sábado, 2 de mayo de 2020

THE COLLAPSE OF US NEOLIBERAL ECONOMY IS REAL



THE COLLAPSE OF US NEOLIBERAL ECONOMY  IS REAL
THE ECONOMY IS AT ZERO  & IT WON’T GO UP
WE NEED A POST-NEOLIBERAL AGENDA
WE NEED SOCIALISM  WHERE PRODUCTIVE CAPITAL
AND LABOR WORK & GROWTH HAND ON HAND
READ THIS:

History is pretty clear about future outcomes from the Fed’s current actions. More importantly, these actions are coming at a time where there werealready tremendous headwinds plaguing future economic growth...

The Fed is now permanently stuck at zero.
The negative 4.8% decline in GDP in the first quarter was stunning. Importantly, that reading only encapsulated the impact of the economic “shutdown” in that last two weeks of the quarter. This suggests, considering the entire month of April (1/3rd of the quarter) was a wash, the numbers will worse next quarter. 

The NYT’s Ben Casselman had a good summary of the devastation:
See Chart: GDP

The economy will eventually bounce back, it may take longer than the White House, and many investors expect.
There are several reasons for this assumption.
Initially, even with the economy open, it is UNLIKELY [that GDP  growth up] even without job losses, individuals will immediately return to old routines [of debt & open  doors to recession]. A survey by Statista encapsulated this view.
See Charts:

It is even harder to expect such activities to immediately occur when there is no decline in virus cases currently. While the rate of increase may be slowing, the concerns of infection will likely slow activity.
See Chart:

Even if Steve Mnuchin is correct and activity does come back, a likely second wave of the virus in the fall could be worse than the first. While I doubt a “re-shuttering” of the economy will occur, the psychological impact would likely cripple the recovery further
See Chart:

Let’s make some basic assumptions about the impact to the overall economy. 
  • Total inflation-adjusted GDP = $18.987 Trillion
  • Median real incomes: $63,179
  • 50 Million job losses x 50,000 = $3.16 Trillion
  • Current bailouts at 14% of GDP = $2.6 Trillion
See Chart:

Effectively, the current fiscal stimulus is a wash relative to the impact on the economy. The more prolonged unemployment remains, the more likely consumption will constrict.
NO ECONOMIC SWOOSH
What this suggests is that hopes for a “V-shaped” recovery could be misguided. If our expectations of a slow re-engagement with the economy play out, the employment recovery will be slow also. As fiscal stimulus plays out, economic growth will struggle to gain traction. 

Ironically, this is precisely what we witnessed post the “Financial Crisis” in 2008. The chart below shows the recovery of GDP, employment, wages, and inflation.
See Chart:
Evolut of GDP, Wages, Inflation, Unemployment since 2009

While employment took nearly a decade to recover to pre-crisis lows, wages, GDP, and inflation failed to gain traction. 
Such was despite a decade of zero-interest-rate policy by the Fed, unprecedented monetary interventions, and a massive surge in consumer debt.
See Chart:

No Money, More Problems
The problem with a sharp loss of employment is that it creates a negative feedback loop into the economy. As job losses mount, incomes fall, which reduces personal consumption expenditures (PCE).
This past week PCE plunged as job losses surged. Importantly, this decline occurred in just the last two weeks of March. Given the entire month of April was shutdown, next quarter’s PCE report will be markedly worse.
See Chart:

BUSINESS OPERATE AGST  ACTUAL DEMAND
PCE a tells us there will be a slow recovery in the economy.
There is a negative feedback loop between employment and consumption. As unemployment rises, consumption falls due to a lack of income. Since businesses operate based on demand for goods and services, the correlation between PCE, fixed investment, and employment are high.
See Chart:

Despite the reopening of the economy, businesses will not immediately return to full operational activity, until consumption returns to more normal levels. Such a recovery is likely going to frustrate policy-makers and the Fed.
SINCE THE “FINANCIAL CRISIS,” massive levels of monetary accommodation, near zero-interest rates, and loose lending policies did not increase rates of economic prosperity. As shown below, what kept the economy growing at 2% were massive increases in debt to sustain the “standard of living,” NOT IMPROVE 
See Chart:

COST OF HAPPINESS
The differential between incomes and the actual “cost of living” is quite substantial. Researchers at Purdue University found in their study of data culled from across the globe, in the U.S., $132,000 is the optimal income for “feeling” happy when raising a family of four. (I can attest to this personally as a father of a family of six)
Gallup survey found it required $58,000 to support a family of four in the U.S. (Forget about being happy, we are talking about “just getting by.”) 
See Chart:

LIVING ON DEBT
The Fed’s problem is shown in the chart below. Beginning in 1990, the “gap” between the “standard of living” and real disposable incomes inverted. It was at this moment that wages alone were no longer able to meet the required standard of living. To make up the difference, consumers turned to debt.
See Chart:

However, following the “financial crisis,” even the combined levels of income and debt no longer fill the gap. Currently, there is a –-$3401.99 annual deficit that cannot be filled.
The debt-to-income problem keeps individuals from building wealth, and government statistics obscure the basic reality. We discussed this point in detail in “Dimon’s View Of Economic Reality Is Still Delusional:”
“The median net worth of households in the middle 20% of income rose 4% in inflation-adjusted terms to $81,900 between 1989 and 2016, the latest available data. For households in the top 20%, median net worth more than doubled to $811,860. And for the top 1%, the increase was 178% to $11,206,000.
See Chart:

THE FED’S TRAPPED AT ZERO
The debt problem exposes the risk posed to the Fed and why they are now forever trapped at the zero-bound.
With an economy now $20 Trillion more in debt than it was before the financial crisis, any small increases in interest rates have almost immediate and catastrophic results on a debt-dependent economy. 
As the Fed’s balance sheet heads toward $10 Trillion, the Fed has stated that interest rates will remain low until “such time as the dual mandates of full employment and price stability achieved.” Given economic stability was not achieved in the last decade, it is highly unlikely a more than doubling of the Fed’s balance sheet will improve future outcomes.
Unfortunately, given we now have a decade of experience of watching the “wealth gap” grow under the Federal Reserve’s policies, the next decade will only see the “gap” worsen.
While many are hoping for a “V-shaped” recovery following the “restart” of the economy, the reality is recovery may take much longer than expected.
We now know that surging debt and deficits inhibit organic growth. The massive debt levels added to the backs of taxpayers will only ensure the Fed remains trapped at the zero-bound. The chart below shows the 10-year annualized run rates of economic growth throughout history with projected debt and growth levels over the next decade.
See Chart:

END GAME
History is pretty clear about future outcomes from the Fed’s current actions. More importantly, these actions are coming at a time where there were already tremendous headwinds plaguing future economic growth.
  • An aging demographic
  • A heavily indebted economy
  • A decline in exports
  • Slowing domestic economic growth rates.
  • An underemployed younger demographic.
  • An inelastic supply-demand curve
  • Weak industrial production
  • Dependence on productivity increases

The lynchpin, like Japan, remains demographics and interest rates. As the aging population grows becoming a net drag on “savings,” the dependency on the “social welfare net” will continue to expand. 
The problem is that after a decade of pulling forward future consumption to stimulate economic activity, a further expansion of the wealth gap, increased indebtedness, and low rates of economic growth, will weigh on future economic opportunity for the masses.
Supporting economic growth through increasing levels of debt only makes sense if “growth at all cost” uniformly benefits all citizensUnfortunately, there is a big difference between growth and prosperity.
But for now, the Fed has no other choice.
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