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Depressionary Economic Crash By James Reed
The Great Depression 2.0 is a coming, and we all need to move to level three of preparation, that is for the economic crash:
“The shock to the global economy from COVID-19 has been both faster and more severe than the 2008 global financial crisis (GFC) and even the Great Depression. In those two previous episodes, stock markets collapsed by 50% or more, credit markets froze up, massive bankruptcies followed, unemployment rates soared above 10%, and GDP contracted at an annualized rate of 10% or more. But all of this took around three years to play out. In the current crisis, similarly dire macroeconomic and financial outcomes have materialized in three weeks.
The substantial increase in the scale and scope of government action needed to tackle the COVID-19 pandemic should be viewed as an unprecedented form of short-term systemic insurance. This approach requires not only vast government spending but also a temporary state-led reorganization of the entire economy. Earlier this month, it took just 15 days for the US stock market to plummet into bear territory (a 20% decline from its peak) – the fastest such decline ever. Now, markets are down 35%, credit markets have seized up, and credit spreads (like those for junk bonds) have spiked to 2008 levels. Even mainstream financial firms such as Goldman Sachs, JP Morgan and Morgan Stanley expect US GDP to fall by an annualized rate of 6% in the first quarter, and by 24% to 30% in the second. US Treasury Secretary Steve Mnuchin has warned that the unemployment rate could skyrocket to above 20% (twice the peak level during the GFC). In other words, every component of aggregate demand – consumption, capital spending, exports – is in unprecedented free fall. While most self-serving commentatorshave been anticipating a V-shaped downturn – with output falling sharply for one quarter and then rapidly recovering the next – it should now be clear that the COVID-19 crisis is something else entirely. The contraction that is now underway looks to be neither V- nor U- nor L-shaped (a sharp downturn followed by stagnation). Rather, it looks like an I: a vertical line representing financial markets and the real economy plummeting. Not even during the Great Depression and World War II did the bulk of economic activity literally shut down, as it has in China, the United States, and Europe today.
The best-case scenario would be a downturn that is more severe than the GFC (in terms of reduced cumulative global output) but shorter-lived, allowing for a return to positive growth by the fourth quarter of this year. In that case, markets would start to recover when the light at the end of the tunnel appears. But the best-case scenario assumes several conditions. First, the US, Europe, and other heavily affected economies would need to roll out widespread COVID-19 testing, tracing, and treatment measures, enforced quarantines, and a full-scale lockdown of the type that China has implemented. And, because it could take 18 months for a vaccine to be developed and produced at scale, antivirals and other therapeutics will need to be deployed on a massive scale. Second, monetary policymakers – who have already done in less than a month what took them three years to do after the GFC – must continue to throw the kitchen sink of unconventional measures at the crisis. That means zero or negative interest rates; enhanced forward guidance; quantitative easing; and credit easing (the purchase of private assets) to backstop banks, non-banks, money market funds, and even large corporations (commercial paper and corporate bond facilities). The US Federal Reserve has expanded its cross-border swap lines to address the massive dollar liquidity shortage in global markets, but we now need more facilities to encourage banks to lend to illiquid but still-solvent small and medium-size enterprises.
Third, governments need to deploy massive fiscal stimulus, including through “helicopter drops” of direct cash disbursements to households. Given the size of the economic shock, fiscal deficits in advanced economies will need to increase from 2-3% of GDP to around 10% or more. Only central governments have balance sheets large and strong enough to prevent the private sector’s collapse. But these deficit-financed interventions must be fully monetized. If they are financed through standard government debt, interest rates would rise sharply, and the recovery would be smothered in its cradle. Given the circumstances, interventions long proposed by leftists of the Modern Monetary Theory school, including helicopter drops, have become mainstream. Unfortunately for the best-case scenario, the public-health response in advanced economies has fallen far short of what is needed to contain the pandemic, and the fiscal-policy package currently being debated is neither large nor rapid enough to create the conditions for a timely recovery. As such, the risk of a new Great Depression, worse than the original – a Greater Depression – is rising by the day.
“The rapid decline is global stocks now exceeds the Crash of 1929 and has liquidated at least $30 trillion or more in equity. A bear market loss of 20% or more in a few short weeks is unprecedented in U.S. history. This is a ‘poof’-it’s-gone moment and it puts banks and financial companies under panic management. Bank stress tests have not yet emerged, but it is inconceivable that some large banks are not technically bankrupt and will be the first ones to start the collapse. Small businesses are being crushed and will soon fill the courts with bankruptcy filings. With unemployment headed toward 30% or more, individuals will also end up in bankruptcy court. Forget the coronavirus for a moment. Who is the only sworn enemy of Capitalism and Free Enterprise that swears it will be destroyed and replaced with another economic system? Yes, the ONLY one – Technocracy, aka the UN’s Sustainable Development. Call it the Green New Deal, Green Economy, Natural Capitalism, it doesn’t matter. It’s all the same twisted plan to flip the world upside down for their own benefit. Now, remember the coronavirus for a moment. It the UN can wag-the-dog on coronavirus and bring the world to its knees, it can declare a similar emergency for anything it wants – how about global warming, the seas are rising, polar bears are disappearing, ice caps are melting, “we only have 12 years left before we all die”? Don’t worry about that yet, because if these global Technocrats achieve what they need during the great coronavirus panic, there won’t be a need for another emergency.
First it was Goldman cutting its Q2 GDP to -5% just one week ago; then JPM quickly upstaged Goldman by slashing its own Q2 GDP forecast to -14%. Then Goldman, which just last December said the US economy is “nearly recession-proof” decided to really show JPM who is boss and nearly doubled this dismal prediction, and on Friday predicted a great depression-like -24% crash in Q2 GDP. And now, in this race to come up with the most apocalyptic GDP number imaginable, here comes Morgan Stanley which expanded its former Q2 GDP -4% prediction nearly 8x to -30%, a number that would have seemed almost insane in isolation… if only it wasn’t for St. Louis Fed president James Bullard coming up with an absolutely staggering -50% worst case scenario earlier today. Here are the highlights from the report which we expect, just like all other bank forecasts, will be revised to an even more cataclysmic number in days if not hours: We now see 1Q GDP dropping by 2.4% as economic activity has come to a near standstill in March, followed by a record-breaking drop of 30.1% in 2Q. We estimate that March will also mark the first drop in nonfarm payrolls, down 700k. We expect a record-high unemployment rate, averaging 12.8% in 2Q. We assume sharp declines in areas of consumer discretionary spending like travel, dining out, other services and motor vehicle spending among others. This will leave a large hole in consumer spending in 2Q, when we expect real personal consumption expenditures to contract at a 31% annualized pace.
While ready to upstage both Goldman and JPM’s pessimism, Morgan Stanley was unwilling to break the mold with the other banks, and just like them sees a sharp V-shaped rebound in Q3, even though as Goldman warned a V-shaped recovery is certainly not to be taken for granted: We expect that 3Q will look somewhat better as consumption climbs back to around its pre-virus level. On the other hand: The outlook for business investment is likely to look more U-shaped, and residential investment should follow a similar pattern. How about US unemployment? Nothing good. With both Goldman and JPM expecting tremendous surged in joblessness in the coming weeks, Morgan Stanley has outdone them both and writes that “on April 3 we expect the Bureau of Labor Statistics to report that total nonfarm payrolls declined by a net 700,000 in March.” Some more details: The bulk of the weakness in March payrolls likely comes from a decline in hiring as opposed to firing. However, as we move into April, it will be both a surge in layoffs as well as a shutdown in hiring that will bring about the darkest days for the labor market since the financial crisis. A corresponding 700,000 decline in household survey employment in March would raise the unemployment rate by 70bp from 3.5% to 4.2%. As we move into 2Q, we forecast the unemployment rate to surge, averaging 12.8% in the quarter (Exhibit 8) – the highest among records dating back to the 1940s.”
The short of the long is that the global economy is already well on the road to the Great Depression 2.0. Whether this is part of a grand plan or not does not matter now, for what counts will be surviving this and opposing the Newer New World Order that will be imposed upon us. After all, they are restricting personal liberties, and that has probably have never been done to this degree in human history. Where did the power to dictate all of this come from? Why no opposition to anything the system wants? Where will this go if the pandemic continues for 12 months? What will be left?
The end of freedom will become the new normal; not post-truth, but post freedom: