The Post-Covid Economy

Pre-Covid GDP for the first quarter of 2020. Q2 loss will be five to seven times greater than the Q1 loss.

Post-Covid Fed funds rates. For all practical purposes, Fed interest rates are now zero.

Covid-19 confirmed infection rates per million for selected countries. Y-axis shows the new-case rate. X-axis shows cumulative cases over time. Note that all nations shown have dropped their new-case rate to a tenth or less of their peak — except the United States.

by Thomas Neuburger

"The Fed can print money, but it can’t print jobs. It can buy bonds, but it can’t cure a virus."
—Nomi Prins

"The stock market is a graph of rich people's feelings."
—Source unknown, last quoted here

The current Covid crisis is three crises in one.

First, it's a medical crisis, one in which tens of thousands of Americans are newly infected each day and 125,000 have already died. Both of those numbers continue to rise at a time when most civilized nations have brought infection rates down to a tenth or less of their peak. At some point, the rest of the world will have to quarantine the U.S. — seriously.

Second, it's a financial crisis, one in which unemployment, if measured by Great Depression standards, has reached Great Depression levels, and in which GDP will drop farther and faster than it did at anytime in the 1930s.

Nomi Prins puts the employment picture this way. The current official unemployment rate of 14.8% "excludes workers the Bureau of Labor Statistics considers “marginally attached” to the workforce, meaning those not looking for a job because the prospects are so dim, or those who were only laboring part-time. If you factor them in, the unemployment rate already stands at a Great Depression-level 22.8%. Some industries, of course, felt more pain than others. Employment in the leisure and hospitality sector, for instance, fell in April by 7.7 million, or 47%." [emphasis added]

At its peak, U.S. unemployment during the Great Depression reached just shy of 25%.

GDP fell 4.8% in the first quarter of 2020 (see chart above), almost all of it pre-Covid-19. In late April, Trump economic advisors put second-quarter GDP at an additional –20% to –30%. As of June 26, a consensus of estimates puts Q2 GDP much higher, between –38.1% and –26.7%.

According to Prins, GDP dropped 27.8% between 1930 and 1932. The most optimistic recent Q2 estimate would put the drop for the first half of 2020 well beyond the Great Depression collapse. If reported Q2 GDP is just the average of these estimates, first half GDP for 2020 will be a stunning –40%.

This is going to hurt the real economy, meaning people's lives, in both imaginable and unimaginable ways, regardless of when the virus is brought under control. And if the virus is not brought under control soon, that damage will be even greater. As Prins puts it, "The Fed can electronically print money, but it can’t print jobs. It can buy bonds, but it can’t cure a virus. It can continue to try to stimulate the market, but it can’t banish fear."

Regardless of where the stock market is headed, the real economy is going down. And if indeed the "stock market is a graph of rich people's feelings" as some anonymous wag put it, even today's buoyant market could crash for good if the wealthy finally figure out that their earnings are tied to everyone else's after all.

The economic damage will touch everything. Consider all the vulnerabilities the jobless face: mortgages, rent, student debt, consumer debt, medical debt, medical expenses ... food. Most people are barely managing their debt payments and monthly expenses on a month-to-month basis now. Government unemployment checks will end soon, and if there is a renewal of support, it will be a small one (because, the deficit).

The same with debt deferments. The first rule of modern capitalism is, lenders (our job-creators) must be paid no matter what, and borrowers (potential deadbeats) must always be forced do the honorable thing. It's almost immoral — so we think — to allow them to do otherwise.

We never bailed out the mortgage borrowers in 2008; only the banks. Does anyone think that, ultimately, we'll do the same again. Again, when the real economy goes down, the people will suffer greatly, as will a great many industries. 

Finally, it's a political crisis, perhaps the one we've been expecting since George W. Bush left office, Bush the butcher of Iraq, servant of the nation's rich and powerful. America, sick of rule by its wealthiest elites and their endless, Ratheon-enriching wars, elected in 2008 what it thought was a peace-loving FDR president. It gave him FDR's Congress and an FDR mandate to change the nation, finally, to something most people could live in.

"Yes we can heal this nation. Yes we can repair this world. Nothing can stand in the way of the power of millions of voices calling for change" was the song of a triumphant Barack Obama in 2008, sung atop the rubble of a crushing financial crisis by a people hoping to rise.

They sang it in vain. "Yes we can" became "No I won't" in the blink of an eye. Promises to enhance Social Security by scrapping the cap on Social Security taxes became endless "grand bargains" to cut benefits designed to appease Republicans (and Obama's Wall Street donors) at the expense of all but the professional and investment classes. Obamacare "healed" the medical care crisis by backstopping medical insurers first, and offered relief to just a fraction, though a large one, of people who desperately needed it. In an unintended irony, Barack Obama presided over the greatest loss of African-American wealth in modern history. His economic policies were a "disaster for middle class wealth," and he made almost all of George Bush's tax cuts permanent.

"At every turn," wrote Matt Bruenig and Ryan Cooper, the Obama administration "was obsessed with protecting the financial system" and left homeowners "to drown."

Many of those who hoped for change in 2008 despaired of it in 2016, and enough Obama voters turned to Trump to give him an Electoral College win over Hillary Clinton, famous for her Wall Street speeches and hatred of progressive policies like single-payer health care.

Will this be the year, if Covid turns the economy to crap, when broken Americans grow angry enough to break things? The nation is angry now, a simmering low boil, and has been since 2016 when it was denied, on the left, a champion of the people, whoever you imagine that champion to have been — and on the right it was offered such a flawed vehicle for "change" that even our grandparents, good Republicans all, may be literally sickened enough to abandon him now.

Someone will win the next presidential election, but frankly, neither candidate deserves to, and neither candidate can give the nation the medicine it actually needs — a world in which the voices "of millions of people calling for change" will actually be heard. Of each of these looming crises — medical, economic, political — the economic could be a world-historical disaster, but the political may be greatest threat of all.