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Never Before Has So Much Stimulus Been Injected In The Economy In A Single Quarter

Never Before Has So Much Stimulus Been Injected In The Economy In A Single Quarter

Pandemic-Driven Recession Is Not Over

Back-to-back strong monthly gains in retail sales in May and June and a powerful rebound in the equity markets in Q2 create the impression the recession is over. But the recessionary environment is only delayed, hidden by the record amount of fiscal and monetary stimulus that has postponed layoffs, spending cutbacks, bankruptcies, and business failures and operating losses.

The pandemic crisis is unique in that it involves public health, finance, and economics. An all-out policy package of fiscal and monetary stimulus helped finance recover and the economy to rebound. However, a pandemic-driven recession runs on its own timeline and is unaffected by the scale of stimulus. The new wave of COVID cases could quickly trigger a shift in investor sentiment from optimism to pessimism as the rebound in corporate earnings is postponed.

Record Output Loss & Record Stimulus

According to the latest GDP NOW report from the Federal Reserve Bank of Atlanta, Q2 GDP is estimated to have declined 35% at an annualized rate. That would be 4x times larger than the prior record decline of 8.4% annualized in Q4 2008.

Quarterly dollar estimates of GDP are reported on an annual rate basis. So assuming the GDP NOW estimate is close to the mark, Q2 Nominal GDP would fall below the $20 trillion (or $ 5 trillion for the quarter), a level last seen in 2017.

$5 trillion in nominal output (and income) in Q2 would essentially match the record amount of fiscal and monetary stimulus that hit the economy in the period.

According to my estimates, the combination of federal stimulus payments to individuals (i.e., stimulus checks to individuals, additional unemployment benefits to a broader range of workers never before eligible and other programs) plus the expansion of Federal Reserve Balance sheet amounted to an increase of approximately $5 trillion in aggregate fiscal and monetary stimulus over the three months ending in June (see chart).

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The US Economy Has Not Recovered And Will Not Recover

The US Economy Has Not Recovered And Will Not Recover

The US economy died when middle class jobs were offshored and when the financial system was deregulated.

Jobs offshoring benefitted corporate executives and shareholders, because lower labor and compliance costs resulted in higher profits. These profits flowed through to shareholders in the form of capital gains and to executives in the form of “performance bonuses.” Wall Street benefitted from the bull market generated by higher profits.

However, jobs offshoring also offshored US GDP and consumer purchasing power. Despite promises of a “New Economy” and better jobs, the replacement jobs have been increasingly part-time, lowly-paid jobs in domestic services, such as retail clerks, waitresses and bartenders.

The offshoring of US manufacturing and professional service jobs to Asia stopped the growth of consumer demand in the US, decimated the middle class, and left insufficient employment for college graduates to be able to service their student loans. The ladders of upward mobility that had made the United States an “opportunity society” were taken down in the interest of higher short-term profits.

Without growth in consumer incomes to drive the economy, the Federal Reserve under Alan Greenspan substituted the growth in consumer debt to take the place of the missing growth in consumer income. Under the Greenspan regime, Americans’ stagnant and declining incomes were augmented with the ability to spend on credit. One source of this credit was the rise in housing prices that the Federal Reserves low inerest rate policy made possible. Consumers could refinance their now higher-valued home at lower interest rates and take out the “equity” and spend it.

The debt expansion, tied heavily to housing mortgages, came to a halt when the fraud perpetrated by a deregulated financial system crashed the real estate and stock markets. The bailout of the guilty imposed further costs on the very people that the guilty had victimized.

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oftwominds-Charles Hugh Smith: Central Banks Have Failed Because They Can’t Push Wages Higher

oftwominds-Charles Hugh Smith: Central Banks Have Failed Because They Can’t Push Wages Higher.

You can print all the money you want, but it will never boost wages to keep up with prices.

 
Central banks have been pursuing two goals for the past six years: ignite inflation and an expansion of debt that will supposedly generate “growth.” Despite squandering trillions of dollars, yen, yuan and euros, central banks have failed to ignite sustainable inflation or growth.

There’s nothing mysterious about their failure: you can’t get “good” inflation or growth if wages are stagnant or declining.
The central banks don’t bother to distinguish between “good” and “bad” inflation: any and all inflation is considered not only wonderful but essential to propping up the Ponzi scheme of debt-dependent consumption, a dynamic I described in Central Banks Create Deflation, Not Inflation.
 
“Good” inflation is wages rising faster than prices. When wages rise faster than consumer prices, households have more money to spend on consumption, and it’s progressively easier for them to pay down debt and support additional borrowing.

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