IMF predicts worst downturn since Great Depression | Hacker News Reader

IMF predicts worst downturn since Great Depression

nytimes.com

74 pointsbookofjoe82 comments

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Discussed yesterday:

https://news.ycombinator.com/item?id=22865127

A lot of people comparing this to 1929, but there are a few things that are substantially different:

* unprecedented scale and speed of QE and government stimulus

* the Federal Reserve has stated they will provide "unlimited QE"

* the markets are a lot more efficient now than they were in 1929

* in the 1930s, credit and banking was, in many ways, still in its infancy

* today's widely available technology was science fiction in the 1930s

PS: There's an interesting documentary on YouTube about the Great Depression, part 1: https://www.youtube.com/watch?v=bCEJ65H_1XE part 2: https://www.youtube.com/watch?v=gO42ZfCN9ug. It's worth watching if you want to understand what happened in the 1930s.

>A lot of people comparing this to 1929,

* Greatest downturn since the depression doesn't imply the mechanics are the same. It's a comparison of scale.

* Unlimited QE isn't free. TINSTAAFL.

* The stock market is not the economy.

* The economy isn't the US economy (it is global)

I'm a proponent of what the Fed, and central banks around the world, are doing. But I feel like people are viewing this as a "pandemic passes, back to normal" situation. There were cracks beginning to show in the late cycle of the economy for over a year. The pandemic just happened to be the exogenous shock, and a bad one at that.

Remember, we just got through a decade long bull-market that mostly benefited the asset-rich classes. We have unbelievably polarized politics around the world. There's evidence of corruption in all of our institutions. Are we really ready to handle this?

Good points. The hyperconnected world did not exist back then. It will definately make a big difference to outcomes.

I have been quite surprised the internet remained up, in different parts that were hit really bad.

The issue is, the people who run the show now don’t understand that hyperconnected world and all it’s marvellous possibilities.

They’re busy throwing “unlimited QE” trying to restore a world they know and remember that is now gone for good.

Trying to restore oil, and bail out legacy companies. It would be wise to invest in the future instead.

That has nothing to do with People up and down the food chain, who know how to get things done and take advantage of the hyperconnection, rebooting their ops.

The advantage of the network over hierarchies, is reboots dont happen top down. They happen all over the network simultaneously.

For example these days I don't wait for my boss or his boss to resolve gating issues if I know people at their levels of the hierarchy who can do it faster. Thats possible if you are well networked. And lots of people are these days, compared to 1930.

Governments can help fund and facilitate though.

The biggest difference is food. Today, we have a transportation problem, but back then, we often didn't have food to transport.

There was actually a surplus of food in the 1930s, but farmers decided to burn their crops instead of selling it at a discount. Kind of like the current situation with oil: a massive supply glut.

[0]: https://en.wikipedia.org/wiki/Agricultural_Adjustment_Act [1]: https://www.nytimes.com/roomfordebate/2010/11/21/do-farm-sub...

I think you may have missed the most important difference. Both President Hoover and the Federal Reserve reacted by tightening monetary and fiscal policy. Their intentions were good, Hoover wanted a balanced budget and the Fed was attempting to defend the US Dollar peg to gold.

The unfortunate and unintended consequence was that the policies sucked all the oxygen out of the room and extinguished the flame of the economy.

This time, building on what Chairman Bernanke started, we are doing the opposite. He advocated for QE, and loose monetary policy.

My personal opinion is that this will not end well, but may take up to a decade to come to it’s natural conclusion.

While my understanding of economics and QE is basic. Printing money won’t make up for lost opportunity and produce which will come out of this. Does “unlimited QE really work ?”

In my view governments are way too focused on the economy as it is / was rather than innovative solutions and investment into transitioning into something new and more resilient.

You’ll often here Trump saying “reopen the economy”. “The economy” he knew is gone. It’s changed forever, time to evolve.

I’m going to say that what contributed to getting us out of the Great Depression was (amongst other things) was that humans better adapted to that environment.

QE "works" because it keeps wealthy investors wealthy, and they're the ones funding campaigns and hiring people like Bernanke after they retire from government.

It works for the people making the decisions, and the people funding them, so you bet it's going to continue happening even if it means the American standard of living will continue to drop.

What is your take, all these specific differences will make it better or worse?

Not OP, but the assumption is that these are all things that can make recovery more efficient and fast.

I think it's too early to make any predictions.

Most of your differences involve just creating money out of thin air more. I don’t see how that will fix it.

What it reminds me of most are things like assignats before the French Revolution. But at least those were said to be based on something (seized church land). We make our money up based on nothing right now. It’s absurd and after it all falls it will seem so obviously stupid to historians.

https://en.wikipedia.org/wiki/Assignat#France

Not creating money out of thin air. Creating it out of military

Not printing money could be far worse.

Check out the Ray Dalio video on how QE is used for stability. https://www.youtube.com/watch?v=PHe0bXAIuk0

I'm not an expert but I don't think our money is based on nothing. As I understand it it is based on the relative debts and wealth of other nations [0].

[0] https://www.mentalfloss.com/article/12715/why-did-us-abandon...

By definition, fiat currency is literally based on nothing. Or, more correctly, fiat currency is based on a shared collective delusion that it has 'value'.

How does this differ from gold-backed currency?

Modern recessions aren't like famines, where there simply isn't enough stuff to go around. We have plenty of stuff, our productive capacity is still available, and the problem is just getting it allocated properly. Magic money creation based on nothing can help with that kind of problem.

That would be true if there was wealth distribution happening, but there isn't. Most of this money goes into the hands of the richest people.

I'd love to see poor people have more money, but I don't see why that's a critical feature for a plan to keep the economy running well. There are many important problems that just don't have much to do with income inequality.

The economy only works when everyone has money to spend. If 30% of the population is broke, that's going to cause a huge drop in economic activity. Most economic activity is driven by consumer spending.

Agreed. Current response plans won't handle 30% of the population being broke; if that happens something very different will be needed.

The way you fix that is by redistributing wealth. The government is doing this in a roundabout way by borrowing the money for a massive stimulus and recouping that money by increasing taxes on the wealthy later - likely with a Democrat administration so Republicans can maintain their rhetoric.

> but I don't see why that's a critical feature for a plan to keep the economy running well

Wow, I knew HNers were "affluent," but I didn't know they were this out of touch. If the people buying the iPhone you're coding software for die of starvation or due to lack of access to medical services, where do you think your salary is going to come from?

> There are many important problems that just don't have much to do with income inequality.

Like what?

You're attacking something I didn't say. It's very bad if people die of starvation or can't get medical care, and bad for much more important reasons than whether or not they'll buy things.

Business closures, for example, are a problem that doesn't have much to do with income inequality. Redistributing wealth won't stop businesses from closing, nor will it produce the goods and services those businesses previously made. If we get more money but lose the goods and services we wanted to buy with that money, it's not a good trade.

> I'd love to see poor people have more money, but I don't see why that's a critical feature for a plan to keep the economy running well.

That kinda is what you're saying, because if poor people don't get more money during this crisis, they're literally going to start starving. 50% of Americans live paycheck to paycheck, and now their paychecks have stopped, how are they going to eat?

> Business closures, for example, are a problem that doesn't have much to do with income inequality.

Of course they do, who do you think spends money at local businesses? If we're talking pre/post pandemic, if you give money to poor people they spend it. That means more people spending money at local restaurants in poor neighborhoods, more people spending money at daycares, more people spending money on car repairs, etc. That's how businesses flourish -- when people have money to spend on goods and services.

What do billionaires do with their money? Spend it on private jets, expensive cars, and invest it in companies like Uber and WeWork? The vast majority of poor people can't even afford an Uber, so how is that helping the average American?

If you give poor people spending power, then the market that supplies their needs grows because it has more customers. What should we do, prioritize the needs and wants of 1% of society, or 50%?

When minimum wage stagnates, so does spending. When the stock market stagnates, does it even affect the average American? So why are we prioritizing the stock market over minimum wage? Is it maybe because of regulatory capture by the ultra-rich?

The economy should not be a funnel for money to get vacuumed up by the top 1%, but 50% of all dollars end up in their hands. Why is that? Why does 1% of society get half of all wealth while the other 99% of society has to fight over the other half? How is that good for the average American?

Why is it that when we're having trouble with the logistics of getting food to people, we're bailing out the airline industry? No one needs to go on fucking vacation right now, we need to get people the food and medical services they need. The only reason is because the only thing that matters in this country is how many dollars are in your pocket, and the starving poor have less than airline executives. It's pathetic.

It will fix it by making all of us pay the bill. In the long run QE will lead to nothing but inflation. In the beginning you may not notice it, but then after a while you will start asking yourself, why is real estate so insanely priced. And then medical care, cars etc. And while a single/small country can't do QE for far too long before going into hyperinflation and people resorting to another currency / currency board, FED+ECB can actually go much longer. Scale matters. On the moral side though, I find it quite totalitarian an non-democratic to do QE at such a scale and in such away. Just ask yourself where the newly created money supply will be poured into. I bet the SMBs won't see much of that.

When I read greatest recession since 1929, I don’t read it is going to be like 1929, I read it is going to be worse than 2008, where are the tools you mention were already there.

Yes fair enough. QE was a thing in 2008, but it took them a lot longer to turn on the money printers. This time they were very swift.

yes and assets started to bubble because of the hidden inflation of QE. What do you think it'd going to happen by just keep printing money, 10% to normal people and 90% to businesses ?

This makes me realize that I never understood macroeconomy.

After shutting down the economies for the developed world for multiple months the prediction for the global economy is ONLY 3% down? I don't get it. Makes no sense frankly.

Stock markets != economy

Edit: I misread, thought the parent mentioned markets.

no one mentioned the stock markets, from the article: "In its World Economic Outlook, the I.M.F. projected that the global economy would contract by 3 percent in 2020"

I am not sure I follow, the stock market is not discussed here, it is about the global economy,

the word "stock" is not even present in the cited work.

What made-up number did you expect?

Only some parts of some economies were shut down.

I was listen to marketplace yesterday, and they had an IMF representative on who said this prediction involved a lot more uncertainty then usual, and would most likely be revised down.

You got to consider the unemployment rate, which is around 13% which is historically huge, but not that much outside the 6% swing in growth predictions by the IMF. Especially when you consider that must of the lost jobs where service industry type jobs which are generally lower paying. Also this loss is being spread across the whole year, if you only look at the second quarter things are looking much worse. If you take all these things into account these numbers are too far fetched.

People say we're shutting down the economy for rhetorical effect. (Guilty as charged here.) In practice, a large majority of economic activity is either doable from home or considered essential, and 20% of economic output lost for 2 months does only add up to about 3% over the year.

Your calculation is only true if the economy will jump back to normal after the two months, which will not happen. 3% is VERY optimistic IMHO.

My calculation leaves out a lot of factors. 20% was a number I pulled out of my arse, many lockdowns are lasting less than 2 months, some things won't go back to normal after lockdowns but normal economic growth won't stop either. I was just trying to say that it's within the realm of reasonability - the number's going to end up being closer to 3% than 30%.

I read an estimate for the Danish economy that a full lockdown costs 4-5% of annual GDP pr month. Meaning that if it goes on for a full year the output of the economy would be half.

Even in a full lock down some parts of the economy is still running at full "potential output", some maybe more: Hospitals, police, some business, utilities like electricity or water, basic supermarkets etc.

But, yes, 3% is probably too low.

Some of the activity lost in the months of lockdown is just deferred, and so is projected to take place when restrictions are lifted again.

QE is pushing off the pain till later (making the future worse [more debt] for a better now).

1. 3% is an annualized number.

2. The _entire_ economy is not shut down even in the hardest hit areas. In fact, most people are actually still working - from home.

3. Most countries are not in lockdown, or are only partially shut-down.

The IMF is predicting the global economy will contract by 3% this year, which would be the worst since the great depression.

However what made the Great Depression so painful was its depth, scope and length. The US experienced 4 straight years of negative growth in 1930s (up to -12%) and in many ways the economy did not fully recover until World War 2.

So far I don't see anyone predicting a downturn of that size.

Even if we consider a global lockdown impact of 3-4 months, the fall in output should be roughly between 25-30%. The best case could be 13.4% i.e 3.3-16.7(for 2 months)

Not an economist, but I don't understand how they calculate just 3%

Further, when this is over, I think the crisis will lead into a geopolitical crisis. Also it is good to assume that multiple countries will not let China (govt) simply get away with this. There could be policies that can end up resulting into collateral damage

All productive output doesn't stop during a lockdown. And not all of the world is locked down, including China, the second largest economy in the world.

You are right, we have at least 20-30% productivity in lockdowns. But most large economies are in lockdown and China is just 15-16% of world economy. It is export oriented and only essentials have demand and functional supply chains in these lockdowns. Even with all the best case scenarios, that 3% number does not feel right

The economy is basically a big network of relationships; employee relationships, business relationships, etc. Unfortunately such relationships tend to break quickly and in a self reinforcing cascade but can only be rebuilt slowly as businesses find that there is enough profit margin and demand to bring new people in, one at a time. That’s why recessions happen quickly and recovery time is proportional to how many people lose their jobs. You look at unemployment data for the last 50 years and the pattern is very simple: a rapid increase in unemployment and a steady recovery. The higher the spike, the longer the recovery. That being the case I would guess that the recovery from this shock will take a decade or more.

https://www.whitehouse.gov/wp-content/uploads/2019/05/April-...

Now I’m not saying it’s impossible for everyone to just get hired back but this would be the first time. You can’t put a broken egg back together; entropy doesn’t go in reverse. The old jobs don’t come back, new ones are created, that’s just the way it works.

The hidden assumption of many economists is that unfettered economic growth is always a good thing. I'm not arguing against growth. I just think it's important to state our biases and assumptions when we make an argument.

Well said! Personally, I'd rather see growth in non-polluting technologies, mental health, education, and other aspects of our society. I don't care about overall economic growth and GDP.

Growth is always good for the poor, as it is good for entire poor nations. The problem with modern capitalism though is that the rich benefit from growth to a greater extent compared to the rest. The gap is only widening. Then there's stagnation/recession/depression when it's the opposite: the poor lose more than the rich compared to what they have. So no, growth is a good thing, but it needs some serious fixing too.

Growth is only good for the poor when it's evenly distributed, which it mostly isn't, and when it doesn't have negative impacts on personal health and the environment, which it mostly does.

Most "growth" is really just stripping the house and burning it down to make a fire - while a small number of people get most of the benefit.

Not true, no. We all become more productive over time, then we develop even more productivity tools etc. That's real growth. There's of course the inflated component in it which gets corrected regularly.

It’s going to be even worse when the second wave hits. Politicians cowing to the demands of their donor base are laying the runway to “reopen” the economy, knowing the loss of life that will entail in the absence of any meaningful preparation.

South Korea has shown that it’s entirely possible to remain “open,” with massive testing, alert systems, and on demand health access expansions. But none of the people arguing that this is necessary are not doing anything similar to prepare and respond.

You probably meant "are NOT doing anything similar".

Thanks! Corrected.

No raises is gonna be the new norm then.

And the stock market has been pumped globally, which shows the Economy has nothing or very little to do with the stock market.

Some companies are actually having to turn work down. I work for one. I'm not expecting a no raise policy anytime soon.

Who do you work for? Or if you cannot be that specific what type of work do you do?

Public sector contracting.

> shows the Economy has nothing or very little to do with the stock market.

I disagree. Stock ownership is not universal and fiscal stimulus and unlimited QE, low intrest rates is very good for people who own majorority of stock shares.

If you have access to credit and some political clout you can expect getting richer with no effort over next few years.

It is the other story for the rest.

I think I’m misunderstanding your point (and I agree with your conclusions): how are you disagreeing?

I meant stock market going up with economy crashing is not as illogical as it may seem.

The value of most of these stocks has decreased while the price has gone up. What we're witnessing is inflation. Any currency that adds trillions of new units overnight will be worth less per unit the next day. If a dollar is worth less, it takes more of them to buy something, making it appear as though stocks are going up. In reality, the price of everything is about to go up, with the exception of wages due to historic unemployment.

I hope IMF is wrong as usual.

https://www.ft.com/content/60581224-3335-11e8-b5bf-23cb17fd1...

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