在美国，股市从今年的峰值下跌了35％到本季度的最低点。 信贷市场已经失灵，垃圾债券的信贷息差比国库券高出的基点从300点升至超过1000点。我们对经济的预期越来越悲观，主流政府和金融机构预测第二季度产出将下降25％至35％。在短短2周的时间内，美国申请失业救济金人数超过660万，创下历史新高。在2008年经济衰退的过程中，美国共损失了880万个工作岗位。美国财政部长史蒂夫·姆努钦（Steve Mnuchin）预测，到今年夏天，美国失业率可能会上升到20％, 甚至更高。
Economic Depression is now the new Reality
By many measures, the global economy has already surpassed the Great depression of the 1930’s. Famous economists around the world, such a the recent Nobel Laureate Paul Romer, are already equating the current economic downturn to the Great Depression of the 1930’s, not the recession of 2008. Recent Nobel Laureate Paul Romer is one just example. But all we have do to is to look at the numbers. Equity markets from its peak this year to its lowest point this quarter has fallen by 35% in the U.S. Credit markets already have already seized up, with credit spreads on junk bonds going from 300 to more than 1000 basis points above treasury bills. Projections of the economy are going down by the day, as mainstream government and financial institutions predict a 25% to 35% loss of output in the second quarter. And in a matter of 2 weeks, 6.6 million Americans have filed for unemployment benefit. The total number of employment loss over the entire course of the Great Recession of 2008 in the U.S. was 8.8 million jobs. The Projections from the Treasury secretary Steve Mnuchin is that the U.S. unemployment rate can go up to 20% by this summer.
However, the main difference between this episode and the Great depression is that it took 3 years from the trigger in 1929 for this to transpire. This time around---it only took three weeks!
By now, virtually everyone has abandoned the idea of a mild recession of a 10% drop in GDP first quarter and a strong V-shaped recovery. But as we get more and more data coming in, these views are getting grimmer and grimmer by the day, by the week, and as we have already seen, the economy has experienced a free-drop---virtually a complete halt of all economic activity---something that was not even seen during the Great Depression.
If the size and depth of the current global downturn is worse than the Great Depression, the real question is how long this will last. A danger is that trend output will be permanently lower, and that even when the economy normalizes the countries will be on a permanently lower growth path. This is exactly what happened to countries like the U.K. There will be permanent losses of output, and many jobs which have been destroyed will never come back again. The longer is the protracted recession, the lower the long run trend growth will be.
Will wel see an ‘L’ shaped long stagnation like the period after the great depression, where it took ten years to recover, or will it recover much sooner? I don’t think anyone can say with certainty at this point given that we have insufficient information about what will happen to 3 things: the pandemic and whether it can be suppressed; 2) whether there will be a second wave of infection in the fall 3) the extent and scope and effectiveness of government policies around the world.
If anyone tells you they know these answers, don’t believe them.
First, nobody has confidence on whether mitigation strategies work. It is ironic that weeks after President Trump declared this to be a normal flu and that there is nothing to worry about, he announced to the American citizens that if ‘only’ 100k-240k people die he would have done a terrific job!
Already, the U.S. has more infected cases than is registered in China, with numbers still climbing by the day. America’s mitigation policies, or, half-mitigation policies---is not sure to be able to stop the spread of the virus. As of two days ago, people were still going freely to the beach in the state of Florida, where most of residents are above the age of 65. For America, the most optimistic scenario is to be like Japan and Korea, where mitigation has worked, and curves have flattened out. But in those countries they had done a lot of testing, as well as high degrees of self-discipline on social distancing and isolation on the part of the people. Are Americans really living up to that standard?
Second, we cannot rule out a second wave of infections---even in this country. It can come about when work re-normalizes, but it can also come about in the autumn, perhaps with a mutation, and attack the population with even greater force and aggression. The Spanish flu mutated several time, with the second wave being the most deadly.
And, how long can borders remain closed? So long as some part of the world has not contained the virus---and there will be plenty of developing countries that will soon rise up that curve---borders will have to remain. But closed border means a loss of GDP.
By looking at China’s recovering and projecting it onto other economies like Europe and the US is highly optimistic. We cannot expect that global supply chains will just go back to normal as before, and we cannot expect that unemployed workers in the U.S. will find jobs immediately. In fact, many of them will have a permanent loss of jobs because companies will start to adopt more digital technologies after this crisis. We also cannot assume that demand will go back to normal right away. If you were used to go to the restaurant 3 times a week and the movie theatre once a week, as an American or European, are you going to make up for lost time by eating out 6 times a week and going to movies twice a week? No. That part of output is permanently lost.
As the economist John Cochrane said, this is like restarting a nuclear reactor. You cannot turn it off and switch it on right back again. It will take time. And the more protracted is this process of restarting, the greater the economic loss.
Third, the optimistic scenario assumes that all of the right policies are in place—this means health policies, monetary and fiscal policies in the major economies in the world all have to work conjunctionally, and without any hesitation.
Do we think that this unlimited quantitative easing, unlimited liquidity, `doing it whatever it takes’ promised by the European and American governments signal good news? In some ways yes, it is good news, because we would be in an even worse situation in their absence. Or---it could mean just the opposite---they are expecting that times are going to get really bad, so all of this aggressive policies is signalling that we are braced for a really bad run.
This is actually why we are seeing such a swift and active response from the major players around the world. Whereas the whole package of the unconventional monetary policy took 3 years to implement in US and Europe, this time it took 3 weeks. Whereas it took the U.S. government months to pass a rescue package of 700 billion dollars, it took less a few days to pass a bill 2.5 times that amount. We think that this is good news, but in fact what it is signalling is very, very bad news to come. This is the ‘signalling effect’ of monetary policy that has been at the frontier of academic research, which I’m also currently working on.
The success of the policy requires it to keep a lid on all liquidity, solvency problems from businesses to households to financial institutions---for a long time to come---until there is a solution. But how long will this take ? no one knows for sure.
There is also the question of stagflation----will there be stagnation and inflation? I’m not of the view that inflation is about to hit the Western economies, but there is also the compelling argument that a heavy negative supply shock in addition to a possible oil price spike if there is war in the middle east may cast us in another run of the 1970’s stagflation experience. I still believe that there is persistent aggregated demand deficiency in the West to level that off, but inflation is not an unreasonable risk for our own country.
These views should adapt as new data comes in. In the next few weeks, we will know whether mitigation strategies work, whether there is a new round of infections in some parts of the world, and in a few months’ time we will know whether a vaccine is more likely. We still do not know whether there will be a new wave in the fall and winter, and we do not know when the economy can realistically return to normal. We have to remember: it is the virus that determines the time line, it is not the economists. It never has been, but even less likely now.
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