16 April 2020

Free Fall: Where Will It End?

With the April 16 report of initial jobless claims, United States reached a grim milestone in grappling with the CCPVirus outbreak: 22 million people have now filed for unemployment in the past four weeks. To put that number in some perspective, the number of jobs destroyed by the CCPVirus shutdowns exceeds the total number of jobs created since the end of the "Great Recession" in 2009.

More remarkably, these jobs were not lost due to an external supply or demand shock, but due to deliberate government action. The United States quite simply chose to destroy a minimum of 22 million jobs, in what is already proving to be an act of economic suicide.

I will not delve further into the particulars of why the lockdown strategy was the wrong strategy to take. My comments on the strategy, as well as on the ultimate cost in lives, have already been made, and nothing has yet arisen to cause either their revision or retraction. The legality, the Constitutionality, the wisdom or unwisdom of the strategy, are all now as they have been.

The lockdown strategy, for better or worse, is the strategy that has been chosen to mitigate the effects of the CCPVirus--which is the proper name for the COVID-19 coronavirus, for it would not exist but for the malignancy and malevolence of the Chinese Communist Party. For better or worse, its consequences will shape the United States and the world going forward. We must consider those consequences if we wish to emerge from this crisis with any shred of what was.

Unemployment During The Great Recession -- 10%

The Great Recession began in December 2007 and ended in June 2009. Across that span of nineteen months--approximately 82 week--unemployment in this country rose to a peak of 10.4%. The best "official" estimates of jobs lost during the recession is around 8.8 million.

The CCPVirus shutdowns destroyed three times that many jobs in just 4 weeks.

The Great Recession continued a phenomenon that was observed in the 2001 recession, and appears to be a growing trend over the past few decades: job growth during the recovery has been getting slower and smaller. 47 months after the recession began, overall employment was still 4% lower than at the start, whereas 47 months after the start of the 1973 recession overall employment was very nearly 8% higher.

If the CCPVirus shutdowns have a similarly inelastic job recovery once they are lifted (if they are lifted), 47 months from now, we could still be grappling with between 6 and 10 million unemployed, given the enormity of the initial job loss (which is not yet done, as more jobs have yet to be shed and more unemployment claims have yet to be reported). If this "Greater Depression" just follows the Great Recession trajectory from this point forward, we could still be looking at total joblessness in excess of the worst of the Great Recession four years hence.

Economically speaking, that would be an apocalyptic level of joblessness that far down the road. We would be nowhere near a complete recovery from just the past four weeks after the next four years--and there is no reason to believe the economic contraction is going to stop any time soon.

Unemployment During The Great Depression -- 24.7%

By far the worst economic crisis in recent memory for the United States was the 1929-1933 Great Depression. By 1933, joblessness had soared to 24.7%, with an estimated 12,830,000 people out of work. So deep was the contraction, that even with FDR's New Deal stimulus programs, by 1937 7,700,000 people were still out of work, for an unemployment estimate of 14%.

However, that 14% unemployment rate still represented a 40% improvement in overall joblessness four years after the contraction ended. If we succeed in trimming the unemployment rolls by 40% over the next four years, we will still have over 13 million unemployed in 2024, or nearly double the total number of jobs lost during the Great Recession. This assumes, of course, that total joblessness in the United States does not exceed 22 million, and the reality is that joblessness is virtually certain to exceed 22 million before the carnage is complete.

Unemployment in 2020 -- 20% And Counting

While official unemployment numbers for 2020 will not be had for quite some time yet, as of this writing preliminary analysis indicates the unemployment rate in the United States has jumped over the past four weeks to over 20%. In just four weeks, the United States has doubled the unemployment rate it took 82 weeks to achieve during the Great Recession, and is within 5 percentage points of what took nearly four years to achieve during the Great Depression. 

At the end of March, the St Louis Federal Reserve forecast as many as 47 million jobs would be lost to the shutdowns, with unemployment spiking to over 32%. In just the past four weeks, we are already halfway there. If we have just another three weeks of jobless claims as we have had for the past three weeks, we will easily cross the 47 million jobless threshold.

We are already nearly at Great Depression levels of joblessness, and the contraction shows no sign of slowing down.

What Goes Down May Not Come Back Up Any Time Soon

The hopeful, almost magical thinking, is that the recovery will be nearly as quick as the collapse, with the current jobless quickly rehired or finding new employment. This thinking is almost certainly wrong.

A principle reason why this must be so comes from the fundamental complexities of the modern economy.  The many interlocking economic forces that combine to produce a national economy are a set of mutually supporting paradigms--paradigms that are being torn asunder and prevented from supporting each other. The sudden surge in unemployment produces a sudden drop in consumer demand, as people have less money or no money to spend. The shuttering of supply lines produces a shortage of intermediate goods, creating an increasing level of shortages at every stage of economic production. 

Restarting the economy requires these interlocking forces be simultaneously reengaged, and that is nearly impossible to do. Intermediate goods must be manufactured before production of finished goods can resume. Shipping must recover in terms of price before distribution of goods can resume. Both of these impact how much employment is needed and when, and in the same fashion these forces support each other when the economy is fully functional, they retard each other when the economy has been shut down.

Nor can we ignore the probability the world economy was headed for a bit of a correction even before the CCPVirus arose. As I observed last year, much of the presumed economic expansion in the United States, at least as represented by a rising stock market, came not from increasing productivity and output, but simply from an expansion of the money supply by the Federal Reserve. Apparent expansion due to asset price inflation is not actual economic expansion at all, and may even mask deflation (as I believe it has).

Notwithstanding all of the previous monetary expansions, last December the Federal Reserve injected still more money into the system to stave off a crisis in interbank credit markets. As early as last summer, speculations were growing that central bank balance sheets had grown too large, and that a correction was long overdue.

The CCPVirus did not cause the current contraction. It merely catalyzed it. The corrections now underway are the results of economic dysfunctions and resource misallocations at least a decade in the making.

A global reset is taking place, at least economically. That reset must play out fully before a meaningful recovery can begin. If it is short circuited, as happened after the Great Recession, we will only return to this juncture again a few years hence, but with even less buffer, less cushion, less margin for error than we have today (and we do not have much margin at all).

This Time, It Is NOT Just "The Economy"

Economic forces are not the only ones under duress. There is growing speculation of the viability of the Chinese Communist Party as a result of the pandemic. Some are calling this outbreak China's "Chernobyl moment", comparing it to the catastrophic nuclear accident in the former Soviet Union that laid bare not just the economic shortcomings of the Soviet system, but also its technological and administrative incompetence. Despite its best propaganda efforts, the CCP is faced with an uncomfortable truth: it failed miserably with this outbreak. 
  • There is growing evidence this pathogen arose within the Wuhan Institute of Virology, to where even the legacy media is belatedly forced to concede the possibility.
  • There is even evidence the pathogen was the product of Chinese efforts to compete with the United States in viral research, raising the ugly specter this virus is in fact a bioweapon.
  • China's efforts to curry favor with the world by donating/selling face masks and medical supplies have been undercut by repeated cases of shoddy work and unsafe/unsanitary production methods resulting in unusable materials.
  • There have been reports of rent protests in China, as workers face financial hardship from China's own lockdown strategy.
Nor is China the only polity facing a potential existential crisis. The European Union, its member states all faced with the same dire economic forecasts as the United States, has struggled to come up with a continent-wide economic response to the chaos brought on by the pandemic and the lockdown strategies adopted. A failure to do so on its part will in all probability trigger its unravelling, producing levels of political chaos and upheaval in Europe not seen since World War 2.

Finally, we must not overlook the United States. The lockdowns themselves have been implemented by gubernatorial decrees that are of questionable Constitutional legitimacy, and yet which represent an assertion of gubernatorial power the nation's governors are not likely to relinquish willingly when the crisis has at last passed.

Will the Federal order survive? Will the states remain united? One certainly wants to think so, but the more that governors break off to form regional compacts and alliances, the more the territory of the United States begins to resemble a patchwork of separate smaller unions and less a single large nation state. 

Even if the Federal government remains authoritative, the assertions of powers that in many cases appear to exceed Constitutional authority raise the dark specter of authoritarian government within the United States. Some would say authoritarian government is already here, particularly in light of prior Constitutional violations and predations by all portions of the nations' government.

Will there be political reset to accompany the inevitable economic reset? To some degree at least, almost certainly. To what degree and with what rapidity are things we cannot yet divine from the data at hand.

There Is A Bottom Down There....Somewhere

The only certainty we can say about the future is that there is a point at which the economic contraction will cease. There is a bottom to the financial markets, there is a bottom to the collapse of jobs and wages, there is a terminus to the economic and political adjustments that must be made.

There is a bottom, and while the landing will not likely be gentle, it will be survivable. We know it will be survivable for the simple reason that mankind has survived every prior great setback, from the late Bronze Age Collapse, to the fall of the Roman Empire, to the Mayan Collapse, to the Black Death to the near suicidal folly of the World Wars of the 20th Century. No matter how grotesque our folly, no matter how enormous the error, mankind manages to pull through and continue to grow despite the setback. That has been our history to date and there is no reason to believe it will not be our future as well.

Our challenge, as individuals and as societies, will be to figure out how to move forward from that bottom. Whatever the global reset will be, in at least this one regard it represents an opportunity: it will be a chance for mankind to choose a new future for ourselves.

The present outlook is grim and will only get grimmer. Yet beyond the present the outlook is as hopeful as we choose to make it. When faced with a grim present reality, it is particularly vital we cling to that hopeful future. That is how we endure.

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