I found the article Why Our Economy May Be Headed for a Decade of Depression very enlightening on trying to explain the current buoyant stock market vs so much job loss, as well as shedding some light into the future of this pandemic. This is an interview with Nouriel Roubini, “Dr. Doom”, and another article Ten reasons why a ‘Greater Depression’ for the 2020s is inevitable. Dr Nouriel Roubini is a professor of economics at New York University’s Stern School of Business.
Roubini is predicting an “L” shaped depression, with a lot of bust coming our way. It seems the financial markets are predicting a “V shaped recovery as well as a quick vaccine, and therefore are edging higher. Draw this out and you get more of a “U” shaped recovery, where the world will tepidly recover, only to be drawn down by the mountain of debt from corporations and consumers alike.
Debt is the watch word here. Debt, accumulated from the 2008 Great Financial Crisis and this CoVid-19 crisis will depress consumption and weaken any recovery. deglobalization, negative supply shocks will raise the cost of resources. Workers will be more exploited, suffering lower wages and worse benefits. Prices will rise but growth will crawl, as regular people will be forced to reduce consumption. Stagflation (inflation and high unemployment) will result in a depression. We will continue to have more natural disasters and viruses.
Unemployment benefits will run out in 2020 Jul, there is no way that these benefits can last. Jobs are gone. New employment means lower wages and benefits. As people lose their jobs they will naturally restrict spending.
Reshoring manufacturing is moving from a low labour cost country back home to a higher labour cost country. The only way to do this profitably is to cut labour costs. Since these jobs are net new, it is more profitable to automate them with robots than to hire people. There are no people to preserve, no unions, no legacy workers. Companies can increase production but not increase employment.
Small and medium sized business will die, Big business will take over. Wall street does not reflect Main street and the common people.
No inflation because for a few years there will be excess goods, excess labour, excess comodities. After there will be two negative supply shocks: 1) globalization and 2) tech improvements will slow down. Globalization -> protectionism, decoupling, fragmentation of supply chains, decoupling of tech. These two forces were providing downward pressure on prices, plus massive government deficits will lead to inflation. Stagflation (high inflation, high unemployment, low demand)
Fed cannot raise interest rates because company and personal debt is too high, would shock economy too much, create a crisis.
Ominous and risky trends were around long before Covid-19, making an L-shaped depression very likely
- Increased deficits, debt and defaults: Much greater growth of government deficits, loss of income may mean that private-sector debts not sustainable, may default
- An older population: needs more health care and increased funding
- Increased risk of deflation: CoVid-19 caused huge amount of excess goods, machinery and capacity, mass unemployment, lower commodity prices due to not being bought and used.
- Reduced value of Currency: governments need to run deficits to avoid depression and deflation
- digital disruption of economy: increased unemployment, guard against supply-chain shocks by reshoring , but using automation and tech instead of new jobs, reduced wages
- Deglobalization: Decoupling, fragmentation of supply-chains, tighter restrictions of exports, goods, capital, labour
- Backlash against Democracy: Populist leaders emerge with mass unemployment, rising inequality, scapegoat foreigners
- China-US standoff, decoupling
- New Cold War: West vs China/Russia/Iran/NKorea, increased cyber warfare, military clashes
- Environmental disruption: More pandemics
