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Keynesian Ideas Can Only Make Things Worse

In the New York Times on September 8, 2020, Paul Krugman suggested that

“The CARES Act, enacted in March, gave the unemployed an extra $600 a week in benefits. This supplement played a crucial role in limiting extreme hardship; poverty may even have gone down”.

For Krugman and many economic commentators, it is the duty of the government to support the economy whenever it falls into an economic slump. Following in the footsteps of John Maynard Keynes, most economists hold that one cannot have complete trust in a market economy, which is seen as inherently unstable.  If left free the market economy could lead to self-destruction. Hence, there is the need for governments and central banks to manage the economy. Successful management in the Keynesian framework is done by influencing overall spending.

It is spending that generates income. Spending by one individual becomes income for another individual according to the Keynesian framework of thinking. Hence the more that is spent the better it is going to be. What drives the economy then is spending. If during a recession, consumers fail to spend then it is the role of the government to step in and boost overall spending in order to grow the economy.

In the Keynesian framework of thinking the output that an economy can generate with a given pool of resources (i.e. labour, tools and machinery, and technology) without causing inflation, is labelled as potential output. Hence the greater the pool of resources, all other things being equal, the more output can be generated.

If for whatever reasons the demand for the produced goods is not strong enough this leads to an economic slump. (Inadequate demand for goods leads to only a partial use of existent labour and capital goods).  In this framework then, it makes a lot of sense to boost government spending in order to strengthen demand and eliminate the economic slump.

…click on the above link to read the rest of the article…

France Again Being Forced To Stimulate Is Bad News

France Again Being Forced To Stimulate Is Bad News

France Holds Title Of World’s Most Visited Nation

On Thursday the French government rolled out a new stimulus plan The fact France is again forced to stimulate its economy should be viewed as bad news. The move reflects the reality that all is not well and things are getting worse. France is facing one of Europe’s worst recessions and its deepest since World War Two. France is looking at posting an 11% drop in GDP 2020. This follows a 13.8% second-quarter contraction that coincided with the covid-19 lock-down. This is seen as an attempt to bolster French President Emmanuel Macron’s re-election prospects. Macron is not loved by many of the French people and the “Yellow Vest” protesters that have marched against his policies are proof of this. If France moves back to the right support for a stronger Euro-zone government body will take a big hit.

The stimulus scheme designed to lift the country out of the recent slump aggravated by covid-19 will cost 100 billion euros or about 120 billion dollars. As with most government stimulus plans, it is aimed at reducing unemployment which French officials concede is slated to top 10% next year. The amount of this particular package is equal to roughly 4.5% of the GDP and brings this year’s total stimulus to around 10% of France’s GDP. The French government is betting that by supporting jobs they will give consumers the confidence to start spending the 100 billion euros they stashed away during the lock-down.

Stash Learn shows France as being the second-largest economy in Europe, and the sixth-largest in the world. As the world’s most visited nation, France’s tourism industry is a major component of the country’s economy. This means that France’s economy being in the muck is a big deal.

…click on the above link to read the rest of the article…

Blain’s Morning Porridge – Aug 11 2020 – Who Pulled the Plug?

Blain’s Morning Porridge – Aug 11 2020 – Who Pulled the Plug?

“Unnervingly coherent and laughably mindless”

This morning’s opening quote isn’t an independent assessment of the Morning Porridge – but is lifted from a newspaper article on Artificial Intelligence.  It ends on a very scary tag: the AI is asked if it is conscious and responds: “To be clear, I am not a person.  I am not self-aware.  I am not conscious.  I can’t feel pain.  I don’t enjoy anything.  I am a cold, calculating machine designed to simulate human response and to predict the probability of certain outcomes.  The only reason I am responding is to defend my honour.”  This is not from some dystopian novel or a reboot of the Terminator series… but from the this morning’s FT

Should we pull the plug or ask it some more questions? 

Back in the real world…

We are now in the depths of the summer doldrums – and markets are showing even less correlation to global events than usual.  Stock and Bond Markets remain chronically distorted by the effects of Central Bank liquidity. China markets have shrugged off the new Trump US sanctions – and Xi has stepped up the arrest of protest figureheads in HK.  Ten-cent has taken a tumble on the back of Trump banning Tik Tok and WeChat – confirming the degree to which individual stocks are vulnerable to shifts in the narrative. Watch for case-by-case wobbles as the China-US rift opens wider – when will China decide to make trouble for Tesla to boost its copy-cars? 

But even the China/US tiff is likely to be something of a sideshow. My first question to the AI machine would be – just how deep is the coming global recession going to be?  Despite some recent strong economic releases, the trend shows the recession is underway.

…click on the above link to read the rest of the article…

The Numbers Tell Us That The ‘Economic Recovery’ Is Dead And Businesses Are Failing At A Staggering Pace

The Numbers Tell Us That The ‘Economic Recovery’ Is Dead And Businesses Are Failing At A Staggering Pace

Even though economic conditions were absolutely awful, during the month of June the mainstream media kept insisting that the U.S. economy was “recovering” and the stock market kept surging on every hint of good news.  But now the “economic recovery” narrative is completely dead, because the numbers clearly show that the U.S. economy is rapidly moving in the wrong direction.  On Thursday, the Labor Department announced that another 1.416 million Americans filed new claims for unemployment benefits last week.  Prior to this year, the all-time record for a single week was just 695,000, and so we are talking about a level of unemployment that is absolutely catastrophic.  But what is really alarming many analysts is that the number for last week was quite a bit higher than the number for the week before.  Many states are rolling out new restrictions as the number of confirmed COVID-19 cases continues to surge, and this is having a huge impact on economic activity.  For months I have been warning that fear of COVID-19 would prevent economic activity from returning to normal levels for the foreseeable future, and that is precisely what has happened.

Overall, more than 52 million Americans have filed new claims for unemployment benefits over the past 18 weeks, and that makes this the biggest spike in unemployment in U.S. history by a very wide margin.

In fact, this dwarfs all previous spikes by so much that the others are not even worth mentioning.

Of course it isn’t just the employment numbers that are depressingly bad.  According to Jefferies, in late June 19 percent of all U.S. small businesses were closed, but now that number has risen to 24.5 percent

…click on the above link to read the rest of the article…

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).

…click on the above link to read the rest of the article…

Chinese Debt Could Cause Emerging Markets to Implode

CHINESE DEBT COULD CAUSE EMERGING MARKETS TO IMPLODE

The novel coronavirus has brought the world economy to a grinding halt. Global growth is set to fall from 2.9 percent last year into deep negative territory in 2020—the only year besides 2009 that this has happened since World War II. Recovery will likely be slow and painful. Government restrictions to prevent the virus from resurging will inhibit production and consumption, as will defaults, bankruptcies, and staffing cuts that have already produced record jobless claims in the United States.

But not all countries will bear the pain of the global recession equally. Low-income countries suffer from poor health infrastructure, which inhibits their ability to fight off the coronavirus, and many of them had dangerously high debt levels even before the pandemic necessitated massive emergency spending. Foreign investors are now withdrawing capital from emerging markets and returning it to the rich world in search of a safe haven. As a result, countries such as South Africa, Kenya, and Nigeria are seeing their currencies plummet in value—making it difficult, if not impossible, for them to service foreign loans.

Faced with the threat of financial ruin, poor countries have turned to multilateral financial institutions such as the International Monetary Fund and World Bank. The IMF has already released emergency funds to at least 39 countries, and by the end of March more than 40 more had approached it for help. The World Bank has fast-tracked $14 billion for crisis relief efforts. Yet even as they offer extraordinary amounts of aid, the IMF and World Bank know that these sums won’t be nearly enough. For that reason, they called on Group of 20 creditor nations to suspend collecting interest payments on loans they have made to low-income countries. On April 15, the G-20 obliged: all of its members agreed to suspend these repayment obligations through the end of the year—all members except one, that is.

…click on the above link to read the rest of the article…

Recession Begins: Q1 GDP Plunges 4.8%, Biggest Drop Since The Financial Crisis

Recession Begins: Q1 GDP Plunges 4.8%, Biggest Drop Since The Financial Crisis

With news that the Gilead Remdesivir trial had reportedly met its primary endpoint hitting “coincidentally” just seconds before the Q1 GDP print, and with newswires initially reporting the GDP erroneously as a positive 4.8% print, it was clear that the real number would be a disaster, and sure enough moments later newswires reversed and reported that Q1 GDP was in fact, a worse than expected negative 4.8%, the biggest drop since March of 2009, and officially marking the start of the US recession.

Perhaps in response to demands from the White House, the BEA was quick to note that “the decline in first quarter GDP was, in part, due to the response to the spread of COVID-19, as governments issued “stay-at-home” orders in March. This led to rapid changes in demand, as businesses and schools switched to remote work or canceled operations, and consumers canceled, restricted, or redirected their spending. The full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the first quarter of 2020 because the impacts are generally embedded in source data and cannot be separately identified.”

Developing

Insuring against catastrophe: The coronavirus predicament

Insuring against catastrophe: The coronavirus predicament

People insure themselves against many types of potential catastrophes: a house fire, a car accident, the untimely death of a spouse, a serious health problem. For other unexpected expenses, prudent people, as we say, save money “for a rainy day.” For some reason people and governments have chosen not to insure themselves (individually or collectively) against two catastrophes that have been much in the news lately: pandemics and large investment losses.

There is a connection, of course, for the two are tightly coupled. Here are some of the similarities between the two:

  1. Both occur at irregular and sometimes very long intervals.
  2. Both require careful thought and regular financial outlays to hedge against.
  3. Despite persistent warnings from experts, most people (and governments) did not act on such warnings.
  4. Now that the worst has occurred, many investment advisors and governments say, “No one could have seen it coming”—even when such a statement can be proven immediately false with easily obtained video evidence!

Will we learn from our current experience?

The answer in some cases will certainly be no because the incentives in our system encourage those in high places to act imprudently. Executives of publicly traded companies have spent trillions of dollars buying back shares of their own companies in order to goose stock prices and make their stock options more valuable—without regard for the need for cash reserves to make it through a recession.

One case that’s making the news is that of the U.S. airline industry. In the past five years the industry as a whole spent $45 billion on stock buybacks in order to enrich top management and shareholders. Now, the industry is asking for $50 billion from taxpayers to bail out profligate managers and their companies. Wouldn’t it be nice if they were asking for only $5 billion instead?

…click on the above link to read the rest of the article…

Worst Recession in 150 Years

Worst Recession in 150 Years

Worst Recession in 150 Years

The stock market had another big day today, spurred by the Fed’s massive recent liquidity injections.

But you really shouldn’t be terribly surprised by the rally. Even the worst bear markets see substantial bouncebacks. And you can expect the market to give back all of its recent gains in the months ahead as the economic fallout of the lockdowns becomes apparent.

This bear market has a long way to run. And we could actually be looking at the worst recession in 150 years if one economist is correct. Let’s unpack this…

My regular readers know I have a low opinion of most academic economists, the ones you find at the Fed, the IMF and in mainstream financial media.

The problem is not that they’re uneducated; they have the Ph.D.s and high IQs to prove otherwise. I’ve met many of them and I can tell you they’re not idiots.

The problem is that they’re miseducated. They learn a lot of theories and models that do not correspond to the reality of how economies and capital markets actually work.

Worse yet, they keep coming up with new ones that muddy the waters even further. For example, concepts such as the Phillips curve (an inverse relationship between inflation and unemployment) are empirically false.

Other ideas such as “comparative advantage” have appeal in the faculty lounge but don’t work in the real world for many reasons, including the fact that nations create comparative advantage out of thin air with government subsidies and mercantilist demands.

Not the Early 19th Century Anymore

It’s not the early 19th century anymore, when the theory first developed. For example, at that time, a nation that specialized in wool products like sweaters (England) might not make the best leather products like shoes (Italy).

…click on the above link to read the rest of the article…

“Worst. Recession. Ever.”

“Worst. Recession. Ever.”

When Harry Met Comic-Book-Guy

Worst global downturn since the Great Depression” says the IMF. Actually, it’s potentially worse than that.We are seeing credible (initial) claims in the UK and US that millions/tens of millions are going to be unemployed – again taking us back to black & white memories of long queues of the jobless holding signs saying “Will Work For Food.”

We are also seeing calls for GDP to collapse by up to a third in the presumed Q2 trough in the UK and the US, as just two examples, which in the space of months would already take us to the kind of depths plunged back in the 1930s (and actually this will be the worst recession since the 18th century according to one UK report.) Moreover, in a world far more economically-integrated today than it was in the 1930s, what happens in the (smaller) West will rapidly hit the (larger) rest.

As will the virus itself, of course. What is to stop it rampaging through Africa and South Asia, as just two examples? “Heat!” we have been told. Yet besides the fact that Covid-19 is transmitting in Indonesia and Singapore we see a report today that French scientists have found some strains of the virus can survive long exposures to temperatures of up to 60c, and it takes almost boiling point to kill it. Another (non-peer reviewed) study from Australian and Taiwanese researchers based on samples from India has shown Covid-19 is already mutating, shifting its mechanism used to bind to human cells – the paper concludes “This means current vaccine development…is at great risk of becoming futile.” Moreover, a Chinese scientist is warning of a serious risk of a second global wave of Covid in November – exactly the pattern seen in the 1918-19 Spanish Flu.

…click on the above link to read the rest of the article…

Oil Tumbles After IMF Slashes Global Growth Forecast

Oil Tumbles After IMF Slashes Global Growth Forecast

As if oil prices needed any more help on their downward spiral towards the teens, The IMF just slashed global growth to the worst since the ’30s.

“This crisis is like no other,” Gita Gopinath, the IMF’s chief economist, wrote in a foreword to its semi-annual report.

“Like in a war or a political crisis, there is continued severe uncertainty about the duration and intensity of the shock.”

As Bloomberg notes, The International Monetary Fund predicted the “Great Lockdown” recession would be the steepest in almost a century and warned the world economy’s contraction and recovery would be worse than anticipated if the coronavirus lingers or returns.

In its first World Economic Outlook report since the spread of the coronavirus and subsequent freezing of major economies, the IMF estimated on Tuesday that global gross domestic product will shrink 3% this year.

That compares to a January projection of 3.3% expansion and would likely mark the deepest dive since the Great Depression. It would also dwarf the 0.1% contraction of 2009 amid the financial crisis.

Of course, there is the hockey-stick recovery with IMF anticipating growth of 5.8% next year, which would be the strongest in records dating back to 1980, it cautioned risks lay to the downside. 

The grim projections are a stark reversal from the IMF’s outlook less than two months ago (on Feb. 19, the fund told Group of 20 finance chiefs that “global growth appears to be bottoming out.”)… and now…

“Many countries face a multi-layered crisis comprising a health shock, domestic economic disruptions, plummeting external demand, capital-flow reversals and a collapse in commodity prices,” the IMF said.

…click on the above link to read the rest of the article…

What the Sunrise Will Show

What the Sunrise Will Show

A storm blew in late last night, dropping trees and powerlines and sweeping the porch of all chairs, bowls, and benches. At 5 a.m. I took a short walk to take stock of the yard and barnyard areas before returning to my desk to type this post. Now, waiting for sunup to take full inventory of the damage seems to echo the world at large: we are all waiting with apprehension for what lies in the wake of the storms.

It is not often that this blog can be accused of prescience, but on February 1st I wrote this:

This past week, off the farm for work, I chanced into a conversation with a computer scientist experienced in modeling disease outbreaks. For a couple of hours, we parsed the data of the coronavirus, looked at his modeling of the numbers, discussed the true fragility of a global economy. He had, with the exception of his current trip, canceled all work-related travel for the next eight weeks. The system will be overloaded during that period, he predicted. 

I found myself wondering if it was wrong to find a kernel of hope in the prospect of a global slowdown built on the bones of a possible pandemic. Ten years after the great recession brought housing expansion in our valley to a halt, the maw of our species is being stuffed once again as wooded lots are bulldozed and foundations laid. This frenzy too may end only with the close of the day. The sun sets on everything, eventually.

…click on the above link to read the rest of the article…

Stockman: This Is Not Your Grandfather’s Recession…

Stockman: This Is Not Your Grandfather’s Recession…

Based on the shocking 6.6 million of new unemployment claims, we’d bet they’ll be some explosive political fireworks soon in this country about Covid-containment versus keeping the main street economy alive. There have now been an unprecedented, off-the charts 9.96 million new unemployment claims in the last two weeks.

For point of reference, it took fully 28 weeks to generate the same level of cumulative new claims after the beginning of the Great Recession. During that interval, the largest weekly number was 387,000 during the week of March 29, 2008.

Even when you scroll forward (not shown) to the worst week after the Lehman Bankruptcy meltdown commenced on September 15, the peak number was only 665,000 during the week of March 28, 2009. So today’s new claims number was 10X higher!

So, yes, some politically incorrect pundit is likely to note that there are now:

  • 47 jobless workers for every confirmed coronavirus case;
  • 320 jobless for every hospitalization; and
  • 2,112 jobless for every coronavirus death.

Moreover, it virtually certain that cumulative initial claims will hit 20 million before the end of April, thereby doubling the above ratios. That is to say, do they really want 100 jobless workers for every case of a bad winter flu?

Well, yes, it seems that our establishment betters can’t get rabid enough urging on a total shutdown of the US economy.

Indeed, the thinly disguised subtext in the whole daily MSM narrative for the last couple of days has been that the benighted governors of the Red States are not doing their part to order their economies into instant cardiac arrest. But it took the perennially obnoxious liberal columnist for the New York Times, David Leonhardt, to come right out and say it.

…click on the above link to read the rest of the article…

How bad will Canada’s COVID-19 recession be?

How bad will Canada’s COVID-19 recession be?

2 million jobs could be at stake, and the economy could shrink by more than it did in 2009

Stock markets have been waylaid by the virus as the global economy slows to a crawl. This NYSE trader has watched as the Dow Jones has lost more than a third of its value in the past month. (Richard Drew/The Associated Press)

The black swan has landed. 

The novel coronavirus pandemic is well underway worldwide, but it wasn’t until this month that Canadians started coming to grips with the economic pain it can bring, in addition to its heavy human toll.

Economists are struggling to come up with best guesses as to what might be coming. There’s still a lot that they — and we — don’t know. But the picture they’re painting for Canada’s financial future is already bleak.

GDP could significantly contract

At a minimum, the Conference Board of Canada is assuming that most industries across the country will be essentially shut down for at least six weeks.

If they take an optimistic view and assume that’s enough to contain the outbreak, even that short term pain will make a major dent in the country’s total output, a metric known as the Gross Domestic Product, or GDP.

Should this relatively mild scenario come to pass, Canada’s economy would eke out a tiny 0.3 per cent growth for 2020 as a whole as things ramp up in the latter half of the year. That’s far from booming — Canada’s economy grew by 1.6 per cent last year, for example — but it’s preferable to other alternatives.

Retail workers have been laid off in droves this month as lockdowns have caused a dramatic reduction in demand for the consumer goods they sell. (Matias Delacroix/The Associated Press)

…click on the above link to read the rest of the article…

Will The Corona Virus Trigger A Recession?

Will The Corona Virus Trigger A Recession?

As if waking up to an economic nightmare, investors see headlines like these and many others flashing across their Bloomberg terminals:

  • Facebook says Oculus headphone production will be delayed due to virus
  • Apple extends country wide store closing for another week
  • Foxconn delays iPhone production
  • Qualcomm cuts production forecast due to virus uncertainty
  • Starbucks announces China store closures through Lunar New Year, uncertain when they may reopen
  • US Steel flashes a warning of a cut in demand
  • Nike shoe production halted
  • Under Armour missed on sales, and their outlook is weak. They partially blamed the Corona Virus outbreak.
  • IEA forecasts drop in oil demand this quarter- first time in a decade

The seemingly never ending list of delays, disruptions, and cuts rolls on from retail to high technology. Even services are impacted as flights and train trips are canceled within and to and from China.  While some technology-based services are provided over the Internet service, restaurants, training, and consulting, as examples, must be performed in person.  Manufacturing operations require workers to be at the factory to produce products. Thus, manufacturing is much more acutely affected by quarantines, shutdowns, transportation disruption, and other government actions. 

It is as if an economic tsunami is rolling over the global economy. China’s economy was 18 % of world GDP in 2019.  For most S & P 100 corporations, the Asian giant is their fastest growing market at 20 – 30 % per year.  Even more critical, China has become the hub of world manufacturing after entering the World Trade Organization in 2000. Over the past two decades, U.S. corporations have relocated manufacturing to China to leverage an inexpensive labor force and modern business infrastructure.

Source: The Wall Street Journal – 2/7/20

Prior to the epidemic, world trade had begun to slow as a result of the China – U.S. trade war and other tariffs.  World trade for the first time since the last recession has turned negative. 

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