Was It All Worth It? — The Response to the Virus and Economic Recovery
The US economy fell by 31.4% (annualised) in the second quarter of 2020. The best estimate is that the economy will grow by about 35% (annualised) in the third quarter.
If that sounds like a wash, it’s not. The 35% gain is applied to the lower level of output resulting from the 31.4% loss. If you take 100 as a starting place, and reduce it by 31.4%, you get to a new level of 68.6. If you increase that level by 35%, you get back to 92.6. That still leaves you 7.4% in the hole, not counting the 5% drop in the first quarter.
When you apply 7.4% to a $22 trillion economy, that means you still have $1.6 trillion of lost output on an annualised basis even after the 35% third-quarter recovery.
Things will not necessarily get much better…
The 35% third-quarter recovery was to be expected as Americans got back to work after the lockdown. But progress from there is very much in doubt.
The lockdown continues in many places. The virus has not gone away, and the case load and fatalities continue to grow. A second wave of layoffs has now begun as companies that were able to hang on thanks to Payroll Protection Plan loans find that the money has run out, their businesses are still closed, and they are now laying off workers who might have survived the first layoffs in March and April.
All this economic devastation was not caused directly by the virus. It was caused by the policy response to the virus, specifically the extreme lockdowns ordered by many state governors.
Was it all worth it?
According to this article, the answer is ‘no’. The scientists who wrote this article, who are among the top experts in the world, agree that lockdowns don’t work. The virus will spread with or without a lockdown.
Some measures make sense, such as washing hands, keeping social distance, and wearing masks in crowded spaces. There’s no evidence masks do any good at all when the wearer is alone, outdoors, or at a reasonable distance from others.
We could have followed these basic rules and got 90% of the benefit of a lockdown at only 10% of the cost. Those supporting lockdowns have ignored the costs of increased suicides, drug abuse, alcohol abuse, domestic violence, and the depression and anxiety that result from lack of social interaction.
There was never a good reason to close every bar, restaurant, salon, boutique and public space. We destroyed the world’s greatest economy for no good reason. This article shows that the experts agree.
Don’t believe the happy talk — high unemployment is here to stay
The economy is not following the script laid out for it last spring by the politicians and experts. We all recall the stock market crash from mid-February to late-March and the skyrocketing unemployment, lost output, and bankruptcies that went along with that crash. COVID caseloads and critical care threatened to overwhelm the public health system and fatalities were soaring.
The government sprang into action, at least on the financial front (the public health response was more muddled). The Federal Reserve printed $4 trillion of new money and backstopped money markets, corporate bonds, municipal bonds, foreign central banks, and other facets of capital markets with direct purchases, guarantees, or currency swaps.
The Congress enacted $3 trillion of new deficit spending plans, including direct aid to airlines, cruise ships, hotels and casinos, and assistance to small business through Payroll Protection Plan loans, which would be forgiven if used for the intended purpose of retaining workers or paying rent.
The idea behind these programs was, in effect, a $7 trillion bridge loan to the economy to keep conditions from getting worse. The expectation was that we’d have a V-shaped recovery with a sharp bounce back in the third quarter, a reopening of closed businesses, rehiring of the unemployed, and a rising stock market.
So far, the economic recovery has not gone according to plan
There was growth in the third quarter, but not nearly enough to return output to 2019 levels. The V-shaped recovery looks more like an ‘L’ with flattish growth beyond the third quarter, or maybe a ‘W’ with another recession right around the corner.
The stock market did rally, but that was mainly because the stock index components are heavily weighted to companies least affected by the pandemic, including Amazon, Apple, Netflix, Alphabet (Google), Facebook and Microsoft. Even at that, stocks have been struggling since hitting new highs on 2 September.
Worst of all, according to this article, we’re facing a second wave of layoffs as the money runs out from the earlier programs and no additional funds are on the way. Beyond the second wave of layoffs, there is a persistent problem of the long-term unemployed whose businesses are shutdown or dead in the water with no prospect of any return of demand.
This is a combination of factors the economy has not seen since the 1930s. It’s worse than a technical recession; it’s a depression. And its effects will be felt for years and even decades to come.
All the best,
Strategist, The Daily Reckoning Australia
PS: This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Click here to learn more.