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Dr. Jack Rasmus
Copyright 2020

This past week US economy collapsed in the 2nd quarter by 32.9% at annual rate and nearly 10% just for the April-June period. Never before in modern US history—not even in the worse quarters of the 1930s great depression—has the US economy contracted so quickly and so deeply!

All the major private sectors of the US economy—Consumption, Business Investment, Exports & Imports—collapsed in ranges from -30% to -40% in the April-June period. That followed first quarter prior declines in single digits as well. More than $2 trillion in real economic activity was wiped from the economy. Consumption collapsed by more than -1.5 trillion. Business investment by nearly -$600 billion. Ditto net trade and even state & local government spending.

Even more foreboding is that the April-June collapse came as the economy opened up in June virtually everywhere and in many states even before in May. So the 2nd quarter collapse—as deep as unprecedented as it was—reflects a rebound of economic activity during the last six weeks of the quarter.

More worrisome still, even the weak May-June rebound has begun showing signs of stalling out as of mid-July, according to latest economic indicators.

Fading 3rd Quarter US Economy

Here’s some emerging evidence of that stall-out now beginning:

Jobs Deteriorating Once Again

Weekly initial unemployment claims began to rise after mid-July. The numbers of new jobless claims are now consistently in the 2.2m-2.4m per week range as the economy enters August. Officially more than 32m are now collecting benefits. Millions more are still trying, or running out of them. Add to that the more than 5 million more workers who simply dropped out of the labor force since February. They’re not even calculated in the unemployment rate, according to official US government practices. So there’s easily 40m jobless out there in America—a number that’s remained pretty constant for months now. 40m unemployed is roughly a 25% unemployment rate, same as that during the worst of the 1930s great depression.

On Friday, August 7 the US Labor Dept. will report jobs and unemployment numbers for July. The reported consensus among economists is that it will likely show only 1.6m new jobs created, according to a survey reported by Reuters—a sharp slowdown after June’s numbers showed 4.8m. But 3 million of June’s new jobs represented workers returning to restaurants, hospitality, and retail work as the economy was reopened (prematurely) in May-June. Now, as the Covid virus has surged again in July, many of those 3 million who returned to work in May-June are being re-laid off in July or returning to sheltering as 30 states have again re-initiated partial shutdowns.

In addition to the Covid surge effect on jobs, scores of large companies have, independently of the virus effect, begun announcing mass layoffs by the thousands and tens of thousands. They have determined the economy’s situation is far worse than reported by the media or Trump administration and are planning for a long recession. Their layoffs will be mostly permanent due to long term restructuring.

If the 32m now collecting jobless benefits, plus those waiting to still get them, plus those who gave up and dropped out of work altogether equal 25% unemployment, how is it then that the US government keeps saying unemployment is only 11.1%?

It’s because that 11.1% is a cherry-picked low ball number for public consumption that conveniently represents only full time workers unemployment. If part timers laid off were included, even per the government’s own figures that’s 18%. Those numbers also don’t accurately count those who left the labor force or reflect the number of ‘gig’ jobs that are picked up as part of the 25% unemployed in the unemployment benefits numbers.

Another indicator of the renewed deterioration of the labor markets is the number of job openings reported by the government. That too has begun to trend down once again after mid- July just as the unemployment benefits claims began to rise in tandem.

US Manufacturing & Construction Stagnant At Best

Manufacturing and construction account for roughly 20% of the US economy and GDP. The spin since the US economic reopening began late May has been all sectors of the economy have been bouncing back—services, manufacturing, construction. Facts show otherwise.

In Manufacturing jobs have continued to decline every month, according to Purchasing Managers Indexes (PMI) More companies continued to lay off workers in manufacturing than hire them during May-June. Manufacturing output continued to contract through June, with a reading of 49.8 (less than 50 indicates contraction). That rose to 51.3 in first half of July, but contracted again at the close of July finishing the month of July essentially stagnant at 50.9, according to the business research firm, HIS Markit.

The condition was roughly the same for construction. Per the US Commerce Dept., construction activity continued to decline by -1.7% in May and another -0.7% in June during the period of the economy’s reopening.

So with services’ industries and occupations re-shutting down in July once again, and with Manufacturing and Construction, stagnating at best—by end of July 2020 the US is teetering on the edge of faltering and ending the brief, weak and tentative economic rebound of late May to early July.

Household Income & Consumption in Trouble

Consumption spending by households represents 70% of the US economy and GDP. The main determinant of household spending for the more than 100 million US working/middle class households is their wage income or, for working class retiree households, their pensions, social security benefits, & other income. Household income for tens of millions is now in a precarious state and is being reflected in reduced spending already.

According to a US Census Bureau report in July, 22% of households report that they now, as of July, can’t make their rent or mortgage payments. There are roughly 70 million renting households in the US. That’s more than 15 million US households and more than 30 million Americans!

According to Urban Institute research, it will cost $7.3B a month to keep renters and homeowners in their homes. That’s a little more than $50B for the next six months. But Republicans—Mnuchin, McConnell & Trump—all adamantly refuse to provide any of the $7.3B assistance. On the other hand, they quickly approved roughly $20B in the March Cares Act for Defense corps making billions in profits, passed the $760B in new money for the Pentagon in one day last week, and now propose another $30B for their Pentagon-Defense Corp. friends in their HEALsAct stimulus proposal announced in July.

Apart from the $760B new record Pentagon budget just passed in the blink of a political eye, that’s roughly $50B in new money for the Pentagon instead of $50B to keep tens of millions of working class households in their homes for another six months!

Already evictions of renters and foreclosures of homeowners are rising fast. It’s something of a myth that even the Cares Act of last March introduced a moratorium on rent evictions. First of all, that addressed only one third of the available rents—i.e. those backed by US government financing. Two-thirds have always been exempt. Even the one-third was not enforceable, moreover. Many areas of the US have continued with evictions throughout the pandemic period.

And now evictions are accelerating even faster in July, now that the Cares Act measure expired on July 25. No fewer than 12.3 million renters covered by the Cares Act lost their moratorium late July. That evictions acceleration, now underway, has resulted in reduced spending and consumption since mid-July and will no doubt depress spending even more into August and beyond.

In addition to the Housing crisis depressing income and consumer spending, there’s the parallel crisis of more than 15 million newly unemployed having no medical insurance. Studies show clearly those without insurance tend to spend less to save for medical expenses. A Commonwealth Health Care Fund survey in late June found that 21% of workers laid off lost all health insurance coverage from their employer and all sources during layoff since March. That means at least 8 million additional US households without health insurance since March. 8 million more—and rising as new unemployment claims also rise—who will spend less and compress consumption further and therefore US GDP in 3rd quarter.

Yet another major factor portends a slowing of household spending and consumption, further dampening any economic rebound: Congress’s reduction of unemployment benefits.

Debate is now intensifying in Congress on the scope and magnitude of a so-called ‘5th stimulus’ legislative package. At the heart of the debate is whether to continue the $600/week federal supplemental unemployment benefits instituted last March under the Cares Act. The cost of the $600/wk. benefit was estimated in March at $340 billion, for a period of four months. Were the $600 eliminated altogether, it would thus take roughly $85B a month out of the US economy.

Republicans in the Senate have proposed an immediate reduction of the $600 benefit to $200. Hidden in the proposal is a further reduction after two months at $200, by integrating the federal benefit with state unemployment benefits and capping both at $500. So at least 3/4s of the $600 would end, taking nearly $65B a month in spending out of the economy starting in August and for however long the benefit continue.

It is not surprising given the rising unemployment claims, pending evictions, growing ranks of health uninsured, and prospects of ending significant unemployment benefits—not to mention the resurge of the virus and growing partial re-shutdowns across dozens of states—that household consumer confidence shows evidence of fading in July as well. University of Michigan’s survey—considered the gold standard of the confidence research—recently reported that consumers’ expectations for the US economy over the next six months continue to slip further. In March 2020 the overall index fell to only 72.5, a historic low (>100 means positive; <100 means failing confidence). That remained at 73.2 in June despite the economy reopening. The next six months expectations index in June was 72.3 but by mid-July had deeply contracted further to only 65.9. Clearly, consumers are not optimistic where the economy is about to go and, to the extent their expectations affect their spending, the latter is not likely to recover soon.

In short, escalating housing evictions, more loss of health insurance coverage, and reduction of weekly unemployment benefits for tens of millions of Americans and households can only further significantly depress household consumption—70% of the economy—and thus undermine the already weak and fading May-June economic rebound.

Fading US Economic Rebound in Historical Perspective

During the depths of the crash in March-April, Trump, his administration spokespersons, much of the mainstream media, and many economists were predicting the crash would soon produce a just as rapid snap back of the economy beginning in June. That was called the ‘V-Shape’ recovery.

But recoveries are sustained, whereas ‘rebounds’ are not. This writer was publicly predicting last March the V-shape prediction was a fiction. At best, the trajectory of the US economy would prove to be ‘W-Shape’—as have all great recessions of which the current contraction has proven to be among the more severe. (Other ‘great recessions’ have occurred the last century in 1908-13, 1929-30, and 2008-11. None were V-shape. All were to some degree ‘W-shape’. And in one case, the ‘W’ transformed into an extended ‘U’ and the great depression of the 1930s.

W-shape trajectories are typical of great recessions. W-shape means a deep initial contraction of the economy is followed by a weak rebound, which then dissipates and produces a subsequent economic relapse in terms of growth and GDP. The relapse may take the form of a dramatic slowdown in the rebound or in the economic growth rate totally stalling out and economic stagnation occur next quarter. Or, yet a third possibility is that the relapse may prove even more severe and result in a renewed contraction once again—i.e. a double dip recession. In a W-shape typical great recession trajectory, the stagnation or double dip is in turn followed by another brief and weak ‘rebound’. And that rebound followed by yet another relapse. Triple dips are not impossible. That’s what happened to Japan after 2008 and almost to Europe as well after 2014.

This ‘bouncing along the bottom’ trajectory following the deep initial crash may go on for months and years—as was the case in the US after 1908 and again after 2009 as well.

Or, alternatively, the stagnation or further economic contractions may lead to a subsequent financial and banking crash that drives the economy even deeper, ratchet-like, to become a de facto economic depression. That was the case after 1930.

What’s happened to date in the US, from early March through July 2020, shows the US economy has clearly fallen into a great recession again–and this time three times deeper than in 2008-09 and in one third less the time!

It is unprecedented. And it represents totally new territory that mainstream economists have no analog experience from which to speculate as to its medium and longer term trajectory into 2021. Indeed, the mainstream economics community has no clue. They are content, as they typically are won’t to be, with predicting the present instead of the future—although very few now bother to say it’s a V-shape recovery. Only the polyannas in the Trump administration still adhere to that nonsense and that fiction.

The first phase of the 2020 Great Recession has passed. That was the deep and rapid contraction of 10% (32.9% annualized). The second phase began with the weak June rebound that continued into early July. The question now is whether that weak rebound will transform into a relapse in the form of a rapid slowing of the economy once again—i.e. a third phase. Or perhaps just a second phase, with the weak rebound of May-June representing a juncture or transition between phases.

Beyond the coming 3rd quarter the central question is whether the US economy will experience yet another weak, short and shallow economic rebound? If so, the W-shape trajectory of the current Great Recession 2.0 will be further confirmed. Another possibility is the contraction will even out and settle into a longer term stagnation. Yet a third outcome is further shocks to the economy will drive it into yet another sharp and deep contraction.

There are three possible ‘drivers’ that would result in the latter outcome: a failure of Congress and policy makers to introduce a sufficient fiscal stimulus directed at household consumption stimulus; a major political and constitutional crisis occurring surrounding the November 3 national presidential elections; or a chain reaction contagion in financial markets provoked by spreading business defaults and bankruptcies—either in the US or abroad.

The nation should know fairly shortly whether Congress—driven by Republican and conservative-radical ideologues—fails to pass sufficient fiscal stimulus as the economy fades in the 3rd quarter.

The second outcome is becoming increasingly likely by the day. Trump clearly has no intention of leaving office by normal processes. A close electoral college vote will further ensure a political crisis in the US of dimensions never before experienced. The economic consequences will prove severe. Those possible scenarios will be described shortly in another article.

Third, although a major financial instability event is not yet imminent, the longer the W-shape great recession trajectory continues, the more likely such an instability event becomes. Moreover, when it does, it will appear swiftly, unexpectedly, and no less severely in terms of its impact on the real economy of households, workers, and even businesses in general.

Dr. Jack Rasmus
August 3, 2020
For a shorter, 15 min. commentary on the US GDP report released yesterday, listen to my interview today with Loud & Clear radio show. (For the longer hour commentary, my own Alternative Visions radio show today in the link and podcast below it).

    TO LISTEN to the 15 min. Short Version GO TO
:

https://www.spreaker.com/user/radiosputnik/gdp-report-shows-worst-ever-decline
Listen to my July 31 Alternative Visions radio show podcast dissecting the 2Q US GDP -32.9% Collapse and why the #3rd Quarter Rebound is also fading. 4 Myths about the US economy’s ‘recovery’ discussed and what may occur yet to trip the current recession into a bona fide great depression by 2021.

    TO LISTEN GO TO
:

https://alternativevisions.podbean.com/e/2nd-quarter-us-gdp-collapses-june-rebound-fading/

    SHOW ANNOUNCEMENT
:

Dr. Rasmus dissects the just released data for US economy’s 2nd quarter GDP stats, confirming his March prediction of W-shape recovery, no V-shape and no 2nd half recovery. The 4 myths are discussed: Fast recovery in second half 2020; US economy was strong in 2019; consumer households were doing great in 2019 and will bounce back again in 3Q20 if the economy reopens; Congress’s March 2020 Cares Act is sufficient stimulus for sustained recovery. (i.e. Republicans’ message there’s no need to rush to another massive stimulus bill). The two great ‘wild cards’ that could throw the US economy into depression in 2021: Trump’s generated political-constitutional crisis around Nov. elections + financial instability in 2021 as business and household defaults deepen.
As an addendum and follow up to my recent post,’What Lies Ahead’, listen to my Alternative Visions hour radio show of Friday, July 18, 2020, for my continued discussion of the themes in the ‘What Lies Ahead’ post.

To Listen GO TO:
https://alternativevisions.podbean.com/e/alternative-visions-what-lies-ahead/

What Lies Ahead

On July 6, 2020 I posted my extended view and analysis why the 3rd quarter US GDP would falter–and lead to a W-shape recovery, as it typical of all Great Recessions. The current recession’s scenario was compared with 1929-30 and 2008-09, and 8 reasons were given why the US current economic rebound (not recovery) would falter. In this follow-on post a somewhat longer term scenario is added to the prior shorter, 3rd quarter view. It’s an addendum and sequel to the prior post, focusing on the more permanent impacts on the economy that will continue well into 2021 and beyond. Here’s the addendum piece, “What Lies Ahead”

WHAT LIES AHEAD?

The US economy at mid-year 2020 is at a critical juncture. What happens in the next three months will likely determine whether the current Great Recession 2.0 continues to follow a W-shape trajectory—or drifts over an economic precipice into an economic depression. With prompt and sufficient fiscal stimulus targeting US households, minimal political instability before the November 2020 elections, and no financial instability event, it may be contained. No worse than a prolonged W-shape recovery will occur. But should the fiscal stimulus be minimal (and poorly composed), should political instability grow significantly worse, and a major financial instability event erupt in the US (or globally), then it is highly likely a descent to a bona fide economic depression will occur.

The prognosis for a swift economic recovery is not all that positive. Multiple forces are at work that strongly suggest the early summer economic ‘rebound’ will prove temporary and that a further decline in jobs, consumption, investment, and the economy is on the horizon.

A Second Wave of Permanent Job Losses

Through mid-June to mid-July, the COVID-19 infection rate, hospitalization rate, and soon the death rate, have all begun to escalate once again. Daily infections consistently now exceed 60,000 cases—i.e. more than twice that of the earlier worst month of April 2020. Consequently, states are beginning to order a return to more sheltering in place and shutdowns of business, especially retail, travel, and entertainment services. The direction of events cannot but hamper any initial rebound of the economy, let alone generate a sustained economic recovery.
Exacerbating conditions, a second wave of job layoffs is clearly now emerging—and not just due to economic shutdowns related to the resurging virus.

Reopening of the US economy in June resulted in 4.8 million jobs restored for that month, according to the US Labor Department. That number included, however, no fewer than 3 million service jobs in restaurants, hospitality, and retail establishments. These are the occupations that are now being impacted again with layoffs, as States retrench once more due to the virus resurgence underway. But there’s a new development as well: A second jobless wave is now emerging in addition to the renewed layoffs due to shutdowns not only of the resumed service and retail occupations, but reflecting longer term and even permanent job layoffs across various industries.

Household consumption patterns have changed fundamentally and permanently in a number of ways due to both the virus effect and the depth of the current recession. Many consumers will not be returning soon to travel, to shopping at malls, to restaurant services, to mass entertainment or to sport events at the levels they had, pre-virus.

In response, large corporations in these sectors have begun to announce job layoffs by the thousands. Two large US airlines—United and American—have announced their intention to lay off 36,000 and 20,000, respectively, including flight attendants, ground crews, and even pilots. Boeing has announced a cut of 16,000, and Uber,n just its latest announcement, a cut of 3,000. Big box retail companies like JCPenneys, Nieman Marcus, Lord & Taylor, and others are closing hundreds of stores with a similar impact on what were formerly thousands of permanent jobs. Oil & gas fracking companies like Cheasepeake and 200 other frackers now defaulting on their debt are laying off tens of thousands more. Trucking companies like YRC Worldwide, the Hertz car rental company, clothing & apparel sellers like Brooks Brothers, small-medium independent restaurant and hotel chains like Krystal, Craftworks—all are implementing, or announcing permanent layoffs by the thousands as well.

Reflecting this, since mid-June new unemployment benefit claims have continued to rise weekly at a rate of more than 2 million—with about 1.3 million receiving regular state unemployment benefits plus another 1 million independent contractors, gig workers, self-employed receiving the special federal government unemployment benefits. The latter group’s numbers are rising rapidly since mid-June.

As of mid-July no fewer than 33 million are receiving unemployment benefits, with another 6 million having dropped out of the labor force altogether and no longer even being counted as unemployed. Unemployment therefore remains at what will likely be a chronically high number, at around 40 million—with about 25% of the US labor force unemployed—as renewed service-retail sector layoffs, plus new permanent layoffs, both loom on the horizon.

Added to the growing problem of renewed service layoffs and the 2nd wave of permanent layoffs in the private sector is the growing likelihood of significant layoffs in the public sector, as states and cities facing massive budget deficits are forced to lay off several millions of the roughly 22 million public sector workers in the US. This potential public employee layoff wave will accelerate and occur sooner, should Congress in summer 2020 fail to bail out the states and cities whose budgets have been severely impacted by the collapse of tax revenues while facing escalating costs of dealing with the health crisis. Estimates as of last May are that the states and cities will need $969 billion in bailout funding this summer—roughly two-thirds for the states and the rest for cities and local governments.

The resurgence of layoffs from all these sources is a sure indicator that the economy’s rebound—let alone recovery—is in trouble. Rising joblessness means less wage income for households and therefore less consumption and, given that consumption is 70% of the economy, a slowing of the rebound and recovery. Problems in consumption in turn mean business investment suffers as well, further slowing the economy and recovery. Exacerbating the decline in personal income devoted to consumption due to unemployment is the evidence that even those fortunate enough to return to work after spring 2020’s economic shutdown are doing so increasingly as part time employed—which means less wage income for consumption compared to the pre-COVID period before March 2020.

Overlaid on these negative prospects for employment, consumption, business investment is the intensification of economic crisis-related problems.

Rent Evictions, Child Care & Education Chaos

There is an imminent crisis in rents affecting tens of millions. At the peak in April, it is estimated that roughly one-third of the 110 million renters in the US economy had stopped making rent payments due to the COVID-related shutdowns of the economy. The CARES ACT, passed in March, provided forbearance on rental payments, although perhaps as many as 20 states failed to enforce it. That forbearance directive expires at the end of July, with as many as 23 million rent evictions projected in coming months. A major housing crisis is thus brewing, as well as the second wave of job layoffs.

A combined education-child care crisis is about to occur almost simultaneously. The K-12 public education system is approaching chaos, as school districts plan to introduce remote learning on a major scale in order to deal with the renewed COVID-19 infection and hospitalization wave. The heart of the crisis is that tens of millions of US working class families dependent on two paychecks to survive economically cannot afford to accommodate school district practices for remote learning—especially for young children in the K-6 grade levels. Even if such families could afford to pay for expensive child care, the current US child care system is far from being able to accommodate them. Many minority and working class households, moreover, lack the computers and networking equipment, or even the requisite skills to set it up, to enable their children participate in remote learning.

Several forces are driving the shift to remote learning: school district fears of liability actions by parents if children become ill, the significant cost of ensuring disinfected classrooms, the lack of classroom space to allow distance learning on site, and the growing concern of teachers regarding their own exposure to infection. At least 1.5 million public school teachers are over age 50 and have health conditions that put them at greater risk of serious infection, should they attend closed-in classroom environments.

The child care plus K-12 education crisis will likely erupt within months on a major scale. Chaos in education is around the corner.

This fall, higher education—colleges and universities—will also experience chaos of their own kind. While distance learning will not be as serious an implementation problem as it will in K-12 levels, costs from the pandemic will force many smaller, private colleges into bankruptcy, consolidation or closure. Public colleges’ funding problems will require them to sharply reduce available services. Remote education will create a two-tier system of higher education—educational services delivered remotely and those of a more traditional nature on campus; or a hybrid of both.

However, demand for higher education services will likely decline sharply in the short term, during which higher education will experience a devastating decrease in tuition and other sources of college revenues. Some estimates show a third of freshmen plan to take what’s called a ‘gap year’: i.e. accept entrance but not attend for a year. That’s a massive revenue loss. Some estimates foresee a 15%-30% decline in new student attendance, with another 5%-10% decline in transfer students, and a similar decline of 5%-10% in continuing students. In addition, the attendance by international students, the ‘cash cow’ for most colleges, will also decline sharply due to the Trump administration’s new rules.

Still other developments will sharply reduce college revenues. Students forced to attend classes via remote learning will demand lower tuition. One can expect a wave of legal suits as students seek to ‘claw back’ full tuition expenses. Other secondary sources of college revenues—from fees, on-campus room and board, endowment earnings and gifts, and sports revenues—also spell a looming revenue crunch.

A wave of college consolidations and closures is inevitable. And with student loan debt at $1.6 trillion it is unlikely that the federal government will introduce new aid through that channel. Nor will States increase their subsidization of public colleges, given the severe state budget deficits on the horizon.
In short, the economic crisis is about to assume more socio-economic dimensions and character: rent, child-care, education chaos will soon overlay the continuing unemployment problem and worsening recession. Social and political discontent, frustration, and anxiety are almost certainly to rise in turn in coming months as a consequence.

Global Recession & Sovereign Debt Defaults

The weakness of the global economy is yet another factor likely to ensure the US economy’s W-shape trajectory. As noted previously, with 90% of other countries in recession, global demand for US exports will remain weak or declining. In addition, global supply chains have also been severely disrupted by the health crisis, or even broken, and will not be restored soon. The global economy is suffering from deep problems of both demand and supply. This too is a unique historical event. Never before have demand and supply problems occurred congruently. Together, they increase the potential for a global depression.
Commodity producing economies have been hard hit, especially oil and metal producing countries. Many were in a recession well before the COVID health crisis. Global trade in general had stagnated, registering little to no growth in 2019, for the first time since modern records were kept. Many countries had over-extended their borrowing, expanding their sovereign debt loads during the last decade. This was money capital borrowed largely from western banks and capital markets (i.e. shadow banks).

Now, with global trade flat and declining, and prices for their export goods deflating in price as well, these debt-extended countries cannot earn sufficient income from exports in order to pay the principal and interest on their debt. As a result, several countries in the worst shape may soon default on their debt payment to western banks, hedge funds, private equity firms, and so on. Debt defaults potentially mean the same western financial institutions that loaned the funds now experience financial crises in turn. In such a manner, financial instability events abroad are often transmitted to the domestic US economy through its banking system. It would not be the first time, moreover, that foreign bank crashes have spilled over the US and rest of the world economy and in the process significantly exacerbated a recession already underway.

Theoretically, countries experiencing severe sovereign debt crises could borrow from the International Monetary Fund. However, the IMF has nowhere near the funds to accommodate multiple large sovereign defaults that occur simultaneously. Nor is it likely that the US and Europe will increase the IMF’s funding to enable it to do so. Once it becomes clear the IMF cannot handle a crisis of such potential dimensions, the global capitalist economy will slip even further toward global depression.

The further deterioration now already occurring in economic relations between the US and China may also potentially impact the Great Recession in the US, and ensure its continued W-Shape recovery. Trump’s trade pact with China signed December 2019 has proven thus far a colossal failure. The president declared at the deal’s signing it would mean $150 billion in China purchases of US goods in 2020—especially farm products, oil & gas, and manufactured goods. At mid-year,

China has purchased only $5 billion of the agreed $40 billion in farm products and only $14 billion of $85 billion in US manufactured goods. Trump’s promised $150 billion was never agreed to by China, even before the Covid pandemic struck the US economy in 2020. China never agreed to a dollar value of purchases of US exports, but announced it would purchase based on conditions in 2020-21. Trump’s $150 billion was typical Trump misrepresentation of a deal never made. At best China would purchase perhaps $40 billion in agricultural goods—i.e. about the level of it purchases before Trump launched a trade war with it in March 2018. Failure to deliver his exaggerated public promise in 2020 Trump turned on on China and embraced further his anti-China hard line advisors on trade and other matters. The former ‘trade war’ with China will likely transform now, in the wake of Covid, into a broader economic war with China. Furthermore, the deterioration of relations with China, set in motion by the current recession and the collapse of global trade, shows signs of spilling over to other political and even military affairs.

Permanent Industry Transformations

The COVID health crisis is accelerating the transformation of entire industries and sectors of the economy, US and global. As noted above, household consumption patterns are already changing fundamentally and will continue as changed even after the health crisis passes. Entire industries will shrink as a consequence. Company consolidations and downsizing are inevitable in airlines, cruise lines, and even public land transport. So too will companies fail, consolidate and restructure in the hospitality, leisure and hotel industries, in mall-based retail establishments, inside entertainment (movies, casinos, etc.) to name but the obvious. Sports and public entertainment companies are struggling to redefine their business models and how they bring their ‘product’ to the public for consumption. Even education—public and private—is undergoing a radical shift. Not so obvious is similar fundamental change in oil & energy industries, and later as well in manufacturing as supply chains are slowly returned to the US economy.
Not only will these changes significantly (and often negatively) impact employment levels and wage incomes, but business practices as well. Already businesses are instituting new cost cutting practices under the pressure of the health crisis and shutdowns. These practices will become permanent. And since much of the practices and cost cutting will focus on workers’ pay and benefits, more of what economists call ‘long term structural unemployment’ will result—in addition to the current ‘cyclical unemployment’ occurring due to the current recession.

An historic consequence of the current Great Recession precipitated by the COVID-19 health crisis is the accelerating introduction underway of what some call the Artificial Intelligence revolution. AI is about cost-cutting. It’s about new data accumulation, data processing and statistical evaluation, to allow software machines to make decisions previously made by human beings. AI will eliminate millions of low level decision-making by workers in both services and manufacturing. A 2017 report by the business consulting firm, McKinsey, predicted no less than 30% of all workers’ occupations will be severely impacted by AI by the end of the present decade. 30% of jobs will either disappear or have their hours reduced significantly. That means less wage income and less consumption still.

The important linkage to the current Great Recession 2.0 is that the introduction of AI by businesses will now speed up. What McKinsey formerly predicted for the late 2020s decade will now take place by mid-decade. The economic consequences for the next generation of US workers, the late Millennials and the GenZers will be serious, to say the least. After decades of the permeation of low pay, low benefits ‘contingent’ part time and temp jobs since the 1990s, after the impact of the 2008-09 crash and aftermath on employment, after the acceleration of ‘gig’ jobs with the Uberization of the capitalist economy since 2010, and after the even more serious negative economic effects of the current Great Recession 2.0, the tens of millions of US workers entering the labor force today and in coming years will have to face the transformation of another 30% of all occupations. The future does not portend very well for the 70 million millennials and GenZers. US neoliberal economic policies and the Great Recession 2.0 is accelerating the long term structural unemployment crisis of both the US and the global capitalist economy.

Return of Fiscal Austerity

The US federal budget deficit under Trump averaged more than a trillion dollars annually during his first three years in office. The federal national debt at the end of 2019 was $22.8 trillion. As of July 2020 it has risen to $26.5 trillion—and rising. Earlier projections in March were that it would increase by $3.7 trillion in 2020. That has already been exceeded. So, too, will projections for 2021, or another $2.1 trillion. The deficit and debt will likely rise to more than $4 trillion in this fiscal year and another $3 trillion in 2021. That means the current national debt within 18 months will reach $30 trillion. And that’s not counting the debt level rise for state and local governments, already $3 trillion; nor the debt carried on the US central bank, the Federal Reserve, balance sheet which is scheduled to rise another $3 trillion at minimum.

The point of presenting these statistics is that the US elites, sooner or later, will introduce a major austerity program. It will likely come later in 2021. And it will make little difference whether the administration that time is headed by Democrats or Republicans. It will come and it will target social security, Medicare, Medicaid, Obamacare, education, housing, transport and other social programs.
A The first Great Recession provides a historical precedent. Obama’s recovery program in January 2009 provided for $787 billion in stimulus. But the joint Republican-Democrat austerity agreement introduced in August 2011 took back nearly twice that stimulus, or $1.5 trillion, in 2011-13. That austerity contributed significantly to the W-shape recovery from the 2008-09 economic crash and contraction—i.e. the first Great Recession. With the current deficit surge of $6 trillion to date, likely to increase to $9 to $10 trillion, the US economic elites will no doubt pursue a new austerity regime at some point within the next few years. That austerity will, like its predecessor, ensure at best a W-shape recovery typical of Great Recessions. At worst, it may prove the final event that pushes the US economy into another Great Depression.

Financial Instability

Those who deny that the US and global economy have already entered a second Great Recession offer the argument that the 2008-09 crash and recession was caused by the banking and financial crash of 2008-09, and therefore, since there has not yet been a financial crash, the economy at present is not in another Great Recession. But they are wrong.

Great Recessions are always associated with a financial crisis, but that crisis need not precede the deep contraction of the real, non-financial economy. The COVID-19 pandemic has played the role of a financial crash in driving the real economy into a contraction that is both quantitatively and qualitatively worse than a ‘normal’ recession. Furthermore, a subsequent banking system-financial crash is not impossible in the coming months, although not yet likely in 2020.
The preconditions for a financial crisis are in development. It won’t be precipitated by a residential mortgage crisis, as in 2007-08. But there are several potential candidates for precipitating a financial crash once again. Here are just a few:

• The commercial property sector in the US is in deep trouble. Commercial property includes malls, office buildings, hotels, resorts, factories, and multiple tenant apartment complexes. Many incurred deep debt obligations as they expanded after 2010 or just kept operating by accruing more high cost debt when they were unprofitable. Today they are unable to continue servicing (i.e. paying principal and interest) on their excessive debt load. Many have begun the process of default and chapter 11 bankruptcy reorganization. Banks and investors hold much of the commercial property debt that will never be repaid. Excess derivatives (credit default swaps) have been written on the debt. A debt crisis and wave of defaults and bankruptcies in 2020-21 in the commercial property sector could easily precipitate a subprime mortgage-like debt crisis as occurred in 2008-09. And derivatives obligations could transmit the crisis throughout the banking system—as it did in 2009. Regional and small community banks in the US are particularly vulnerable.

• The oil and gas fracking industry, where junk bond and leverage loan debt had already risen to unstable levels by the advent of the COVID crisis. The collapse of world oil and gas prices—which began before the COVID-19 impact and continues—will render drillers and others unable to generate the income with which to service their debt. Already more than 200 companies in this sector are in default and bankruptcy proceedings. Again, regional banks that financed much of the expansion of fracking in Texas, the Dakotas, and Pennsylvania will be impacted severely by the defaults. Their financial instability could easily spread to other sectors of banking and finance in the US.

• State and local governments, should Congress fail to appropriate sufficient bailout funding in its next round of fiscal spending in July 2020. State and local governments are capable of default and bankruptcy—unlike the Federal government, which is not. The US has a long history of state defaults associated with the onset of Great Depressions. This time around, state financial instability will quickly spill over to public pension funds, and from public to private pensions, and from there to the municipal bond markets with which state and local governments raise revenue by borrowing to fund deficits.

• Global sovereign debt markets, as previously noted. Defaults on massive debt accumulated since 2010 by many countries could result in serious contagion effects on the private banking systems of the advanced economies, including the US, Europe, and Japan. Should the IMF fail to contain a chain of sovereign debt crises that could follow in the wake of the current Great Recession, a chain reaction of defaults across emerging market economies in particular has the potential to precipitate a global financial crisis.

History shows that financial crises often originate from unsuspected corners of the economy. The above candidates are the ‘known unknowns’. There may also lurk in the bowels of the capitalist global financial system still more ‘unknown unknowns’—i.e. what are sometimes called ‘black swan’ events.

Political Instability

The US and other countries are on new ground in terms of potential political instability. The piecemeal curtailment of democratic and civil rights has been progressing at least since the mid- 1990s. In the 21st century it has been accelerating, both in the US and across the globe. Recent years have seen a growing public confrontation between contending wings of the capitalist elites and their political operatives. Institutions of even limited capitalist democracy are under attack and atrophying. And now political instability is growing as well at both the institutional and grass roots levels. One should not underestimate the potential for even more intense political confrontation among elites, or between segments of the US population itself, from having a negative impact on the current economic crisis and 2nd Great Recession. A Trump ‘October Surprise’ or a November 2020 constitutional crisis are no longer beyond the realm of the possible, but even likely.

The expectations of both households and business may serve as transmission mechanisms propagating political instability into more economic and financial instability. Political instability has the effect of freezing up business investment and therefore employment recovery. It has the further effect of causing households to hoard what income they have and raise the savings rate—at the expense of consumption. It also leads to government inaction on the policy necessary to provide stimulus for recovery.

On a global front, political instability may even assume a global dimension. History in general, and US history in particular, reveals that US presidents seek to divert public attention from domestic economic and social problems by provoking foreign wars. Targets for US attack, in the short term, are Iran and Venezuela—especially the latter, which is more susceptible to US military action. But tomorrow, in 2021 and after, it could well be Russia (Ukraine or Baltics US provocations), North Korea (a US attack on its nuclear facilities) or China (a US naval confrontation in the South China sea)—irrespective of the unlikely success of such ventures.

Like another financial-banking crash, a major political instability event—domestic or foreign—could easily send an already weak US economy struggling in the midst of a Great Recession into the abyss of the first Great Depression of the 21st century.

Dr. Jack Rasmus
July 17, 2020
Listen to my last friday’s radio show, Alternative Visions, and my discussion whether the current tepid economic rebound due to reopening will result in a relapse and economic retreat before year’s end. Why none of this qualifies as ‘recovery’.

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Dr. Rasmus explains 8 reasons why the US economic ‘rebound’ will not be a recovery. Why jobs are not recovering at rate announced by government, while mass layoffs of permanent jobs are beginning to occur amidst recalls due to economic reopening. Other reasons for W shape rebound and relapse and not robust recovery is that the 2nd surge in Covid will depress economic activity again, the lack of a sufficient fiscal stimulus in Congress as the first CARES ACT dissipates, growing business and consumer negative expectations, global trade collapse with 90% of world economies in recession, business cost cutting, wage cutting and layoffs of the recent shutdown becoming permanent, intensifying US political instability in coming months, prospects growing of rising business defaults, bankruptcies, and another financial crisis in 2021.
The reopening of the US economy in June—and some states as early as May—has produced a modest economic ‘rebound’. But rebound is not to be confused with economic recovery.

The current rebound is the natural result of the US economy collapsing 40% between March and June 2020. In the first quarter, January-March 2020, the US economy contracted 5%, virtually all of that in March. While the final data for the 2nd quarter is yet to be announced, the US Federal Reserve Bank’s forecasts of US Gross Domestic Product (GDP) show a much greater collapse, ranging from -30.5% (NY Fed district) to -41.7% (Atlanta Fed district). No economy can continue to collapse at that steep a rate quarter after quarter.

Economies experiencing deep and rapid contractions—which is typical of both great recessions and economic depressions—inevitably experience periods of leveling off for a time, or even a slight bounce back—i.e. a rebound. But that’s not a recovery. ‘Recovery’ means a sustained, quarter to subsequent quarter economic growth that a continues more or less unabated until the lost economic ground is ‘recovered’. But a rebound is typically temporary, followed by subsequent economic relapses in the form of stagnant growth or even second or third dip recessions.

Look at the Great Recession 1.0 that began in December 2007. The decline began that month subsequently declined more rapidly in the first quarter 2008, but then bounced back slightly in the 2nd quarter 2008. It then took a deep dive in the second half of 2008 through the first half of 2009, contracting every quarter for an entire year. A short, shallow recovery followed into 2010. But the economy relapsed again in 2011, contracting once more for two quarters in 2011. Another small rebound followed in early 2012 and was followed by stagnation in the second half of 2012.

The reported GDP numbers after 2008 were even weaker, and the relapses more pronounced, before the US Commerce Dept. changed the way it defined US GDP and boosted the totals by $500 billion a year after 2013, retroactive to 2008 and before.

All Great Recessions with an initial deep economic contraction, are typically followed by brief shallow recoveries, cut short by subsequent double dips or quarters of no growth stagnation.

That was true of the Great Recession of 2008-09, which didn’t really end in June 2009, but bounced along the bottom economically for several more years. A similar trajectory will almost certainly follow today’s 2020 Great Recession 2.0 now concluding its Phase One initial deep collapse.

The Phase One deep collapse is now giving way to its Phase Two and what will prove a brief and quite modest ‘rebound’. But that’s not a recovery.

Further economic relapses are inevitable after ‘short, shallow rebounds’ that characterize all Great Recessions. That trajectory—i.e. short, shallow rebounds followed by relapses also brief and moderate can go on for years.
What it means is there will be no V-shape and true recovery in the US economy in the second half of 2020. What there will be is an extended ‘W-shape’ period, the next two years 2020-2022 at minimum. And it may continue for perhaps even longer.

The 1929-30 Great Recession: Anteroom to 1930s Depression

A similar scenario occurs prior to bona fide economic depressions, like that which occurred in the 1930s. The great depression began initially as a Great Recession. US policy makers failed to contain it and it slipped into the Great Depression of that decade as we know it. What precipitates Great Recessions collapsing into bona fide Depressions is the collapse of the financial and banking system.

The Great Depression of the 1930s did not begin with the stock market crash of October 1929, however. The real economy was already slipping into recession in manufacturing and construction sectors in 1929, well before the October 1929 stock market financial crash. The economy contracted in 1930 by -8.5% and continued to contract every year thereafter through mid-1933 as the US economy experienced a series of four banking crashes, one each year from 1930 through 1933. The banking crashes drove the real, non-financial economy ever deeper every year, in a ratchet like effect.

Rebound and growth followed 1934-36. However, that weakened significantly in late 1937 as a conservative Republican Congress and Supreme Court together began dismantling Roosevelt’s 1935-37 New Deal social spending fiscal stimulus programs. As a result, in 1938 the US economy fell back into depression once again. A partial reversing of the dismantling in 1939 produced a return to positive GDP growth that year. But it wasn’t really until 1941-42 that the economy really exited the Great Depression, as US GDP rose 17.7% in 1941 and then 18.9% in 1942. Recovery—not rebound—was clearly underway after m id-1940—i.e. the result of government spending on both social programs and defense that amounted to more than 40% of GDP those years. That was fiscal stimulus. That was recovery.

In other words, the lesson of the Great Depression of the 1930s is in order to end a depression, or stop a Great Recession from becoming a Depression, the government must step in and spend at a rate of 40% GDP.

Prior to the onset of the current 2020 Great Recession 2.0, the US government’s spending and share of US GDP was about 20%. It needs to double to 40% to engineer a true recovery from the current crisis. 5.5% is no stimulus in fact; just a partial ‘mitigation’ of the severe collapse that just occurred. That is, a temporary floor under the deep 30%-40% collapse that would have been even greater.

The 2008-09 Great Recession: The 5.5% Failed Stimulus

In January 2009 the incoming Obama administration proposed a fiscal stimulus recovery package amounting to roughly $787 billion and 5.5% of GDP.

Economists advocated double that. Even Democrat party leaders in the US House proposed another $120 billion in consumer tax cuts. But Obama’s economic advisers, mostly former bankers and pro-banker academics like Larry Summers, argued the US could not spend that much. Obama listened to Summers and reduced the amount to the $787 billion. It proved grossly insufficient. The real economy continued to lag and job losses continued to mount. Supplemental programs like ‘cash for clunkers’ and ‘first time homebuyers’ had to be added.
Even with these post-January program supplemental spending Obama’s fiscal stimulus proved insufficient to generate a robust recovery, as the historical record shows. The US recession under Obama ‘recovered’ at its weakest rate compared to all the prior ten US post-recession recoveries since 1947. The Obama recovery was only 60% of normal for recession recoveries.

The problem with the Obama 5.5% was not only the insufficient magnitude of the stimulus. Its composition was deficient as well. It called for almost $300 billion of the $787 billion in mostly business tax cuts, which were then hoarded by business and not invested to expand output, hire more workers, and generate thereby more income for consumption. Nearly $300 more was in the form of grants given to the states to spend. They too hoarded most of it and failed to rehire the unemployed as was intended. The remainder of the $787 billion was composed mostly of long term infrastructure investment and spending that had little initial effect on the economy’s recovery. As a result of the insufficient magnitude and poor composition of the Obama 2009 stimulus, the US economy fell into a ‘stop-go, W-shape economic recovery for the next six years. US jobs lost in 2008-09 were not recovered until as late as 2015, and the average wages paid for the new jobs was significantly less than wages paid for the jobs that were lost.

The point is: if 5.5% was insufficient to generate sustained recovery in 2009, today in 2020 the effective 5.5% fiscal spending produced by the CARES ACT in March 2020 will prove even less successful. The US economy’s economic collapse today is five times deeper than in 2008-09 and has occurred in one-fifth the time of the 2008-09 event. If a second more aggressive government spending program does not follow in the second half of 2020, then the current tepid economic ‘rebound’ underway due to the reopening of the US economy will certainly fail at generating a sustained recovery. Here’s why the CARES ACT—the main and only stimulus program to date—is only 5.5% and will fail to generate a sustained recovery as the economy reopens with a modest ‘rebound’.

The March 2020 CARES ACT: Failed Stimulus Deja Vu

As of mid-year 2020 the US government spending to date is summed up in the various provisions of the CARES ACT passed by Congress in March 2020, plus several smaller measures passed before and after it as supplements. Its actual spending as of late June 2020 amounts to only approximately a 5.5% contribution to US GDP.

The CARES ACT on paper called for $1.45 trillion in loans and grants to small, medium and large businesses. $500 billion is allocated as loans to large corporations. Another $600 billion to medium sized plus some other measures. And $350 billion in loans, convertible to grants, to small businesses called the Payroll Protection Program, or PPP.

Another $310 billion was added to the PPP small business loan program as banks quickly misdirected hundreds of billions of dollars to many of their ineligible bigger business prime customers which scooped up much of the original $350 billion for small business.

The three business programs combined thus allocated $1.76 trillion in loans and grants.

Another $500 billion was allocated to workers and US households in the form of supplemental income checks of $1200 per adult plus an extra $600 in federal unemployment benefits available through July 31, 2020.

A couple hundred billion dollars more went to hospitals and health care providers in emergency reimbursements before and after the March CARES ACT passage.

That brought the total March CARES ACT fiscal stimulus to roughly $2.3 trillion. However, not discussed much in the media is another $650 billion CARES ACT provided business and investor tax cuts. The tax cuts include a temporary suspension of business payments to the payroll tax; more generous net operating loss (NOL) corporate tax averaging that allows business to use current losses to get tax refunds on prior year taxes paid; faster depreciation write-offs ( de facto tax cut); and more generous business expense deductions. Less than 3% of the $650 billion tax cuts in the CARES ACT went to families earning less than $100,000 per year in annual income.

On paper, the roughly $2.3 trillion CARES ACT amounted to roughly 11% of GDP. But only half of that 11%–or just 5.5—has actually hit the US economy. This contrasts with Germany and other European and Asian countries that boosted fiscal spending stimulus by as much as 15%-20%.

Another 5.5% Stimulus Means Another Failed Sustained Recovery

The 5.5% to not enough to kick start the rebound into a sustained recovery. Much of the 5.5% is already spent to mitigate the 2nd quarter deep contraction and is no longer available as a stimulus in the upcoming 3rd quarter.
All the $1200 checks have been spent already and most of the $600 unemployment benefit boost has entered the economy. The latter expires on July 31. Furthermore, the majority of the $1.7 trillion allocated to businesses large and small has yet to get into the US economy as well.

Of the $660 billion in the small business PPP program, about $520 billion has been spent. Less than $100 billion of the $500 allocated to large businesses, like airlines and defense companies, has actually been ‘borrowed’ by big business. And as of mid-June 2020, none of the $600 billion for medium size businesses had been ‘taken up’ by those businesses. That program only became fully operational by the Federal Reserve in the last week of June, more than three months after its announcement.

Thus far little interest appears on the part of medium and large businesses in the more than $1 trillion loans allocated to them. And as far as the $650 billion in tax cuts is concerned, its effects can be delayed until December 31, 2020, if even then. Given the weak US economy and consumer demand, many businesses will take the tax cuts and hoard them.

In short, more than half the roughly $3 trillion total of government spending, loans, grants and tax cuts provided by the CARES ACT is yet to be committed to the US economy. The official 11% is really only half that at best.

This fact leads to the interesting question: Why have medium and large businesses not take up more of the $1.1 trillion business loans allocated to them?

The $3+ Trillion Uncommitted Business Cash Hoard

The answer is they haven’t because they are already bloated with cash and don’t need or want it. That cash hoard has resulted from several sources in recent months: Large corporations saw the writing on the wall with regard to the virus as early as January-February 2020. They quickly began loading up on cash by drawing down their generous loan credit lines with their banks. That produced a couple hundred billion dollars in cash by March. Then they issued record levels of new corporate bonds to raise still more cash. From March to end of May more than $1.3 trillion in new corporate investment grade bonds was raised by the Fortune 500 US businesses—i.e. more than in all 2019. A couple hundred billion dollars more was raised in junk grade corporate bonds. Still another cash source was raised by businesses suspending dividend payments and stock buybacks to shareholders. In 2019 they distributed $1.3 trillion in buybacks and dividend payouts ($3.4 trillion total under Trump’s first three years in office). So buybacks and dividends suspensions saved at least another $500 billion in cash.

Companies also began selling off and cashing in their minority stock interests in other companies. Furloughing workers to work from home also saved still more cash in reduced facilities, benefits and related costs for many corporations. Tech companies especially benefited from this.

Bloated with trillions of dollars of cash, large and medium sized corporations had little interest in borrowing from the CARES ACT, since the latter came with conditions like the provision that 70% of the loans be spent on keeping workers on their payrolls. They preferred to lay off their workers, and borrow from the credit markets, issue new bonds, and otherwise conserve cash.

A good example was Boeing Corporation. Congress allocated more than $50 billion to Boeing as part of the $500 billion loan program earmarked for large corporations. Instead of borrowing that, Boeing raised $25 billion issuing new bonds and announced layoffs of 16,000 of its workers! Less than $100 billion has been used to date by large corporations under the CARES ACT big corporations’ $500 billion loan allocation. And virtually nothing of the $600 billion to date allocated under the medium size business loan program called the ‘Main St.’ lending facility.

7 More Reasons Why ‘Rebound’ Won’t Mean Recovery

Here are some seven other reasons—apart from the US current insufficient fiscal stimulus—why the US economy will not experience a sustained ‘recovery’ in the next six months, and why instead the US will follow a W-Shape trajectory of weak un-sustained growth followed by economic relapses through 2020-21 (and perhaps even longer):

1.) 2nd Covid-19 Wave Economic Impact:

It is inevitable a number of states will reinstate shutdowns—in significant part if not totally—as the infection, hospitalization, and death rates rise over the summer due to premature reopening of the economy and a growing breakdown of social discipline in adhering to basic precautions like social distancing and mask wearing. The partial shutdowns will. To varying degrees, reduce consumer spending, business investment, and result in re-layoffs of workers. Second wave layoffs in services like leisure & hospitality, bars, restaurants, travel, public entertainment, and even education and health care services will emerge—all negatively impacting household consumption demand. It is estimated that at least half of the states, 40% of the reopened economy, will reinstate some degree of re-closures of business activity in coming weeks and months as a resurgence of Covid 19 impacts the US economy in the second half of 2020 and beyond.

The official US June employment report on July 3, 2020 showed 4.8 million jobs were reinstated. But no less than 3 million of that 4.8 million were recalls in leisure & hospitality, hotels, bars, restaurants, and retail industries. These are the same industries that will be affected most by states reinstituting shutdowns. They are also industries where businesses that have been able to reopen only partially thus far in most cases operate on very thin margins. They are likely to fail in Phase Two of the crisis now beginning, and many closing completely in the second half of 2020 as a result of operating only at half capacity.

The scope of the possible closures is revealed by the recent Yelp survey of 175,000 of its customer business base. During the 2nd quarter, Yelp’s survey found that in May-June only 30,000 of its 175,000 had reopened. More important, its survey showed that 40,000 of its 145,000 that hadn’t yet opened had already closed permanently.

The wave of permanent business closures in the second half of 2020—especially in the leisure & hospitality and retail industries—should not be underestimated. The permanent shutdowns will occur not only due to reduced consumer demand, but to a resurgence of Covid-19 and a second wave of layoffs.

2.) Deeply Entrenched Business & Consumer Negative Expectations

The US economy has been deeply wounded by the deep contraction of the past four months. Both businesses and consumers have negative expectations as to the direction of the economy in the short to intermediate run. Businesses don’t see the conditions for returning to expanding investment, or even returning to prior levels of production and output. With consumer demand clearly in retreat, business expectations of future sales and profits are dampened. Reducing the cost of investing by lowering business taxes or interest rates have little effect on generating more investment, when expectations of profitability—which is what really drives investment—are so low. This is the fundamental reason why business across the board is hoarding its accumulated cash. The same applies to consumers and households. They too are hoarding what cash they have available, spending mostly on necessities only. The evidence is the sharp rise in the household savings rate and bank deposit rates. As much cash is saved and deposited as a precaution that economic conditions may worsen, instead of actually spent. The result is only minimal increase in spending occurs, just as minimal investment. Until negative expectations are somehow reversed, both business investment and household consumption do not rise to levels that result in sustained recovery.

It will take a major event to again shift business and consumer negative expectations, like a vaccine for the virus or a major fiscal stimulus or a program of mass hiring of the unemployed by government. However, none of the above is on the immediate horizon. Therefore negative expectations will continue to dampen any sustained recovery and limit whatever insufficient government fiscal stimulus to generating a modest ‘rebound’ at best.

3.) Business Cost Cutting & Permanent Layoffs

The deep and rapid rate of contraction of the economy over the past four months, and the business expectation of weak recovery, has convinced many businesses to make many of the cost cutting moves of recent months permanent. An example is how some industries and businesses moved their workforces to work from home. It has saved them significant costs of operation—on facilities, maintenance, and some employee benefits. In recessions businesses always find new ways to cut costs that often result in more layoffs and lower wages. Another phenomenon is rehiring and recalling workers back to work temporarily laid off does not occur en masse and all at once. The typical business practice is to recall only part of their workforce and to recall workers more on a part time basis. Not least, the cost cutting and the part time recalls typically results in businesses leaving part of their furloughed work force behind, whose unemployment then becomes permanent.

This second wave of jobless is already beginning to emerge, as businesses downsize in employment after the initial shock to the economy that has already occurred. Airlines are announcing tens of thousands of layoffs. Several other industries are experiencing growing defaults on debt payments and bankruptcies that will result in mass layoffs as well. For example, the oil & energy sector which was a major source of new job creation during the fracking boom of the past five years. More than 200 defaults of companies are in progress. Layoffs are beginning, of a permanent nature not just temporary furloughs or layoffs.
Cost cutting and layoffs translate into less household income for consumption and therefore for generating a sustained recovery.

4.) Deeper Global Recession & Global Trade Crisis

The collapse of the US economy in the first half of 2020 has been accompanied by a synchronized contraction of the global economy. Global economic contraction means US production for export does not recover much in the short run. Offshore demand for US goods & services remains weak. That in turn dampens domestic US investment, employment, and therefore business-consumer spending. Although the US economy is relatively less dependent on exports to stimulate economic growth, exports are not an insignificant contributing factor to US growth and recovery.

More than 90% of the world economy has also experienced deep recession in the first half of 2020. That compares with the first Great Recession of 2008-09 when a fewer 60% of countries were in recession along with the US. Foreign demand for US exports is thus even weaker this time around. Post 2009 China and emerging market economies boomed after 2010 and put a partial floor under US economic contraction by stimulating demand for US product exports; that China-Emerging Market economies stimulus effect on the US economy no longer exists in 2020.

5.) Intensifying US Political Instability

One should not underestimate the potential growing political instability in the USA in the second half of 2020. This instability will occur on two ‘fronts’. One is at the level of political institutions. It is likely the upcoming national elections on November 3, 2020 will be challenged and not accepted by either Trump or the Democratic Party nominee. The growing social instability in the USA and Covid 19 effects on voter turnout, combined with the already widespread voter suppression in various states, makes for ripe conditions for post-electoral crisis should the election be narrowly decided by voters in November. Evidence is growing, moreover, that Trump is prepared to declare voting by mail as fraud and use that as an excuse to throw the election into the Supreme Court—as occurred in the US in 2000. Today Trump, unlike George W. Bush in 2000, enjoys an even firmer majority in the US Supreme Court.

The instability at the level of political institutions in the USA today is accompanied by what appears as growing grass roots civilian conflicts. Street level confrontations between Trump supporters and rising popular movements and demonstrations are not beyond the realm of possibility, perhaps even likelihood.

The political instability has significant potential to negatively impact both consumer and business expectations and therefore dampen both business investment and household consumption even further in addition to causes already noted.

6.) Wild Card #1: Financial Crisis 2021

Intermediate term, in 2021 likely more than in 2020, is the wild card of a financial system crisis emerging that would exacerbate the real economy’s faltering recovery still further. This channel by which a financial crisis might emerge is a growing wave of corporate and state & local government defaults. Massive excess debt has built up over the past decade in business sectors in the US. More than $10 trillion in corporate bond debt exists at present. At least $5 trillion in corporate junk bonds and virtual junk like BBB investment grade. Still more for corporate ‘junk’ leveraged loans. A protracted period of recession and weak recovery will generate a major potential for corporate defaults and bankruptcies. If the magnitude and rate of defaults is too great, or comes too fast, the banking system could very well experience a major credit crash once again.

Industries highly unstable with high cost unaffordable debt, and with insufficient revenues with which to service that debt, include: oil fracking and coal, big box retail, smaller regional airlines, rental car and other travel related companies, hotels and resorts, malls, commercial property in general, and hundreds of thousands of small restaurants and regional restaurant chains. Defaults have already begun rising rapidly in many. Household debt and state and local government debt finds itself in much of a similar situation—highly leveraged with debt amidst collapsing incomes to service the debt as unemployment and wage incomes continue to decline and as tax revenues remain depressed long term due to the weak economic recovery.

The US central bank, the Federal Reserve, is in the midst of an historic experiment to pre-bail out non-bank corporations to forestall the defaults and to flood, at the same time, the US banking system with massive excess liquidity with which to manage the defaults should they come excessively and too rapidly. It remains to be seen whether the Fed’s massive liquidity injections thus far ($3 trillion), and promised (unlimited), will prove sufficient to manage the defaults. If not, the US banking system will freeze up as financial institutions begin to crash as well with the transfer of defaulted corporate debt on to their own bank balance sheets.

In 2008-09 it was the banking system that collapsed first and in turn precipitated a deeper and faster contraction of the real economy in the US. Today it is quite possible the reverse causation may occur in the Great Recession of 2020. But it matters not in a Great Recession which precipitates which first—i.e. the banking system the real economy or vice-versa. The key point is that both cycles—financial and real—feed back on the other in a Great Recession and amplify the downturn in both.

7.) Wild Card #2: Artificial Intelligence Faster Rollout

Another wild card that may emerge with fuller force longer term is the penetration of Artificial Intelligence in business operations. McKinsey Consultants estimated that by 2025 AI would accelerate in its penetration of business practices. By the latter half of the 2020s decade it would have deep and widespread impact on employment and wages, as AI led to deep cost cutting by business. As much as 30% of occupations would be seriously impacted. The essence of AI is to eliminate simple decision making jobs, in services as well as manufacturing.

But it is highly possible that AI will now penetrate even faster, accelerated by business cost cutting and productivity enhancing drives, as a consequence of the current deep economic crisis. The deeper and more protracted the current recession, the more likely business will engage in multiple ways to reduce costs as a means to weather the crisis. AI offers businesses a prime opportunity to do just that. But AI also means a significant reduction in net jobs, especially simple low paid service and retail work. And with the net jobs and wage loss come reduced consumer household demand, consumption, and therefore sustainable economic recovery.

The Case for 40% Government Share of GDP

As previously noted, recoveries from great recessions and depressions require at least a 40% US government spending share of total GDP. Obama’s raised the US government share of GDP to barely 25%, not 40%. The economy accordingly struggled after 2009.

The current 2nd Great Recession 2020, the first phase of which has just concluded in June, is following the same rough trajectory and scenario as the 2008-09. There has been only token fiscal stimulus to the economy thus far from the CARES ACT. Indeed, Congress never considered, at least in the House of Representatives, the CARES ACT was a stimulus bill. It was called a ‘mitigation’ bill, designed to put a partial floor under the collapse of the economy going on at the time in the 2nd quarter 2020. A true stimulus bill was to follow. That’s the HEROES ACT now blocked in Congress by Republican Senate and Trump. What the latter want is to end the unemployment benefits and provide no further income supplement payments. They want to exchange further unemployment benefits for direct wage subsidies to businesses. They want even more tax cuts for business—permanent payroll tax cuts, more capital gains tax cuts, and more business expense deductions. And they are reluctant to provide funding support for state and local governments with accelerating deficits as a result of tax revenue collapse. Should support for state and local governments not occur soon, it is likely mass layoffs will emerge in states and local governments soon.
However, it does not appear so far that anything resembling a real stimulus will get passed with the HEROES Act. The unemployment benefits extension will likely be eliminated. More business tax cuts, should they be added to the $650 billion provided by the CARES ACT, will be hoarded in large part. As will corporate income that would have been otherwise used to pay wages, as the government pays the wages of their workers instead.

An insufficient fiscal stimulus from an eventual HEROES Act, should it occur, will ensure the current tepid ‘rebound’ of the US economy will fail to evolve into a sustained recovery of the US economy. The seven other, additional factors noted above will further prevent a sustained recovery—and indeed may precipitate a subsequent further serious economic contraction. The summer of 2020 is thus a critical juncture period for the US economy.

The US is currently experiencing what might be called a ‘triple crisis’. A health crisis that shows little sign of abating. A deep economic crisis that is still in its early phases. And a ripening political crisis. Never before in its history have three such major events converged. The one of the three that is potentially most manageable is the economic. Health crisis depends heavily on the development of a vaccine. Not much can be done to prevent a deepening political crisis. It will run its course, whatever that may be. But a government fiscal stimulus equivalent to about 40% of US GDP would very likely stabilize the economy and set it on a path to sustained recovery. However, it is highly unlikely that in the current political climate of instability, deep splits within the US political elites, growing grass roots social confrontations, and failure to mount an effective strategy to address the Covid-19 health crisis that the capitalists and their political representatives will be capable of introducing the necessary 40% war time economic stimulus.

Dr. Jack Rasmus
July 6, 2020
Dr. Rasmus is author of the recently published book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, Clarity Press, January 2020. He hosts the weekly radio show, Alternative Visions, blogs at jackrasmus.com. His twitter handle is @drjackrasmus and his website: http://kyklosproductions.com.
A second wave, or a second surge, in the Coronavirus is underway. Will it translate into a 2nd wave impact on the US economy–i.e. a relapse after a brief and modest rebound as the economy reopens? The topic is discussed below in my Alternative Visions show. (A written print analysis of the same is in progress. Posted soon).

TO LISTEN GO TO:

https://alternativevisions.podbean.com/e/alternative-visions-2nd-wave-virus-2nd-wave-economic-contraction-coming/

SHOW ANNOUNCEMENT

Dr. Rasmus reviews the facts re. surging 2nd wave of virus infections and hospitalizations in the USA and discusses whether it will precipitate a further weakening of the US economy in the second half of 2020 as well. As World Bank chief economist, Carnmen Reinhart, has recently warned: it is important to distinguish between a ‘Rebound’ and a ‘Recovery’. Rasmus explains the reopening of the US economy the past 6 weeks has produced what looks like a ‘rebound’ for historic depths of contraction during the 1st wave of the virus, February-April, but that it is not a recovery. 39m still unemployed by moderate estimates, work hours down 15%, personal incomes up but being significantly unspent, the CARES Act stimulus either already spent by households or loans being hoarded by big corps. amount to no added real stimulus. Fed forecasts for US GDP for 2nd quarter at -30.5% to -41.9% mean a very deep hole for the US economy to try to crawl out of. Rasmus reviews the current late June state of the US economy: consumption, business investment, trade, and government spending that shows a slowing of the deep contraction but a continued contraction nonetheless. Conclusion: despite reopening the economy and a 5.5% GDP stimulus in March the US is not poised for an accelerating ‘recovery’ but a modest ‘rebound’ at best. And a 2nd wave increases probability of another economic relapse in late 2020 or early 2021 if no real fiscal stimulus comes soon.
Evidence is growing from a number of quarters how banks and big corporations are ‘gaming’ the more than $5T combined bailout thus far by Congress (CARES ACT) and the Fed (loans, 11 special lending facilities, etc.). My radio show of friday, June 19, 2020 discusses some of the scams. Also, begins commentary on how the bailout is not really getting into the economy and producing much recovery so far.

    TO LISTEN GO TO
https://alternativevisions.podbean.com/e/alternative-visions-gaming-the-economic-bailout-the-economic-stimulus-that-isn-t/
    SHOW ANNOUNCEMENT:


Dr. Rasmus reviews the various ways the Cares Act and $2.7T Congress bailout since March has been ‘gamed’ by big business and investors. How big corps have taken the funds and not invested, or refused to take up the loans altogether. The same applies to the Federal Reserve’s $3.3T in loans to banks and investors via its QE and 11 ‘facilities’ to provide free money capital to banks and others. A second theme of the show is Dr. Rasmus explanation that the nearly $5T in Congress and Fed stimulus is not really a stimulus. And the near future appears a further lack of stimulus, amidst a further subsidization of businesses that aren’t really investing or growing the economy. Economic news of the past week is also reviewed re. retail sales, housing, manufacturing, etc.

Over the past week evidence keeps growing that the US has entered a second wave of the Coronavirus pandemic. More than 117,000 Americans thus far have died in just the past three months and more than 2.1 million have been infected. That compares to roughly 460,000 and 7.6 million worldwide. With roughly 5% of the world’s population, the US has about 25% of the world’s virus cases—a testimony to the abject failure of the US thus far to manage the virus.

That failure is perhaps most evident in Trump’s virtual withdrawal from the ‘war’ on the virus and what appears to be his new strategy of letting the states each deal with it as they may and can. Trump’s government is clearly in retreat, concerned only with one thing: to get Trump re-elected no matter what the cost in lives or economic well-being of American citizens.

Trump’s policy boils down to this: totally reopen the economy now, blame the states, World Health Organization and the Chinese for the crisis, declare the rising numbers of infections, hospitalizations, etc. as ‘fake news’, blame a 2nd wave on increased testing, and hold daily mass political rallies from now until November.

Trump is a phony ‘war’ president who long ago dropped his rifle and fled from the field of battle. It’s as if president Franklin Roosevelt on December 8, 1941 left town to sail down the Potomac river on his yacht to contemplate the December 7 Japanese attack on Pearl Harbor, Hawaii—instead of appearing before Congress, as he did on December 8, 1941, to declare war on Japan and rally the country in an all out effort. Roosevelt immediately announced a comprehensive ‘war production act’ to take effect across the entire US economy in just a few weeks. His first executive order was to develop and mass produce penicillin, which was thought impossible but which the US did within just a few months. In contrast, what we got from Trump was a declaration the virus a hoax, a proposal for a bogus hydroxychloroquin treatment that the CDC has since declared dangerous and likely to cause heart attacks, and a public announcement it would all be over by Easter. And today, even more incredibly, Trump has said the virus would go away if we just didn’t test for it so much.

Trump’s only concern is to hold rallies with his conservative red state base that will exacerbate the contagion effect of the virus. As President of only the 30% (his base), he is little concerned about the country at large or the virus ‘war’ that has already killed more Americans than every US war together since 1945. Trump’s only actual order after he announced the activation of the war production act months ago has been to force meatpacking workers back to work else their forfeit unemployment benefits. Work or die! will be the legacy of Trump as a war president!

Trump’s economic legacy, history will also eventually show, is to have pushed for a premature reopening of the US economy in the midst of the pandemic and a resurging of virus infections.

Indicators of a second wave in the US are now rising in no fewer than 18 states, most of which are located in the South and Southwest.

Key indicators of a virus re-surge in the US—like hospitalization rates, death rates, and the test positivity rate—are all on the increase throughout those 18 US states. In some states, like Arizona, the availability of ICU beds is fast approaching maximum capacity. Texas is now experiencing more than 2,247 new hospitalizations per day, after having stated to reopen its economy weeks ago, on May 1. That’s seven straight day of rising hospitalizations per day for the state. Florida experienced a new one day record of more than 1900 cases just this past Friday. Alabama, Arkansas and South Carolina are all witnessing surging hospitalizations as well, approaching max capacity in ICU beds.

But it’s not just the deep South. West coast states—Nevada, Oregon, Alaska, and others—are recording a new rise in cases, reversing a prior downward trend. That fact suggests what’s going on now is more than just a first wave. What we may now have is a simultaneous extension of the first wave into the red states, as well as an emergence of a second wave congruent with that extension.

Meanwhile, scientists have recently confirmed that the Coronavirus has indeed now mutated, and is potentially five times more contagious.

Congruent Developments Fanning the 2nd Wave

It is in this general environment that the US is now rushing toward reopening its economy, especially in the South, Southwest and Mid-west, where a more or less full reopening is entering its fifth week in some cases. Added to the premature reopening are public demonstrations against policy brutality that have grown and continue, overlaid on the economic reopening. Perhaps the biggest factor contributing to the emergence of a second wave, however, has been the lack of public self-discipline in many states, especially the ‘red’ ones where Trump’s political base is concentrated. A rising disregard of social distancing has been the growing norm in many states. It’s not just that many people don’t believe they can catch the virus; it’s also that they just don’t care if they spread if they do come down sick.

Add to all this the example of President Trump himself, who has announced he now plans to begin holding mass election rallies once again—thus sending the message to the public it’s ok to engage in mass gatherings. And if they are to follow Trump’s example, they’ll do so without wearing face masks. As the moronic right wing blogosphere has been saying—and Trump has again picked up—the rising rates of infection are because we’re testing too much. Social distancing may have ‘flattened the curve’ in places like New York City and big urban centers of the northeast. But the general economic reopening now underway, the widespread protests and demonstrations against police brutality, Trump’s personal behavior example to his political base and, probably and most important, the general lack of social discipline by the populace in many regions like the country, have ensured the effects of Covid -19 in the US are now on the rise once again.

And it does not appear any of these sources driving a 2nd wave are about to abate any time soon.

Trump administration key spokespersons, like economic advisor Larry Kudlow and Treasury Secretary, Steve Mnuchin, have both declared publicly this past week the US economy will not shut down and shelter in place again a second time. Trump thus has decided to trade tens of thousands of more US lives for the right of business to return to producing revenues and profits.

Nor does it appear Black Lives Matters protestors, mobilizing against decades of intensifying police brutality, will relent in their public demonstrations.

Nor that a majority of residents of the ‘red’ states will finally acknowledge the need for social discipline and social distancing soon by all indicators when the trend is actually opposite.

Nor does it appear Trump is about to reconsider holding mass election rallies, an action that sends a clear message to the rest of the country that it’s ok to gather in large groups, to abandon social distancing, and mask wearing.

A 2nd Wave Means W-Shape Economic Stagnation…Or Worse

In short, it is increasingly likely that things are about to get worse in terms of US public health. And as that happens, so too will the US economy experience a further negative impact from the virus. A 2nd wave now emerging means not just a further decline in public health, but an eventual 2nd wave of problems for the US economy as well.

What a second wave all but ensures is that the US economic recovery will not be ‘V-Shape’ but will be ‘W-Shape’; that is, a W shape recovery characterized by periods of short and shallow GDP growth, followed by brief periodic economic relapses thereafter. These short, shallow recoveries and relapses may repeat and continue for years to come.

Following such a duration of economic stagnation, a major threat grows that could usher in an economic depression perhaps even worse than the 1930s: should the economic stress building from weak, short and shallow recoveries—i.e. an extended deep economic stagnation for years to come—result in an inevitable flood of business, local government, and household debt defaults and bankruptcies, it will eventually overwhelm the financial system. At that point the short-shallow recoveries and relapses will give way to a more generalized banking crisis that will make 2008-09 great recession appear as a minor dress rehearsal. A next great depression rivaling, and perhaps exceeding, the experience of the 1930s may well be the consequence in 2021 or beyond.

Great Depressions are always the result of mutually amplifying crises in the real and financial sectors of the economy. The current deep contraction of the US economy has yet to experience a subsequent banking-financial system crash. However, the longer the current seriously wounded US economy continues to stagnate, slipping in and out of recessions for years, the more likely it becomes that a wave of business and consumer defaults (i.e. failure to pay interest and principal) on record levels of business-household-local government debt will wash over the economy.

When that happens, banks will have to assume the bad debt of failed companies, households, and local governments on their own bank balance sheets. That freezes up lending to business and households in general. Further mass layoffs then follow. Following the bank lending freeze, the real economy contracts still further as the banking system crashes. A financial crisis converges with the real, deep economic contraction and stagnation already underway. As the two systems—financial and real economy—mutually interact and amplify each other, the outcome is a descent into a bona fide economic depression.

2008-09 Great Recession & 2020 Briefly Compared

In 2008-09 it was the financial side that crashed first, subsequently dragging down the real economy 5%-10% for several quarters and producing unemployment rates of 15%-20%. Thereafter it took six years just to recover the jobs lost in 2008-09 and return to 2007 employment levels. Wages for most working families stagnated or fell for the next decade. Working class family debt ballooned in lieu of real wage gains across all categories: credit cards, autos, mortgage, student debt, installment debt, etc., to almost $15 trillion today. In the first three months of the virus that household debt has risen 16% further, according to the New York Federal Reserve. Federal Reserve policies of 2008-09 quickly bailed out investors and the banks, but did little for jobs, wage and income levels for workers, and working class living standards in general.

At the same time corporate profits nearly tripled from 2009 to 2019. Corporate America in turn awarded its shareholders nicely. Stock buybacks and dividend payouts under Obama averaged more than $800 billion a year from 2009 through 2016. To that under Trump was added a further $3.4 trillion in just three years. That’s a total of more than $10 trillion of income and wealth distributed to shareholders in a decade! In contrast to wage stagnation and decline for the bottom 80% of US households.

This time, in 2020, the causal relationships between the two sectors—real and financial—are reversed. This time it’s a crash of the real side of the economy, at least four times worse than that which occurred in 2008-09!

In 2008-09 it was the financial crash that precipitated, accelerated and deepened the real economic contraction. Today in 2020 the causal relation is reversed, and may prove worse. The real economy contraction and extended stagnation may precipitate a financial crisis which, in turn, could feedback further on the real economy and cause an even deeper and longer contraction. Mutual feedback historically always leads to a great depression. It doesn’t matter which precipitates which. The mutual negative interaction is the key determinant that drives the depression.

In just the 1st wave of Covid-19, from late February through May 2020, working class households lost more than $1 trillion net in wage income—even after $500 billion in expanded unemployment benefits and government $1,200 checks are factored. In contrast, corporations were provided since March with $1.7 trillion in loans and grants plus another $650 billion in further business tax cuts under the March 2020 ‘CARES Act’. And the Federal Reserve US central bank has provided another $3.3 trillion in loans to banks, to corporations, and to investors as well. That’s a 10 to 1 ratio: more than $5.5 trillion to business and only $500 billion to the rest. Most of the subsidy to business is being hoarded, moreover; whereas, most of the $500 billion has been already spent. Neither provide any further real stimulus to the economy in the second half of 2020.

In the 2nd wave on the horizon, moreover, more of the same is yet to come, as it appears likely Congress in its forthcoming ‘HEROES Act’ will discontinue the March 2020 unemployment benefits extension that expires the end of July; will refuse to provide further income supplement checks; and will instead use the ‘savings’ from such programs to provide direct wage subsidies to business. By some estimates, the Government (and thus the taxpayer) plans to subsidize business further by providing a wage subsidy of up to 85% of wages that were previously paid by businesses to their employees. In short, instead of unemployment benefits to workers, it will be wage payment subsidies to businesses.

In short, a 2nd covid-19 wave will coincide with an already seriously depressed US economy with little further real economic stimulus in the pipeline. That contrasts with the great recession of 2008-09, which hit a real economy that was still growing strongly when recession hit late 2007.

The Great Capitalist Experiment: Pre-Bail Out the System

So far the central bank of the USA, the Fed, has staved off a banking crash by pumping $3.3 trillion into bankers and investors, in effect pre-emptively bailing them out before a crash actually occurs! Congress has provided another $1.7T so far to pre-bail out the non-banking side of the business economy with loans and free grants, plus another $650 billion business-investor tax cuts. The Fed has promised even more ‘free money’ to banks & businesses. And Congress has signaled it is prepared to provide still more to business—if not to workers, consumers, and state and local governments. (For example, the forthcoming ‘Heroes Act’ proposes to end $1200 income checks and $600 supplement unemployment benefit checks to workers and, instead, take the money and give it to business in the form of government paid wage subsidies!).

An historic policy experiment is thus now underway in the US economy. By pre-emptively bailing out the banking system with trillions of dollars of liquidity (money at low or no interest rates) the Fed is attempting to ‘fatten up’ the banks with record excess money reserves on hand to enable them to absorb the defaults, bankruptcies, and deflation that are coming—even before it occurs. The Fed is also, in another historic first, attempting to pre-bail out broad sectors of non-bank businesses in the US with $1.7T in loans and grants. Something its own legislative mandate actually prohibits. That non-business bailout is designed to reduce the flood of defaults and bankruptcies even before they ‘hit’ the banking system. So the Fed (with assistance of the US Treasury and Congress) is bailing out the capitalist system today even before it crashes. Whether it will succeed in doing so remains to be seen.

One thing is certain, however. The Capitalist state in the 21st century in the USA today is engaged in a massive subsidization of Capitalism itself on a grand scale never experienced or even envisioned before. It is flooding the system with free money and liquidity (loans, grants, tax cuts, QE, corporate bond purchases, etc.) in an attempt to prevent another ‘great recession’ of 2008-09 that would prove to be an even ‘greater recession of 2020-21’—or perhaps morph into the first Great Depression of the 21st century.

A second virus wave will certainly test the experiment of a massive pre-bailout of the system now underway. How broad and deep the second wave goes is yet to be determined. Similarly the specific economic ‘transmission mechanisms’ and ways in which the health crisis impacts and exacerbates the current economic crisis further.

But even if there is no second wave of significant dimension in coming months, the independent dynamics of the current crisis will eventually precipitate a banking-financial crash nonetheless. It will just take longer. For the US (and global) capitalist economy is seriously wounded, fundamentally. It was already slowing and in decline in the US and globally, in certain sectors of the economy. A second virus wave will accelerate the process of weakening and decline, as it did the first wave. At some point that will inevitably translate into a financial system crisis once again as well. At that point, a new phase, more serious, of the crisis emerges: i.e. the financial crisis occurs, more likely than not drives the seriously wounded ‘real economy’ into a deeper contraction. No longer mere stagnation and W-Shape. Now a clear descent into bona fide economic depression similar to the 1930s, or perhaps even worse.
Until the financial banking crash takes place, the US economy stagnates more or less in a W Shape trajectory. Short shallow recoveries are followed by short relapses and returns to recessions. This will occur regardless of whether a significant 2nd wave of the virus impacts the economy.

The Covid-19 effect, whether first or second wave, is not the sole factor driving the economy and the current economic crisis. Forces have now set in motion a continuing economic crisis, virus or no virus. It’s just a matter of time and place before the economic crisis enters a new and even more unstable phase.
It’s not a Covid-19 economy. It’s a capitalist economy, the instability of which has been rendered even more unstable by the current Covid-19 health crisis. And that instability is not going away should the virus disappear which, of course, is not about to happen either.

Dr. Jack Rasmus
June 15, 2020

Dr. Rasmus is author of the recently published book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, Clarity Press, January 2020. He blogs at jackrasmus.com and hosts the weekly radio show, Alternative Visions. His twitter handle is @drjackrasmus.