The Most Counterintuitive Recession Ever
awealthofcommonsense.com
awealthofcommonsense.com
I thought the main unemployment number included only people looking for work? If states dropped the LFW requirement from unemployment, that number would drop despite lots of people still on unemployment, no? I assume federal unemployment statistics focuses on other less state dependent metrics.
Similarly the median house price is a farce if, like in the GFC, there's plenty of easy capital available for a land grab at the top. The prices could easily reflect increased competition and asset inflation, not something new about this financial crisis - and it wouldn't really be new, would it?
Alternatively, what if people have stopped buying/selling cheap housing?
If everyone except millionaires has dropped out of the market (say, due to lockdown restrictions) then the median house price will rise even if the market is dying. Particularly if the wealthy are desperately trying to turn cash into assets in response to the government largess.
I suspect Mr. Carlson fell for Simpson's paradox with that one; it seems unlikely that the property market is booming. That chart isn't enough evidence.
The economy was put on pause, and small businesses are being decimated. If people need financing, the status quo was to use credit card debt to keep people/business afloat as the debt is unsecured.
As the article posits, the situation is quite unique and very counterintuitive...
I haven't noticed this with my neighbors (I'm not sure I would), but amongst my friends and myself I can definitely second this.
It does make me wonder about this line
> The real estate market has been red hot after an initial slowdown during quarantine: (Median house prices)
Maybe it's the case that predominantly rich people are buying/selling right now?
If so that bodes ill for apartment-building-owners.
Edit: ...also dining out
In my neck of the woods, real estate is insane and people are refinancing. Lenders are writing 90% LTV loans at 2.7%
The loans are probably considered low risk between the combo of stimulus checks, tax refunds (July 15 was the filing deadline so rebate checks are hitting now or soon), juiced-up unemployment benefits, and rent forgiveness/deferral all hitting at once.
So I'd be curious to see if there's any correlation between credit card debt and "personal" (non-mortgage, non-auto) loan balances. It could just be refinancing via consolidation.
Was it? How much of the total credit debt held in the US was being used to weather short term cash shortfalls like this?
It seems like a more reasonable hypothesis is that "most" credit debt in fact was being used to finance luxury expenditures by the middle class instead, and that when these were suppressed by the pandemic along with everything else credit spending dropped.
Note also that for people in the first category, the very generous UI and stimulus benefits we available to bridge the gap too. We'll see what happens now that most of these are being rolled back or replaced with more regressive measures like the payroll tax suspension (which only benefits people who are employed).
My money is still on the "the pandemic shut down vacations and boat purchases" argument. Obviously some people need to float emergencies on cards, but by numbers that's not where the money was actually going.
Mortgage deferments! If you can stop paying your mortgage for a while, then you have more money to pay down your credit cards.
* Since March, the Federal Reserve has created "out of thin air" approximately $3 trillion dollars in new monetary assets, to support asset prices and prevent another financial crisis. This figure is about 3x greater than the $1 trillion of monetary assets created in all of 2008 and 2009, during the worst of the financial crisis. Source: https://fred.stlouisfed.org/series/WALCL
* In addition to the above monetary intervention, the federal government launched a ~$3 trillion rescue package at the beginning of the pandemic (including all those PPP loans that won't be repaid, all that spending on special unemployment benefits, all sorts of support for states, businesses, etc.), and now the debate is whether to spend an additional ~$1+ trillion (the last figure floated by the US treasury) or an additional ~$3.4 trillion (as proposed by congress). Source: https://www.reuters.com/article/health-coronavirus-usa-congr...
The federal government is supporting the economy in an unprecedented manner to an unprecedented degree, to prevent it from collapsing until the virus is fully under control. All economic statistics reflect this unprecedented massive economic support. They do not reflect the "true underlying state" of the economy. There's nothing counterintuitive about that.
And while this is true to an extent, it's also important to note that the government is supporting some parts of the economy (corporations, the stock market) significantly more than others (workers, the unemployed), and with the failure of the Republicans to agree to a new stimulus bill that wasn't 99.9% "bail out the wealthy and grant immunity to corporations that force their employees to work without adequate safety measures", that latter part is going to start showing in a big way, real soon.
If the government had paid every American some reasonable sum—something approaching the median cost of living, perhaps?—for the duration of the pandemic, it would have drastically reduced the amount that would have been necessary to support businesses, as expenses for all but essential businesses would have been cut down to infrastructure maintenance.
Also, my main point regarding support for regular workers/unemployed is that now it's ending and things are going to get worse.
It's probably not instantaneous. Other people in this thread mentioned that savings is up, so I'm guessing people have some money saved up, and therefore can probably last a few weeks (or months?) before running out of money.
>could be kicked out of their apartments
Aren't most cities still not processing evictions? Even if they did, the combination of social distancing restrictions (less court capacity) + flood of evictions probably means there's a huge backlog, which means very little people would end up getting evicted.
I agree, seems incredibly short sighted. I’m not a landlord so maybe I misunderstand the thinking.
Is it something like tenants who get evicted then have to find even worse landlords to rent from so by evicting people in tough economic times you gain access to tenants at their lowest rate/most desperate? So effectively any tenant you get in bad economic times is someone who is more likely to be stable and reliable after recovery?
I’m totally making things up at this point. It is truly baffling to me.
If you have tenants in NYC right now who aren't terrible, I think you want to keep them because there are a bunch of empty apts
In NYC if you want a good apartment right now, you can significantly underpay for the next couple of years (if your lease is up), but a lot of people whose leases are up are leaving
You make a good point, though. There will be a large shuffle for the next few months (and probably gradually back in the following years), so whoever "makes shovels" for moving will be in a good position
I guess you could also use it as an opportunity to get rid of the more problematic tenants in jurisdictions where that is difficult.
It's not an easy problem to optimize this.
Part of the benefit of renting - for both parties - is ease of vacating.
AFAIK there's no "lost income" deduction. Yes, you pay less taxes, but that because you had less income to begin with, not because of some deduction. If a tenant is not paying, then you're not getting income, so you're already paying less taxes.
Upshot: evicting non paying tenants can be profitable, while letting them stay on “they’ll come thru, just give them time” grounds can mean losing the property outright. (Strange this must be explained on Ycombinator.com.)
https://www.realwealthnetwork.com/learn/landlord-tax-deducti...
Are you not able to claim rental property losses if you simply have a tenant who is unable to pay?
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My model for dealing with a pandemic-induced economic slow-down is that if you can just jump forward til the end, most things will revert to normal (for airline companies but also tenants who can't pay rent)
It's not clear to me that evicting someone and then needing to cut rates to find a new tenant who can afford to rent is a better deal than keeping someone who has fallen on hard times for very straightforward reasons
It just seems to simple to say "when the stimulus is gone, and people can't pay rent, evictions will be huge".
Not all proposals are the same. A man who refuses to buy his child a new video game console is not the same as a man who refuses to pay for his child's life-saving surgery.
Your jump from "refusing to act against a deadly plague" to "refusing any spending proposal at any time" is breathtaking: I'm a little skeptical that this was a pure mistake...
165,000 Americans are dead. Most of them died in agony on a respirator. The vast majority of those deaths were completely avoidable: https://www.statnews.com/2020/06/19/faster-response-prevente... And people of color are hugely overrepresented in this number.
Since the start of the pandemic, McConnell has systematically opposed any rational reaction to it, and strongly supported the psychopathic lies of Donald Trump.
McConnell is not some nice old man who systematically caused tremendous damage to the hundred million poorest and blackest Americans for the last thirty years by mistake and now accidentally killed another hundred thousand, sorry guys!
I strongly hesitate to use the word "evil" in general - but if any human ever has been evil, then McConnell is a profoundly evil man.
tl;dr: people not buying things = deflation, but giving everyone money = inflation. How this balances out is uncertain.
If you compare the stimulus payments in similar annualized terms it is nearly half of GDP. $9.36 Trillion.
Having said that, the relevance of GDP in a conversation about inflation is unclear to me when GDP does not account for inflation.
look up money supply - m0, m1, m2, m3, m4, velocity of money
figure out how federal reserve "printing money" (what does that even mean) affects the different buckets
look up difference between how reserve requirements affect money supply vs "helicopter money"
look up the federal reserve mandate to target 2% inflation while keeping unemployment as low as possible
figure out how the federal reserve balance sheet works (eg what happens if debt the federal reserve owns defaults)
and you'll be much closer to understanding our current economic situation than you were in high school ;)
- Treasury makes bonds and sells them into the market. The market impact of this tends to increase interest rates (cost of bonds relative to dollars) a bit.
- The government uses the money raised to buy goods and services. This causes the price of goods and services (relative to dollars) to go up a bit.
- The Fed makes dollars and buys bonds. This pushes interest rates down and is roughly the inverse of step 1.
Netting the Fed and Treasury actions (which people never do, mostly because they vary independently according to independent policy), the effect of recent fiscal and monetary policy is "the government" making cash and buying things with it (as well as giving it out to people who need it.)
I guess it's the Fed's job to worry about price stability, but the above does make me think that the fiscal policy is just as relevant to inflation -- if govt spending as a proportion of the economy changes, it gets easier/harder for others to buy things. I guess interest rates mostly change behaviour, and have a less direct (though maybe no less real?) impact on scarcity.
government fiscal policy has a much more direct effect on m0, m1 through stimulus and other direct lending and spending efforts, which have a high velocity and directly impact inflation
now...what happens if the assets on the feds balance sheet start to default?
The US "fixed" that problem by squashing the ability of workers to demand more money - starting with Reagan in the 80s and extending all the way 'till now. The problem is that increased prices just meant a lower standard of living and more people more precarious. By the time Covid hit, a large precentage of people were living pay check to paycheck. 28% of renters didn't paid rent in July and 30% won't be able to this month. That printed money has essentially had devastating consequences.
That seems like an incredibly simplified and wrong explanation. Monetary policy changed drastically in 1979 in order to get inflation under control.
Sources:
https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us...
Total compensation as a percentage of national income has remained pretty steady, which means productivity growth is being passed on to employees.[1] Not necessarily as wages thought.
Considering that wages is the main income of lower incomes this means that most growth has gone to higher incomes.
The raw data indicate that total compensation as a percentage of GDP/GDI has been falling since at least the early 1970s. These percentages are derived by comparing nominal dollar values within the same year (e.g. 2018 total compensation divided by 2018 GDP, both in 2018 nominal dollars). Unlike estimates of long-term real wages, these percentages are not dependent on inflation assumptions. The long term trend paints a clear picture that people who earn most of their income (including benefits) from wage labor have been losing ground economically for decades.
Even without metrics, this conclusion is supported by living memory history. In 1970, a single middle-class full-time income could support a comfortable lifestyle for a family of four. In 2020, a single middle-class full time income can't support housing costs in most (possibly all?) urban centers.
We're going backwards.
And back in 1970, could a single middle class income support a family of four in Manhattan? Urban centers have always been expensive.
https://nplusonemag.com/issue-34/reviews/other-peoples-blood...
Regardless, inflation is complicated, even if you wanted to you might not be able to cause it, at least not in a controlled manner.
However, I think that national inflation often doesn't give a complete picture, and the more significant effects of inflation are often localized closer to the money. A lot of the insane COL in the Bay Area is an example of this. Exactly where is closest to the money in this instance is difficult to say.
The other type of inflation, cost-push, happens when the cost of goods rises independent of demand. Abuse of monopoly power can cause cost-push inflation (hello, business software pricing) but so can increased costs of labor.
On balance, cost-push inflation is a more probable outcome of the pandemic. It's physically harder to Do Stuff because workers need to stay further apart and because many will get sick and be unable to work. This will drive up prices to an extent, but price rises will be constrained by slack demand caused by reduced employment.
Just to drive the point home, observe that goods and services which can’t be produced elsewhere have experienced massive inflation: healthcare, housing, education.
There is a whole fascinating YouTube series on the eurodollar that goes extremely in depth:
But what it all means is hard to gauge. For example, the long increase from 1970 to 1990 involved the (re)entry of women into the workforce. The present a labor force participation rate now equal to that of 1973 might not involve the re-emergence of the happy homemaker.
people actively looking for work
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people actively looking for work + people with jobsBut my implicit point is "people actively looking for work" has been a quantity whose definition shifts and who method of measurement shifts and which is inherently difficult to measure.
When the propensity to save increases it reduces consumption. Falling credit card debt, reductions in mortgage delinquency, those are all trailing results of the increase in savings.
People are spending less with most people's income staying steady. This money is flowing into assets and reducing debt.
In normal times this would be a welcomed reversal of the American trend. Yet this effect is temporary and instead will only serve to hurt the velocity of money.
"Why is there no inflation despite massive printing?" is also a common refrain. Here to the savings rate is to blame. With less consumption the velocity of money has shrunk and the effective money supply shrank with it. Thus the FED's insane money printing is in part only there to counter act the deflationary pressure. Again: everything comes back to the savings rate.
Edit: typo
I've seen significantly better pandemic / economic coverage from Byrne Hobart, Money Stuff, etc
Gee, if only they'd have been encouraged to do that earlier.
Essentially through regulatory capture, capitalists have commoditized things you shouldnt, like labor and currency. As this progressed through the past decade the markets began to drift further and further from any meaningful ties to labor or consumer confidence and spending. Markets began to perform simply due to the fact that they were a market in most cases, and so we see in 2020 though the US suffers nearly 40% unemployment and a service economy that has a failure rate of nearly 50%, markets that float along with easy access to low interest or negative interest credit as a function of the post 2008 recession are nearly entirely divorced from reality. They no longer serve as a barometer for the overall state of a nation at all.
And now we enter the 2020 tax season next january with a promise that somehow this burden will be deferred yet enforced for the average citizen, which could honestly only be maintained with evermore low or negative interest loans this time issued directly citizens instead of major multinational corporations as part of a personal shift of public service (competent taxation policy in this case) to personal responsibility that began in 1993 with the US exit from the public sphere of education and ambulance services in the form of charter schools and ambulance bills. this was enhanced with the transition from low wages and savings to personal lines of low interest credit that inevitably wracked the market in 2008.
This let people pay off debt, save, or invest. All of which is probably good considering...
There are multiple super scary looming issues:
* Commercial real estate is about to collapse
* Renters are about to have to start paying again (although, with Trumps executive order, maybe not?)
* Auto repos are about to pick back up
* Those who are required to use credit cards to finance their lives are about to be cut off (banks are limiting increases)
* Wave two of the virus is going to increase
* Civil unrest from elections, pandemic, racism, etc. are going to [probably] continue to escalate
* Inflation will start to hit (we can already see it in the stock market and some food prices). This will effectively reduce any stop-gap mechanism.
* Unemployment insurance is going to start dropping off for people (who did apply). States typically have 12 - 24 weeks[1], plus the additional 13 weeks from the CARES Act.
* Although unemployment is dropping, part of that is their counting mechanism. Many left the job market (my parents just retired), job openings are dropping (we will see Junes tomorrow[2]), a second pseudo-lockdown will likely continue through the end of the year.
* Many small businesses haven't really "recovered" and are still running red. Many will be out of business by the end of the year.
* Oil prices are stagnant, but any kind of lockdown will cause this to drive down further.[3]
* Airlines aren't expecting a recovery any-time soon. [4]
[1] https://www.forbes.com/sites/zackfriedman/2020/04/29/unemplo...
[2] https://tradingeconomics.com/united-states/job-offers
[3] https://www.marketwatch.com/investing/future/crude%20oil%20-...
[4] https://www.barrons.com/articles/german-airline-lufthansa-sa...
The S&P 500 is performing well, because it's being driven by big tech stocks that were largely unaffected by the pandemic.
There is a flood of retail investors enabled by mobile apps, many of them are inexperienced. There is stock mania, trading without looking at fundamentals.
People aren’t paying rent and entire industries are truly and completely fucked. The conjecture here is baffling for a website that supposedly is rich in common sense.
A recession need not be an endogenous crisis. I don’t know where that’s coming from, but there have been plenty of exogenous induced recessions. 9/11 being one of them. (I know you don’t like references, so I’ll leave that up to you)
When there is exogenous disruption, the Fed is responsible and capable of preventing a then endogenous recession. For instance, this is the first time the money stock has been raised proportionally to the extent as the money velocity has dropped—-a correct measure as described by the monetarists.
Record job numbers were posted in May.
There’s absolutely no evidence that any sector other than the social entertainment sector has been negatively impacted. Even REITs are doing well. Traversing economic damage across sectors is a key ontological definition which the NBER and monetarists agree on. Which is what I mean by systemic.
Most major central banks, including the Fed hold the monetarist parallax of where a recession is endogenous as the other commenter notes—-where all recessions are caused by monetary policy failures.
Indeed the surprising facts of this article are instead predicted by the monetarist, perhaps it’s only the NBER acolytes and Keynesians who are left confused with their certain ontological stubbornness.
The spike here coincides with the riots and "defund the police", not the recession or pandemic/quarantine. It's likely people moving away from the hotspots.
Not sure whom they're selling to though, investors maybe...
It is definitely a strange economic situation.
The way this kind of borrowing shows up in society is in low marriage rates and smaller families and eventually lower birth rates as people cannot find the stability or financial ability to start families or even to establish stable relationships, which eventually leads to low consumption as your demographic basis simply needs less of everything.
As long as you have political will you can keep kicking the can down the road at the cost of a declining population. In liberal western societies this is partially made up by immigration from developing countries, but that creates another host of issues and tensions between recent arrivals and natives.
What matters is real productive capacity. Factories that build stuff, fields that grow crops, people learning skills. If next year, we have shuttered factories and fallow fields and a less skilled workforce - then the future has paid the price!
Perhaps the government saves the future by borrowing today. The Fed issues bonds, Jeff Bezos buys them, and in 50 years Jeff Bezos's kids own bonds, that yours and my children pay for through taxes. But that is a wealth transfer between people in the future, not a transfer from the future to today.