“Performance is better than promise. Exuberant assurances are cheap.” – Joseph Pulitzer
The Corona Economy, Part II
Will America Survive It?
Alec writes:
Today marks the 29th day in a row that I have worn pants with a drawstring.
I went into Rand’s room this morning and woke him up. I said, “Rand, you have to get up.”
He raised his head up from his pillow and said, “Why?” Then he went back to sleep.
My wife is running a business with 10 restaurants and goes to work every day. She is busier than ever… as other restaurants gradually close, they are filling a growing number of carryout orders for breakfast, lunch, and dinner.
Her text this morning read, “Has at Costco $1.49.”
How she had time to text me, or what the text meant, I didn’t know. But thinking it might be vital information, I texted back, “WHAT??”
Her reply was, “G gas.”
I thought, “Wow, gas, $1.49 a gallon. I can’t remember when gas was that cheap. I’d better rush to Costco to get gas before they run out.”
I jumped into my car and backed out of the driveway. Then I realized: I hadn’t gone anywhere for 29 days. My gas tank is still full! (Later, I did the math and I am driving an average of 0.7 miles a day. I may not need gas until the middle of June.)
But America will soon be “opening up again.” Not because Donald Trump wants it to. Nor will it happen because we’ve passed the peak of the contagion. (There will be a second wave.) State governors will have lots to say about it, but they won’t actually make the important decisions. America’s people – its entrepreneurs, professionals, corporate executives, and employees will.
“Opening up” is bit of hyperbole. Our economy was never truly shut down. It was regulated into a crippled gait. In six short weeks, the US has experienced a financial collapse it hasn’t experienced in a hundred years.
As I write this, for example, more than 22 million American workers have filed for unemployment. Millions more will surely be filing in May and June. Both Treasury Secretary Steven Mnuchin and the Fed’s James Bullard have said they believe that unemployment will bypass 20% and could end up higher than it was during the Great Depression of 1929.
The unemployment rate hit a record of 25% in 1933 – 4 years after the Great Depression – and remained over 14% during the entire decade of the 1930s. The highest rate since then was 10.8% in 1982.
Another concern: The 2008 financial collapse was triggered by mortgage defaults. What is happening today is just as serious – rent defaults. According to Rent Payer Tracker, as of April 19, one-third of the 13.4 million renters surveyed hadn’t yet paid their April rent, ordinarily due on April 1. An increase in rent defaults isn’t likely to collapse the economy by itself, but it reflects a trend I’ve seen even among friends and colleagues that are financially secure: People are reluctant to pay bills they don’t have to pay.
The big picture is the gross domestic product (GDP), the total output of the US economy. With so many businesses, large and small, inactive or unprofitable, Goldman Sachs projects that GDP could decline by 24% by the end of June.
Think about that. Total GDP output in 2019 was about $21.4 trillion. If it drops 24%, that’s an annual loss of over $5 trillion of economic activity. And that’s on top of the macroeconomic factors we covered in Part I of this series:
* The US government is currently in debt to the tune of $24 trillion.
* It’s been running at a $1 trillion annual loss for years.
* The Treasury itself is broke. Its bills exceed its revenues by several trillion dollars.
* The government recently spent $2.5 trillion it didn’t have.
* On the other side of the ledger, federal tax revenues will be at least $2 trillion less than they were last year.
Add it all up and you have an already broke government increasing its deficit by as much as $10 trillion in a single year!
The government is working furiously to avoid a total collapse. Their strategy is to give away trillions of dollars in paper money. They have already given half a trillion via the Payroll Protection Program and have committed to another half-trillion more. And that’s not counting the 1.5 trillion that went to bail out Wall Street.
As you remember from Monday’s essay, the US government doesn’t really have any wealth to distribute. It’s broke and is getting broker every day by billions of dollars. If, as I suggested, our government were a business, only a fool would invest in it or lend it money. But that’s how it’s been surviving these past several years – by selling Treasury bonds to the likes of China, Saudi Arabia, and Europe.
That’s of no apparent concern to some of our legislators and public thinkers. They are criticizing the giveaway so far for being too conservative.
Regarding the 20% to 24% projection of GDP loss, a NYT columnist said, “This time, with government deliberately shutting down commerce, it could well fall faster.
Only a World War II-scale response can make up that difference.”
And where will government get the money?
His answer: “At a time when inflation is close to zero and the government can borrow for 30 years at less than 2%, this is precisely the moment to borrow to underwrite a recovery that also modernizes the economy.”
Never before in US history has so much money been doled out so quickly and with so little understanding of or regard for consequences. Rarely have so many politicians from both sides of the aisle favored such a level of spending.
As Bill Bonner recently pointed out, the Small Business Administration giveaway is forcing banks to review and approve loans at a surrealistic rate.
“Every half a second,” he writes, “they’ve had to check out the facts… verify the value of collateral… and assure themselves that everything was on the level – after all, they were giving out as much as $2 million per application!”
“Who gets the money?” Bill asks. We can’t be sure. But when money is being given away so fast and furiously, there’s a good chance that much of it will be unproductive. “Like subprime mortgages in 2007,” Bill says, “All you need [to qualify] is a pulse. Even hedge funds are eligible.”
The millions that have been fired or furloughed will be getting a few hundred dollars a week while the shutdown continues. Meanwhile, the hundreds of US senators and representatives and their thousands of aides will continue at full pay while they try to spend our way out of all this mounting debt.
“Don’t worry,” they assure us. “We are going to take care of this.” Assurances from people that have never run a business and have little to no understanding of how a real economy actually works.
So what is it they don’t understand? We’ll talk about that on Monday.