“Collette said hope costs nothing. But it does. It costs the time you spend hoping.” – Michael Masterson

The Corona Economy: How Bad Is It… Really? 

It’s time for another look at our Corona Economy. Time to assess the amazing amount of economic damage the shutdown has caused and make some guesses about how long, how bad, and how widespread the coming recession will be.

Recession? What? You think that things are under control? You feel confident that the economy will bounce back once we get this virus thing out of the way?

This is the way I see it…

The US economy is shrinking.

In my May 1 blog post, I noted that since the Corona Crisis began, our national production was down $10 trillion. That’s $10 trillion that was lost forever. No matter what happens in the future, that loss cannot be erased. In the three months since then, GDP has continued to shrink. In the second quarter alone, it fell by 10%. That’s higher than any 3-month period in the history of our country.

Unemployment is still crazy high. 

The unemployment rate has gone down considerably since it peaked this spring, with jobless claims down from nearly 7 million in the third week of March to 1.2 million last week. Overall, the official unemployment rate has dropped from about 13% in April to 10.2% today.

Of course, the official unemployment rates are entirely bogus. They don’t count people who are unemployed and not looking for work. This number was about 6 million before the $600 giveaways. It’s probably 10 million now. Plus, the official rates don’t include part-time workers that want, but can’t find, full-time jobs. And on top of that are the problems with the way workers are classified. The most egregious: Those on furlough are counted as working, rather than as unemployed.

If you add back in those purposeful and possibly accidental errors, the actual unemployment rate is probably about 16%, which would make current levels higher than at any time since the Great Depression.

200,000+ businesses have been closed for good. 

According to a study by the University of Illinois, Harvard Business School, Harvard University, and the University of Chicago, more than 100,000 small businesses had shut down permanently from March to the beginning of May. In June and July, another 100,000 may have been shuttered.

“We are going to see a level of bankruptcy activity that nobody in business has seen in their lifetime,” James Hammond, chief executive of New Generation Research told The Washington Post. “This will hit everyone, but it will be harder for small businesses since they don’t have a lot of spare cash.”

And Mark Zandi, chief economist at Moody’s Analytics, predicts that total failures for small businesses this year will pass 1 million.

It goes without saying that the closing of hundreds of thousands of small businesses will have a domino effect on hundreds of thousands more, the little shops and restaurants that survive on the patronage of these small businesses in small communities around the country.

Entire industries have been decimated. 

Travel bans have gutted the transportation industry, drastically cutting not just airline revenues but train travel, bus travel, and car travel. Uber and other such businesses are down more than 75% since last year.

The near halt in travel has sent oil prices tumbling, putting thousands of businesses that support oil and gas distribution out of business and millions more Americans out of work.

In the retail sector, it’s not just small shops and restaurants that have been forced into bankruptcy, it’s beauty shops and fitness studios and day care centers. The list goes on and on.

But things don’t seem so bad… right? 

I know. The unemployed have been getting federal paychecks. Businesses are getting billions in loans. And the stock market has been charging along.

That don’t change the facts.

When I last wrote about this (May 1), I noted that the numbers then were worse than they were at the nadir of the Great Recession of 2007-2009. And that even though the Great Recession officially ended in June of 2009, the growth of the GDP afterwards was anemic. Well… except for a modest improvement in the phony unemployment rate, all the key economic health indicators have only gotten worse.

Remember how difficult it was to make ends meet from 2009 to about 2016? It could be worse this time.

What about the bailout? Shouldn’t that help? 

The coronavirus scared the hell out of millions of Americans, with studies predicting mortality rates of 6% and 3 million dead before the end of the year.

It was a national health emergency that could have united the country. Instead, it morphed into a ludicrous political drama, with the Democrats accusing the Republicans of being heartless and incompetent, and the Republicans accusing the Democrats of exaggerating the danger to tank the economy and bring Trump’s ratings down.

When it came time to pass an economic stimulus bill, partisan politics continued. The first round of bailouts cost US taxpayers $2.4 trillion that the Treasury had to borrow. And that was on top of $2.2 trillion approved to cover the budget deficit. The current package will add another $1 trillion to $3 trillion to that, bringing the total national debt to $25 trillion or more.

That – spending trillions of dollars we don’t have – has been the government’s solution to an economic disaster that is as bad as any we’ve had since the Great Depression.

Let’s stop here and remind ourselves that debt and spending have been the primary causes of every economic disaster the US economy – and, for that matter, every economy – has ever had.

If your kid were in debt because of a gambling habit and told you he was going to get himself square by borrowing money from a loan shark, would you think that was a good idea?

So that’s the real problem. We may never know how necessary it was to shut down the economy, but the solution to the economic damage it did has been a borrowing spree greater than ever in our history (and in the entire world).

And nobody in Washington thinks there is the slightest thing wrong! The old debate about responsible spending and balancing the budget has gone out the window. Those free checks from the government have bought the hearts and minds of the entire electorate. We may be doing something we’ll regret later, the most conservative say, but what the hell! Let’s print more trillions and wish for the best!

What to expect. What to do. 

If you believe the stock market is the economy, I don’t know what to tell you. There are good reasons to believe stocks will continue to move up. The biggest reason is all these trillions of free dollars.

I have converted about 75% of my stocks into cash for reasons I explained on July 24. As I said then, my decision wasn’t based on any certainty that the market is going to crash, but on the possibility that it might.

If you understand that the stock market is not the measure of the wealth of the US but the measure of only the wealthiest 10%, you should be very concerned about all this debt and continued spending. You should be worried that sooner or later the bill will come due. And the only feasible way that the government can manage that debt is by allowing for an extended period of “moderate” inflation – low enough that the Treasury can pay the interest on its debt, but high enough that it can erode the value of that debt. And what that means is stagflation: years and years of increasing prices without any significant economic growth.

Unless you are already wealthy, this means that you will get a lot poorer over the next 5 or 10 or even 15 years.

There are things you can do to protect yourself and profit. I’ll tell you about it in my next essay on the Corona Economy.

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