April 16, 2020

The Recovery Will Not Be V-Shaped

During the last four weeks 22 million workers in the U.S. filed for unemployment insurance. Some 10 to 15 million additional workers were not eligible but also lost their jobs.

Michael Hudson extrapolates from there:

Ross: Ultimately, where does this end? Because if in 12 weeks time, people can’t afford to enter into the social norms, enter into the economy, live, put bread on the table, where does that logically finish? Michael Hudson: With the American economy looking pretty much like Greece. It’ll be austerity. There will be people who don’t have jobs. They are going to be evicted from their apartments. They will have run through their savings. They will not be able to pay their credit card debt and other debts so arrears are going to rise. The banks would be squeezed, but Trump says that although we can’t save the people, we can save the banks. The Federal Reserve has enough money to keep all the banks afloat, even if they’re not getting the mortgage payments, even if they’re not able to collect on their loans. The banks can now make up for the money they’re not getting by having a huge new market: lending money to private capital and to the large companies to buy out these small businesses that are going under. It’s a bonanza.

A bonanza for the 1%.

But the oligarchs who rule the United States are probably miscalculating this crisis:

“U.S. stocks are pricing in a V-shaped economic recovery even more keenly than elsewhere in the world, so are vulnerable in the case that exits from lockdowns globally and in the U.S. prove more complicated,” said Edmund Shing, head of global equity derivative strategy at BNP Paribas SA.

The crisis will not be over before the fat lady sings. That lady has not even entered the house. A recovery will not be V-shaped. The economy will not spring back into action as soon as the lockdowns are over. It will be a long slog. The U.S. economy always depends on consumer resilience. But with more than 30 million people out of jobs there will be a huge fall of demand compared to before the pandemic.

It is also likely that there will be more than one wave of the pandemic. During summer the case numbers will probably recede but they are likely to go up again during the fall. In between the pandemic will slowly burn through more of the population but mostly out of view because of many asymptomatic cases. When it comes back it will be in a different way. During the first wave the infections started first in place A then in place B then place C all depending on traffic and contact pattern. But the second wave will likely come, as it did during the Spanish flu, as one big wall that will hit all places at the same time. That will make it more difficult to allocate resources.

Pandemics are, as Nassim Taleb and other have pointed out, fat tail events where normal statistics no longer apply. They are not symmetric Gaussian distributions curves where the way down from high case numbers has a similar shape as the way up had. The way down is actually much longer and more of a very slow decline which might even include additional eruptions.

To expect a V-shaped return to a normal economy under these circumstance is foolish.

The political consequences will be huge. A wide public demand for more social policies will come into conflict with a recalcitrant oligarchy. Can that conflict be solved within the current U.S. system?

There are a few signs for hope. The first two vaccines developed in China are now in their first phase of human testing and more are coming. Some of them may actually work. A mass producible effective vaccine would mean that the fat lady has started to sing.

There is also the curiosity that most children not only do not fall ill with the covid-19 disease but do not get infected at all. Further research into the phenomenon could point to a protection mechanism that might be exploitable for the protection of adults.

On the sad side the Economist has started to systematically cover 'excess death' from the pandemic and finds that all official death numbers are serious undercounts.

Posted by b on April 16, 2020 at 17:49 UTC | Permalink

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