel approach – he would suspend the payroll tax for employers and employees through at least year-end. Doing so would infuse $950 billion into the U.S. economy over 9 months, a type of approach consistent with Modern Monetary Theory (a subject previously addressed by TLR in April and July 2019). Comparing that to the much-maligned 2009 post-Great Recession/Obama-era stimulus package that infused $800 billion over more than 2 years, it’s clear that the President recognizes that a massive stimulus of unprecedented size and scope will be necessary to abate a national health and economic disaster. What might be better targeting, however, would be to provide a cash distribution of similar size to every person in America – not only those who are employed. Either way, the Federal government must rapidly find a way to offset the enormous human and economic losses that American workers and businesses very soon will be absorbing. Doing so will have long-term and far-reaching benefits. Unfortunately, the bipartisan bill passed by the House on Saturday barely scratches the surface … and speed is essential. If Congressional consensus cannot be reached within the next few days, the President should execute on his payroll tax proposal.
From a political perspective, the Covid Crisis already is confounding affecting domestic politics and primaries. Campaign events are being cancelled, a blow to effective speakers Trump and Sanders and a boon to the Biden candidacy. The outcome of the Presidential race may well turn on how successful the government’s Covid health policies turn out to be. The economic fallout may also determine the outcome of the November elections (assuming that National Emergency doesn’t prevent voters from voting).
From an international perspective, the Covid Crisis is likely to catalyze action by Iran, Iraq, and ISIS in the Middle East and Africa, China and North Korea in Asia, Russia in Central Europe, and Venezuela in South America … and in unpredictable ways likely to create challenges for America. Iran was in crisis before Covid-19 hit. Its regime now is faced with an ever-greater existential threat, and whenever an authoritarian regime faces such a threat it seeks a distraction. By further escalating tensions with The Great Satan, as the Iranian and Chinese governments have claimed, that America is responsible for unleashing Covid-19 on the Iranian people world, Iran has upped the stakes … as it also has recently done by using its surrogates in Iraq to kill two and wound three American soldiers. Iran’s goals are two-fold: to pressure the U.S. into withdrawing its troops from Iraq; and to take actions that damage Trump’s reelection chances in the hope that a new U.S. administration will ease sanctions. Expect America’s other enemies to take similar actions (for background, see “Axis of the Sanctioned” in the June 21, 2019 TLR and “Axis of the Sanctioned, Part 2” in the January 2, 2020 TLR).
The markets suffered a major breakdown last week. Whatever was wrong with stock and bond prices has now corrected is in the process of correcting and there is hope that prices have reached soon will reach a bottom. The same cannot be said for the long-term economic and political effects of Covid-19. Covid-19 will continue to ravage the health of people and the economies of countries around the world. It will continue to sow havoc that will cost not only lives, but also jobs, businesses and, possibly, governments. In order to cope, we all will need to change our individual, societal, economic and political expectations. Momentous changes are afoot. “There’s a battle outside and it is ragin’. It’ll soon shake your windows and rattle your walls, for the times they are a-changin’.”
Finally (from a good friend)
*┬® Copyright 2020 by William Natbony. All rights reserved.
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