Saturday, March 28, 2020

We were already in a recession before Covid-19

Our unstable markets and economy were not ready for exogenous events.

It may come as a surprise to many, but the U.S. and several other countries were already in a recession before the late February/early March start of the exponential expansion of Covid-19 cases worldwide, post Wuhan, China. 

This is a controversial subject, but it is important for those serious about econometrics and the dynamics of economics not to shy away from sobering analysis of the data and the deleterious effects of policy from monetary authorities (Central Banks) and governments. 

In recent papers below, I established that the reported numbers for U.S. real GDP were some +4% points over the actual, accounting for an understated PCE deflator, overstated additions to private fixed investment, and seasonal smoothing tricks for defense and government spending, indicating that real GDP is negative, and has been for some 16+ years [1]. 

The source of this economic anemia in the U.S. is multifold, but primarily tied to structural problems of lower productivity and industrial production, and a persistent negative balance of trade. The U.S. has become predominantly a service economy, with significant wage gaps amidst rising under-reported inflation, and a large portion of long-term discouraged workers that are not included in reported unemployment numbers. 

The short story is that the U.S. was on edge for a black swan event to further destabilize its economic status. Equity and bond markets have been propped up by a decade of massive ongoing monetary stimulus provided by the Federal Reserve, so much so that they were ripe for sharp declines, certainly from any exogenous event, such as Covid-19. I’d include in that the oil market shock, a follow-on destabilizing event from expected demand destruction that has commensurately roiled the broader equity and bond markets. Debt loads were and are at an all-time high [2]. 

The last 2-3 weeks of market turmoil have shown us that corporations and governments were not, and are not, prepared to handle such a shock. High debt loads are the culprit of such instability. Companies are not saving for their work force, they are loaded with debt, encouraged by cheap money policies. 

The antidote will become worse than the contagion. Massive monetary easing programs have been announced daily from the Fed and other central banks, but none more so than the U.S. Fed and Treasury. The Federal Reserve buying corporate debt for U.S. government ownership is a radical move that will serve to prop up debt-loaded ailing companies that should otherwise fail. This will weaken our reserve currency over time and will prevent ailing companies from the default that would have happened without the exogenous events. Moral hazard and lemon socialism are thriving. This is regressive for many economic participants that might otherwise have the opportunities to save for retirement and invest in small business ventures. 


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