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The Coronavirus has been wrecking the US and global economies. While focus has been on addressing the biological devastation wrought by the virus, the economic devastation keeps growing.

Failure to properly address the deepening economic impact of the coronavirus has been no less shocking to date than the obvious failure of politicians and policymakers to get a handle on the medical-human impact of the virus.

Trump had called the virus a ‘hoax’, said it would be over by April, declared publicly there were millions of test kits being used when there weren’t, and blamed first the Chinese then the Europeans for the obvious spread of the virus, and rising death toll, in the US.

His answer thus far to the spreading and deepening economic impact of the disease has been to demand US Federal Reserve bank chair, Jay Powell, to drop interest rates further plus advocate a payroll tax cut across the board—the latter a measure that economists almost unanimously say will have no stimulus effect on the economy. Even his own advisers, Steve Mnuchin & Larry Kudlow, reportedly have advised against the payroll tax cut.

The payroll tax cut was first enacted under Obama to try to stimulate consumption in the wake of the last 2008 economic crash. It is generally acknowledged not to have had much, if any, effect on economic recovery.

How the Virus is Crushing the Economy

There are at least four major ‘channels of contagion’ by which the virus is driving the contraction of the US, and global economy:

1. Global Supply Chain Disruption

This was the easiest to see. Intermediate and final goods exported from China to the US were halted in many industries. US production began to cut back on final goods delivery in the US economy, already affected by Trump’s trade war with China during 2018-19. Not only goods from China to US directly. But supply chains in which Japan and So. Korea goods, made in China and delivered to those countries, would otherwise be shipped to the US. Or goods shipped to Mexico and then exported as final goods to the US. Or from Asia to Europe, and then to the US. The net effect was a significant drop in US production and therefore sales and the output of the US economy in general. But that channel of contagion is now being dwarfed by another.

2. Collapsing US Consumer Demand

We can see this now spreading and deepening rapidly throughout the US economy. First demand for travel related spending: airlines, cruise & shipping, hotels & leisure, entertainment, etc. were initially impacted. But that’s been spreading to other industries as rapidly as the virus itself. Personal services of all kind are coming to a halt, except for healthcare. Restaurants and bars are shutting down. Education is being driven to an online underground. Malls and stores are virtually deserted. Social entertainment, including sports, is suspended everywhere. Even grocery stores are experiencing empty shelves, and consumption in basic necessities will soon fall off. Then there’s online purchasing, now developing huge backlog and delivery problems.

The consumption sector is coming to a halt in industry after industry, and it’s not over yet. Social distancing required by the virus to slow its spread is, conversely accelerating the spread of the economic impact. Consumption was the only sector of the US economy in late 2019 holding it up. And it was slowing in that regard as well by year end. Now it is collapsing. Nearly 70% of the US GDP and economy, it is now joining the contraction in business investment and trade that was occurring throughout 2019.

The recession is here, as of March 2020, folks. The only real question now is how deep will it go and how long will it last! And that question depends, in turn, on how quickly and seriously will US politicians respond. And the actions thus far do not portend well for a prompt ‘v-shape’ recovery.

But there is yet a third & fourth channels of economic contagion emerging that may dwarf the effect of the supply chain disruption and household consumer demand collapse. It is the condition of the financial system itself.

3.& 4. Financial Markets Deflation & Default

Globally and in the US financial markets are churning and fracturing, with a net effect already of having deflated by more than 20% and in some cases 30% or more. Not just stock markets. But oil and commodity futures markets. Foreign exchange currency markets. Corporate bond markets, which are far more important to capitalist economies than stock markets, are showing signs of great stress, to put it mildly. Especially unstable are markets for what’s called junk bonds (especially in oil fracking, retail, and travel & leisure). And what’s called ‘junk loans’—i.e. leveraged loans. In the US the total at risk is a combined more than $7 trillion. Add to that the fact that banks globally are sitting on $10 trillion in non-performing loans. Should prices collapse further, widespread defaults on paying principal & interest on debt will take place. That will result in mass layoffs once again, as in 2008-09; a further collapse of business investment; and a yet further acceleration of contraction of the real economy.

It’s not coincidental that the US central bank, the Federal Reserve, last week pumped an extra $1.5 trillion into the banks via what’s called the Repo market, plus more through traditional bond channels, and is planning in a couple days this coming week to drop interest rates to near zero and re-institute special funding once again, as in 2008, to bail out mutual funds and other ‘shadow’ (i.e. unregulated) banks. Why? Because liquidity is rapidly drying up throughout the economy as businesses drawn down their bank credit lines to zero as well, in order to hoard cash to weather out the storm of consumption and production collapse on the horizon.

The financial markets collapse, the 3rd channel, may prove to have the greatest devastation on the now already recession hitting the US economy. What began as supply chain and household demand problems will be greatly exacerbated by the financial instability.

Is Trump and the politicians preparing for this economic contingency? No, not at all. Here’s what Trump and even the Democrat leadership (Pelosi-Shumer) are proposing:

Trump’s Failed Economic Stimulus ‘Program’

In the middle of last week Trump addressed the nation on TV and proposed the weakest possible response. It was so weak even investors reacted with a 2,200 point fall in the stock market. There were basically three things Trump proposed:

First, a $50 billion increase in the small business administration loan fund. A hint of some kind of tax deferral extending the normal IRS April 15 deadline. And, third, a payroll tax cut costing the social security trust fund a hit of at least $800 billion.

He then revisited that paltry proposal on Friday, March 14. He proposed an apparent additional $50 billion for the states to spend on emergency measures to address the spreading virus. He clarified the tax deferral would be only for ‘some’, not all. He added a suspension of interest on student debt. But failed to explain if that meant a full waiver of debt for all students, or just a temporary halt to paying interest, which would nonetheless continue to accumulate and for which students would still have to pay later after the suspension was lifted.

Trump also added the proposal the US would buy more oil from US producers to fill the US strategic reserve. That was to help oil companies experiencing revenue loss from oil prices falling to the low $30s per barrel. Trump’s statements to the press indicated he still wanted the payroll tax cut, even as the Democrats were saying ‘no way’, it won’t have any effect except to further destroy social security funding.

Pelosi & Democrats’ Blocked Stimulus Program

As Trump was prevaricating and dribbling out minimalist economic responses to the cratering US economy, Pelosi and the Democrats were trying to address the real scope of the problem, even if not as broadly required as well.

Intense discussions were being held behind the scenes between Pelosi and Trump’s Treasury Secretary, Steve Mnuchin. All that came out of that negotiation by Friday, March 14, however, was an agreement to provide free testing of the virus. But how ‘free’ was defined was not all that clear. Did that mean those sick would have to pay out of pocket and then get reimbursed by the government. If so, millions will hold off getting tested. More than half US households have less than $400 for emergencies, according to the Federal Reserve’s own data research. They can’t afford to get tested.

Pelosi and the Democrats had also been proposing paid medical leave of 14 days, tax credits to small business to help pay for the leave, an increase in unemployment benefit payments in anticipation for all those, maybe not sick, who would soon be laid off or asked by their employers to stay home (on unpaid medical leave). Pelosi &company, to their credit, also refused to cut payroll taxes. They know of Trump’s leaked plans to cut social security and medicare after the November elections.

While there are some good provisions in Pelosi’s proposals, the Democrat economic stimulus doesn’t go far enough as well to address the scope and magnitude of the negative economic impact that’s coming to the US economy: as it shuts down in broad industries and should the financial system crack as it did in 2008.

Furthermore, it appears that both Trump and McConnell in the Senate are intent on doing their worst to refuse to agree on most of the proposals in the Pelosi plan; demanding in particular acceptance of a payroll tax cut in exchange for other proposals. So don’t expect anything big or effective in any agreement coming this week. Trump is determined not to have an effective fiscal stimulus, now that his budget deficit last year exceeded $1 trillion—and that his current budget deficit after only five months is running at a rate of $1.4 trillion for this year.

An economic stimulus must focus on government spending and income restoration. It cannot focus on tax cutting. Nor on interest rate reduction. Neither of those kinds of policies will stimulate investment or consumption. Why? Because there’s a massive shift to hoarding cash underway by business and consumers will not get relief quick enough, or at all if they’re unemployed.

Businesses is selling its financial assets across the board to gather in as much cash as possible, needed to continue to pay interest and principal on its $10 trillion debt run up since 2008, as its prices, sales and revenue drop precipitously in the meantime. There’s a ‘dash for cash’ underway. And no amount of tax cutting will lead to re-investing in production. The tax cuts will simply be hoarded and not spent. Ditto for households and consumers. Any payroll tax cut will be hoarded, not spent, to ensure households have enough to continue paying mortgages and car loans and student loans—assuming they still have jobs. If no jobs, it will be spent on trying to maintain current consumption, not increase it.

The same applies to interest rate reductions by the Fed. Why will businesses borrow even at a lower rate to expand production, when consumers are buying less of their goods or if they can’t get parts from abroad with which to build the goods? And why would households borrow to take the risk to purchase a new auto or even a new home given the current direction of the economy? Cutting the costs of business investment is now the least important variable determining the outcome of investment. Expectations of a collapsing economy and thus falling profitability is what’s driving investment now—and the anxiety of being able to continue to pay for debt accumulated in recent years in order to avoid default.

Yet that’s what exactly Trump will propose: more tax cuts, for business especially, and lower interest rates. It will prove throwing money down a rathole.

My Proposal for Economic Stimulus & Recovery

Make no mistake. The US is now in recession. And it will deepen considerably before it is over. Moreover, the great risk is now a spreading crisis of credit, a fracturing of the financial system as in 2008-09, and the potential emergence of another ‘Great Recession’, this time even worse than 2008-09. All the efforts by the Federal Reserve and other central banks to pump trillions of dollars more into the US and their economies may prove futile this time around.

What’s needed is an immediate restoration of consumer household spending power and a protective floor under incomes that may soon also collapse should mass layoffs emerge once again in another couple months. Here’s some measures, a necessary short list, expanding on some of my earlier proposals, to provide that immediate income effect:

I. Paid Medical Leave

A 14 day paid medical leave until vaccines for the virus are generally available, eligible for:
· Those tested with virus
· Those with symptoms
· All those Parents of K-8 students forced to remain home due to school closures
The 14 day paid leave should be renewable by state legislatures’ decision since the economic impact, nor the recovery from the virus, will not occur evenly across all states

II. Company Reimbursement for Paid Medical Leave

· Paid Medical Leave costs should be reimbursed by the federal government to companies with fewer than 500 workers. Reimbursement by tax credits for companies with more than 50 employees; and by means of direct subsidy payments for companies with fewer than 50.

· 50% reimbursement to companies with more than 500 workers by means of tax credits provided the company shows a full restoration of jobs for those laid off within a year of the development of a vaccine for the virus.

· Paid leave shall not result in a reduction of paid sick leave provisions already provided by a company or by union contracts, which shall otherwise remain accrued to workers

III. Employment Guarantees

· Employers are required to restore workers on paid medical leave, who return, and to their former position, pay and benefits.

· All other benefits shall continue to accrue for workers while on paid medical leave

IV. Hospital Testing & Related Costs

· Costs for hospital-clinic-doctor office entry and testing will be billed by the health provider directly to the government, not paid by the worker and then reimbursed

· Provider costs associated with the visit for testing (i.e. labs, emergency or other room charges, out patient, in patient, etc.) will similarly be billed by provider to the government

· Return or follow up visits if needed will be billed directly as well

· Pharmacy and drug costs are waived for patients determined to be infected by the virus, and all their immediate dependents under age 21, or on Medicare, Medicaid, or otherwise uninsured.

V. Health Insurance Companies Responsibility

If a worker is insured and on medical leave, or if otherwise laid off due to the economic effects of the virus on their company of primary employment, the health insurance provider shall waive the worker’s share of monthly health insurance premium. This shall apply as well as for their immediate dependents covered by the company’s insurance benefits program

· If a worker is insured, or if otherwise unemployed due to the economic effects of the virus on their company of primary employment, the health benefits insurance provider will waive all deductibles and co-pays for services for those determined infected or on leave due to school shutdowns. This shall apply as well as for their immediate dependents covered by the company’s insurance benefits program

· Premiums, deductibles, copays and coverage shall remain frozen until the State legislature declares the virus effect is declared over

· State legislatures shall review all insurance company requests to raise rates after the virus effect is over for the next 3 years. Attempts to recoup costs during the virus period by accelerating price increases or reducing coverage will be denied if greater than the rise in the local consumer price index for the urban region.

VI. Medicare & Medicaid

For those employed while receiving Medicare coverage, the monthly Medicare deductible payment shall be waived until the vaccine for the virus is made available

For those employed while receiving Medicaid, all doctor or hospital costs to the employee or unemployed shall be paid for by the State’s Medicaid authority. All doctors and hospitals shall be required by law to accept Medicaid patients until the vaccine for the virus is made available.

Refusal by doctors, hospitals or clinics to accept Medicare or Medicaid patients will result in fines levied on the health provider’s annual federal tax payment
VII. Unemployment Benefits

· The federal government shall immediately extend unemployment benefits for all layoffs for an additional six months (one year total), effective as of March 1. 2020

· Companies shall be required to continue to pay unemployment benefits taxes to their states for laid off workers for up to a year, commencing March 1, 2020.

· There shall be no suspension of the Social Security 6.2% payroll tax or Medicare 1.45% tax by companies.

VIII. General Company Requirements

· For the duration of the virus crisis period, companies shall be required to continue to pay their workers’ health insurance monthly premiums if laid off, for a period of six months from date of initial lay off

· Banks shall be required to provide lending to business customers at interest rates no greater than the original loan, if extended; or for initial loan, no more than the average rate for the local urban area in which the company is located
· Banks and mortgage companies shall institute immediately a moratorium on mortgage payments for those on paid medical leave, or for those laid off for economic reasons associated with the virus effect on their company for a period of three months or until returning to work, whichever is sooner

· Auto companies’ financial services, credit unions auto financing, and other sources of financing of vehicles shall introduce a moratorium on monthly auto loan payments for those on medical leave, or for those laid off for economic reasons associated with the virus effect on their company for a period of three months or until returning to work, whichever is sooner

IX. Federal Student Loans & School Districts

· For college students who work, but are laid off due to economic effects associated with the virus at the company or institution for which they work, student loan principal and interest payments shall be suspended until returning to work. Suspension shall be defined as permanent waiver of all interest charges. Such interest payments shall not further accrue.

School districts that shut down shall continue to receive per pupil reimbursement from their states on the same schedule as when students were attending sessions
X. Food Provisioning & Delivery System

K-8 students who were receiving meals while in attendance at their school, but are not so doing due to school shutdown, shall continue to have meals delivered to their primary residence daily. State programs providing ‘meals on wheels’ for elderly residents or similar programs shall be expanded to cover K-8 students
All former cuts to the SNAP (food stamp) program since January 2017 shall be restored for all those eligible on paid medical leave, leave from work due to school shutdowns, receiving unemployment benefit payments, or on Medicare or Medicaid

Federal & State governments shall undertake whatever measures necessary to ensure the physical delivery of food to local grocery outlets, and to remove bottlenecks to online ordering and delivery of food and necessary household items to residents or local distribution centers, including if necessary mobilization of state national guard units and requisitioning temporarily of private delivery company facilities and equipment

by Dr. Jack Rasmus
copyright March 15, 2020

Jack 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 his twitter handle is @drjackrasmus. His website is http://kyklosproductions.com.

Today my Alternative Visions radio show focuses on the growing ‘dash for cash’ (aka liquidity crisis) underway by businesses and investors, as they anticipate falling revenues, profits, and cash needed to service (i.e. pay principal & interest charges) their $10T run up in corporate debt (bonds, loans, etc.) over the past decade. How the liquidity crisis represents a potential credit crunch and crisis that could exacerbate the synchronous global declines now underway in both financial markets and real economies worldwide.

TO LISTEN GO TO:http://alternativevisions.podbean.com

    SHOW ANNOUNCEMENT

Rasmus explains how the $5T in junk bond & BBB corporate debt is especially at risk. Initial likely crisis in oil-energy junk bonds as global oil prices plummet into the $20-$30 range. How falling financial asset markets and prices are becoming synchronized globally, how the real (non-financial) global economy is falling into recession everywhere, and how the two sectors—financial markets and real economy—exacerbate each other’s downward trend. Credit crunch and crisis are the mechanism and nexus for transmitting the mutual downturns of financial & real sectors. Rasmus explains what’s going on in the credit markets and why the Fed is pumping $1.5T in just three days into just the Repo market in the US. A general liquidity crisis has emerged now. Dr. Rasmus then reviews the measures proposed by Trump and the Democrats in the House. The show concludes with Dr. Rasmus reviewing his own just published fiscal stimulus measures (also available today on his blog, jackrasmus.com, and on the Counterpunch.org blog, and soon elsewhere).

For a similar discussion, listen to Dr. Rasmus’s interview with Vermont ‘Equal Time Radio’ host, L. Traven, this past Wednesday at http://equaltimeradio.com/2020/financial-crash-underway-prelude-to-deep-recession.

Listen to my 30 minute radio interview with Equal Time Radio (Vermont) host, L. Traven, on Monday, March 9, on the nature of the current financial crash and its understanding in relation to past financial-economic crises. How financial cycles interact and mutually impact real cycles and recessions. How my past books–from Epic Recession (2010) to Systemic Fragility in the Global Economy (2016) to Central Bankers at the End of Their Ropes (2017) to The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’ (2020)–are related in their combined analysis of 21st century US and global capitalism. TO Listen to the 30 minute show, GO TO: https://equaltimeradio.com/2020/financial-crash-underway-prelude-to-deep-recession

Listen to my extended radio show interview last week on the proposals of Sanders and others on Medicare for All and how it could be paid for, as well discussion on the South Carolina and other primaries, with host Phil Farruggio.

GO TO: https://www.spreaker.com/episode/23804131

Tonight, March 11, Trump gave a TV address to the Nation that was to be his program for mobilizing the country to address the growing spread of the Covid-19 virus and its increasing negative impact on the US economy. The proposals landed with a thud. Even the financial markets gasped and went into a tailspin. The Dow Jones stock futures market immediately went into a tailspin, falling 1250 points again even before the markets reopen tomorrow morning, Thursday March 12.

Not only the financial markets, but the rest of the real economy is declining rapidly. The US stock markets now have officially entered ‘bear’ territory, having lost more than 20% in value. That has nearly wiped out all of Trump’s much vaunted stock market gains since he came into office.

Subsidizing Stock Markets with Tax Cuts & Interest Rates

The markets under Trump have been artificially boosted since he assumed office. First by expectations of his 2016 campaign promise he would deliver a $5 trillion business-investor tax cuts immediately once elected. Secondly, his delivering on that promise in January 2018 with his $4.5 trillion tax cut for multinational corporations, businesses, and investors. (To this was added a further $427 billion in business-investor tax loopholes in 2019). And third, as a result of Trump forcing the Fed to reverse course and lower interest rates in 2019 as well.

Working and middle class households end up paying $1.5T in more taxes under as a consequence of Trump’s 2018 tax cuts. That boosted already record profits to still higher profits. For example, 23% of the 27% rise in the Fortune 500 companies’ profits in 2018 were attributed to the Trump windfall tax cuts alone. Flush with record profits, the same Fortune 500 redistributed their profits bonanza to their shareholders. They gave back to shareholders $1.2T in stock buybacks and dividend payouts in 2018, plus another $1.2T in 2019. Most of the $2.4T went right back into the stock markets, driving their price levels still higher.

But that wasn’t all. Added to Trump’s subsidization of Corporate America by means of tax cuts was the subsidization of Banking America. Trump browbeat, threatened and successfully forced the US central bank, the Federal Reserve, to provide cheaper money once again to America’s bankers by lowering interest rates three times in 2019. The cheaper money led to loaning out more to investors, more cheap money to speculate in stock and other financial markets. Cheap money also served to drive up stock prices even more in 2019.

In other words, under Trump tax policy and Trump monetary policy have been in the service of the stock markets ever since he came into office. The tax and interest rate policies artificially pumped up corporate profits, that in turn boosted corporate stock buybacks and dividend payouts to record levels that then enabled the diverting of much of those buybacks-dividends cash into the stock markets. In the end it created an artificial stock market boom.

But it all came crashing down in 2020. After risen for three years, the markets crashed 20% in just three weeks. And another 20% is likely yet to come.

Accompanying the stock market crash has been the collapse of other financial asset prices in the US and worldwide. Stock markets globally have followed the US down. Oil and commodity futures prices have tanked. Oil has fallen into the low $30s per barrel, flirting with the $20s. Ditto other commodity prices. So have foreign currencies. Ditto the US Muni bond market. And corporate junk bonds in the energy sector are well on their way to mass defaults, followed by retail and other high yield bonds.

Meanwhile, the real non-financial economy in the US and globally fare no better. Already slowing before the virus’s impact on global supply chains and domestic demand, only the US household consumer was holding up the US economy at year end 2019. That has now changed dramatically in 2020, however. All the indicators of the real economy are now in freefall too—not just the financial markets.

The US recession, in other words, has arrived as of March 2020. The same recession is spreading now globally: in Europe, So. Korea, Japan, Latin America, Australia, and by many independent forecasts, China perhaps soon as well. Goldman Sachs research is projecting a second quarter 2020 US growth rate of zero. Others are forecasting a China growth between 2% and -2%, depending on the source. In other words, half of the global economy—the US and China—are about to stagnate at best and more likely contract now—as the rest, even weaker, economies in Europe, Japan, Latin America and elsewhere slide even deeper into recession.

So there’s a globally synchronized real economic contraction underway (aka recession), as well as a spreading global contagion of deflating financial asset markets. The last time financial markets and the real economy were similarly synchronized was 2008. But this time the financial price collapse is the fastest on record.

Trump’s DOA TV Address to the Nation

It was in this economic context that Trump came before the cameras tonight, March 11, to tell the nation what he was going to do. But his answers were not well received—by business, the media, and I’m sure the vast majority of Americans looking for leadership and a convincing program. Nor was his delivery convincing. He appeared wooden, subdued, unconvinced of his own words, and, of course, he contradicted himself repeatedly in typical Trump fashion.

Just one week ago he declared publicly that the virus was not a problem in the US. He said only 15 cases had been recorded and that number was going to zero soon. It would all disappear by April when warmer weather returned. Last week he said 43 million test kits for the virus were being distributed. And that everyone should make sure they go to work and carry on life as normal.

But tonight he did not challenge the fact of more than 1200 cases in just one week, and 38 deaths, with both numbers rising rapidly. Instead of ‘going to work’, he reversed himself and said “if sick, stay home”. And normal life, he said, now means not traveling, no mass events or gatherings, closing schools.

Nor did he mention why California governor, Gavin Newsom, complained today that many of the test kits sent to California have been defective and that the most recent kits received by California were sent without the biological ‘reagents’ necessary to make the kits work. As a result, 2500 travelers disembarking today from the Grand Princess cruise ship now docked in Oakland, California were not tested as they left the ship unless they showed direct symptoms of the virus. In other words, thousands were being sent on their way even if they were asymptomatic carriers of the virus because there just wasn’t enough working test kits. Nor did Trump mention New York governor, Cuomo, who has had to shut down entire communities in New York because of insufficient test kits. Following Trump’s speech, Cuomo today on CNN TV added “we don’t have testing capacity…We are way behind on testing”.

And of course Trump would never say that in four weeks the US has tested fewer than 10,000 nationwide, in contrast to China’s testing 200,000 in a single day or South Korea 15,000 in a day. Nonetheless, according to Trump, the US had carried out an “unprecedented response”, and was “responding with great speed”. Trump’s speech was typical ‘reverse hyperbole’. To refute the facts and critics, just say the opposite and exaggerate to the max. It used to be called the ‘big lie’ when Nazi ideologue, Joseph Goebbels, used to employ it.

In the days immediately preceding his speech, Trump and administration officials began calling the coronavirus the ‘China virus’ or the ‘Wuhan virus’, in a clear Xenophobic attempt to divert blame. But even that was contradicted in his speech tonight. Now it was Europe that was the cause of the spread of contagion in the US. As he put it directly, it was Europe that had “seeded the virus” to the US as its citizens traveled from Europe to the US. So the Europeans were now to blame as well as the Chinese.

In the same breath identifying Europe as the cause, Trump announced he was “suspending all Europe travel to the US for 30 days”. However, he failed to clarify if that included cargo and freight from Europe to the US as well as passengers. If cargo were included, that of course would accelerate recession in the real economy, for Europe as well as the US as global trade between the two came to a halt. In an even more astounding clarification to all that, however, he added that the UK would be exempt from the freeze on all Europe to US travel.

That remark was almost comical. What then would stop European passengers from taking the ‘Chunnel’ (the train tunnel under the English channel) from France to London and then flying to the US after a London connection? Was he trying to help his buddy, Boris Johnson, and his fast weakening UK economy by diverting all Europe travel to the US through London? Was he making a concession to Boris on upcoming US-UK trade negotiations? To point was as silly as it was transparent.

After meeting with US bankers earlier in the day, Trump had made a point to mention that collapsing US stock prices was “not a financial crisis”. Oh yeah? Tell that to Fed chairman Powell who today rushed another $175 billion into the markets overnight. Or to the giant shadow banks, Blackstone and Carlyl Group, who today began telling their clients to quickly draw down their credit lines at their banks because it was likely the banks would freeze their access soon. Or tell it to the various financial analysts who are now increasingly warning of escalating defaults on the way in the junk bond market for oil-gas fracking companies. Oil at $20 a barrel. No crisis really? (Let’s not forget the oil price crash in early 2008 that preceded the collapse of Lehman Brothers and other banks in the fall of 2008).

What working class America got out of Trump’s speech was that something for them was ‘on the way’ but Trump couldn’t say what that was, except there would be “relief soon”. That’s all. A ‘maybe’. Sometime. Perhaps. We’ll see. Just wait.

But US business would not have to wait. What Trump did propose in his speech was a series of measures directed mostly at US small businesses. He said he would add $50 billion to the government’s small business loan fund to provide money capital to small businesses in need. Secondly, he promised deferring of tax payments due April 15. And there was the payroll tax cuts, where all businesses across the board would enjoy an immediate 6.2% tax cut—whether they were negatively affected by the virus or not.

The idea of suspending the payroll tax was first introduced by President Obama in the wake of the 2008-09 crisis, when his other economic stimulus programs weren’t working too well. In retrospect, today most economists agree that Obama’s payroll tax suspension had little to no effect on stimulating the real economy—and would have even less today. What a payroll tax cut did accomplish under Obama was to further undermine the finances of the social security trust fund. But that would serve to support Trump’s announced plans this past January 2020—while talking to billionaires in Davos, Switzerland, at the World Economic Forum—to cut social security and medicare after the November 2020 US elections. Create a deficit in social security in order to order cuts in its benefits.

But where was the assistance to those who needed it most? What about the millions of American workers who would now have to stay home because they were infected. Either voluntary quarantined or ordered to do so by their employers. Or the millions unable to ‘work from home’ due to their occupation. Or those too sick to go to work. What about the more than half of the 165 million US work force who, according to the Federal Reserve research, have less than $400 in emergency savings for such situations? Or the 30 million who have no health insurance whatsoever. Or the 87 million who may have some insurance but have $500, $1000 or even $2000 deductibles, plus copays? Or the millions who have no paid sick leave whatsoever, since the USA is the cheapest provider of paid sick leave among all the advanced economies. Even most union contracts provide only 6 days paid leave on average. That’s 8 less than a 14 day quarantine period. And what about the tens of millions of working class households with Kindergarten through grade 6 children who can’t afford nannys or babysitters? What if their parents have to stay home, not work and not get a paycheck because their school districts shut down? And what about the many millions who will almost certainly have to go on unemployment in the travel industry, hotel workers, restaurant workers, airline and ship workers, those who work in entertainment, sporting, and other ‘social gathering’ industries? Where were Trump’s proposals for them? Trump and his administration advisors keep referring to ‘targeted’ stimulus, but his ‘target’ is businesses whether they need it or not, while working families are not at all a ‘target’ and will have to wait to get “relief soon”.

An Alternative Fiscal Stimulus Program

Trump’s proposals would throw money at many who don’t need it, in particular at general businesses that won’t. And Trump’s tepid proposals noted in his speech leaves out those who do need support most, especially working class households. Here’s what could and should been announced by Trump if he were really serious about ‘targeting’ those needing the most support and really ensuring the virus effect does not further negatively impact the real US economy.

What follows are measures that constitute my own ‘Alternative Fiscal Stimulus’ to address the increasingly severe impact of the virus on the US economy:

I. Paid Medical Leave

A 14 day paid medical leave until vaccines for the virus are generally available, eligible for:

• Those tested with virus
• Those with symptoms
• Parents of K-8 students forced to remain home due to school closures

The 14 day paid leave renewable by state legislatures’ decision

II. Company Reimbursement for Paid Medical Leave

• Paid Medical Leave costs shall be reimbursed by the federal government to companies with fewer than 500 workers
• 50% reimbursement to companies with more than 500 workers
• Paid leave and reimbursement not in lieu of paid sick leave provisions in union contracts or company benefit plans, which shall otherwise remain accrued to workers

III. Employment Guarantees

• Employers are required to restore workers on paid medical leave, who return, to former positions, pay and benefits.
• Benefits shall continue to accrue for workers while on paid medical leave

IV. Hospital Testing & Related Costs

• Costs for hospital-clinic-doctor office entry and testing will be billed by the health provider directly to the government, not paid by the worker and then reimbursed
• Provider costs associated with the visit for testing (i.e. labs, emergency or other room charges, out patient, in patient) will similarly be billed to the government
• Return or follow up visits if needed billed directly as well
• Pharmacy and drug costs waived for the worker

V. Health Insurance Companies Responsibility

• If worker is insured, insurance health benefits provider will waive all deductibles and co-pays for services
• If worker is insured, insurance health benefits provider, will pay for worker’s share of monthly health insurance premium (including dependents if previously covered)
• Premiums, deductibles, copays and coverage shall remain frozen until the State legislature declares the virus effect is declared over
• State legislatures shall review all insurance company requests to raise rates after the virus effect is over for the next 3 years. Attempts to recoup costs during the virus period, after the fact, should be rejected.

VI. Unemployment Benefits

• The federal government shall immediately extend unemployment benefits for all layoffs for an additional six months (one year total), effective as of March 1. 2020
• Companies shall be required to continue to pay unemployment benefits taxes to their states for laid off workers for a year, commencing March 1, 2020.
• There shall be no suspension of the Social Security 6.2% payroll tax or Medicare 1.45% tax by companies.

VII. General Company Requirements

• For the duration of the virus crisis period, companies shall be required to continue to pay their workers’ health insurance monthly premiums if laid off for six months from date of lay off
• Banks shall be required to provide lending to business customers at interest rates no higher than the original loan, if extended; or for initial loan, no more than the average rate for the region in which the company is located

• Banks and mortgage companies shall institute immediately a moratorium on mortgage payments for those on paid medical leave, or for those laid off for economic reasons associated with the virus effect on their company for a period of three months or until returned to work

• Auto companies’ financial services, credit unions auto financing, and other sources of financing of vehicles shall introduce a moratorium on monthly auto loan payments for those on medical leave, or for those laid off for economic reasons associated with the virus effect on their company for a period of three months or until returned to work
VIII. Federal Student Loans

• For college students who work, but are laid off due to economic effects associated with the virus at the company for which they work, student loan principal and interest payments shall be suspended until returning to work. During the suspension, all interest charges on loans shall not further accrue.

Dr. Jack Rasmus
March 11, 2020

Dr. Rasmus is author of the just published book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, Clarity Press, January 2020. He blogs at jackrasmus.com. His website is http://kyklosproductions.com. And tweets at @drjackrasmus. Dr. Rasmus hosts the weekly radio show, Alternative Visions, on the Progressive Radio Network every Friday at 2pm eastern.

For my further discussion on the economic effects of the virus on global and US financial markets and the real economy, listen to my March 9 radio interview.

GO TO:

https://www.spreaker.com/user/radiosputnik/global-recession-looking-imminent-as-cor

(Further interviews and articles to soon follow)

This morning, Monday, March 9, financial asset markets continue to implode: US stocks are further collapsing -6% (Dow down 1650, Nasdaq >500 mid-day). Ditto Asian and Europe stock markets -6%. They were already declining sharply last week due to coronavirus induced supply chain shocks (reducing production) and expanding demand shocks (consumer spending contraction in select industries like travel, hotels, entertainment)–all of which are being forecast by investors to whack corporate earnings in 2Q20 big time. But imposed on the equities market crash of the past 2 weeks now is the acceleration of the global oil price deflation that erupted yesterday as the Saudis deal with Russia last year to cut production and prop up prices fell apart. Collapsing oil & commodities futures prices are now feeding back up equities and other financial asset prices. Financial price deflation spreading, including to currency exchange rates. Money capital fleeing everywhere into ‘safe havens’ (gold, Treasuries, Yen). Historic decline of US Treasuries now below 1% (30 yr.) and .5% (10 yr).

Will the financial asset markets deflation soon spill over to the credit system (especially corporate bonds) and accelerate the decline of real economies worldwide in turn? Are traditional monetary & fiscal policy tools now less effective compared to 2008-09? If so, why? Is the global economy on the precipice of another ‘great recession’?

Financial Asset Markets Imploding

So we have oil futures market prices–i.e. another financial asset market–collapsing now and impacting the stock markets. In other words, a feedback contagion underway on stocks market prices in turn. Feedback is occurring as well on other industrial commodity futures prices that are following oil futures prices downward in tandem. But that’s not all the financial contagion and deflation underway.

The freefall in financial assets (stocks, oil, commodities) is also translating into currency exchange price deflation in turn, especially in emerging market economies in Latin America, Africa, Asia highly dependent on commodity sales with which to earn needed foreign exchange with which to finance their past debt (e.g. case of Argentina whose egotiations with IMF on how to restructure their debt will now break down, I predict).

Currency exchange rates are in sharp decline everywhere as a result. For emerging market economies that means money capital is more rapidly flowing out of their economy, toward safe havens globally like the US dollar, US Treasury bonds, gold, and the Japanese Yen currency.

In short, stocks, oil-commodity futures, and forex currency markets are all imploding and increasingly feeding back on each other in a general deflating downward spiral. This is a classic ‘cross-contagion effect’ that occurs in financial asset market crashes. And crashing financial markets eventually have the effect of contracting the real economy in turn, by freezing up what’s called the credit markets. Businesses can’t roll over their loans and refi their corporate bonds. Banks stop lending. The rest of the real economy then contracts sharply. It starts in the financial markets, spreads to credit markets (corporate junk bonds, BBB corporate bonds, then top grade bonds).

Coronavirus Effect as Precipitating Cause

But it even earlier begins in a slowing real US and global economy that precedes the markets crash. The global economy was already weakening seriously in 2019. The US economy at year end 2019 was also weak, held up only by household consumption. Business investment had already contracted nine months in a row in 2019 and inventories built up too much. And, of course, the Trump trade war took its toll throughout 2018-19.

Then came the Coronavirus which shut down supply chains in China, and then in So. Korea and Japan in turn. That then began impacting Europe, already weakened by the trade war (especially Germany) and Brexit concerns. The supply chain economic impact of the virus developed into a consumer demand economic impact as well, as travel spending was reduced (airlines, cruise ships, hotels, resorts, etc.) and now, in latest development, other areas of consumer spending too. Both supply chain (production cutbacks) and demand (consumption cutbacks) are interpreted by investors as leading soon to a big fall in corporate earnings–which translates in turn into stock price collapse we see now underway. Investors have decided the 11 year growth cycle is over. They’re cashing in and taking their money and running to the sidelines, moving it from stocks to cash or Treasuries or gold or other near liquid financial assets.

So the Coronavirus event is really a ‘precipitating cause’ of the current markets crash. The real economy weakness was already there. The virus just accelerated and exacerbated the process big time. (see my 2010 book, ‘Epic Recession’ for explanation how financial causation comes in different forms as precipitating causes, enabling causes, and fundamental causes. Book reviews are on my website). Again, worth repeating: global and US economies were weakening noticeably in late 2019. The virus further impacted supply chains (production) and demand (consumption), reduced corporate earnings in the near term and thereby simply pushed stock markets over the cliff.

Mutual Feedback Effects: Real & Financial Economies

But financial crashes have the effect of feeding back into the real economy as well, causing it to contract further in turn. What starts as a weakening of the real economy that translates into financial markets crashing, in turn feeds back into a further weakening of the real economy. Mainstream economists don’t understand this ‘mutual feedback effect’; don’t understand the various causal relationships between financial asset cycles and real investment cycles. (For my explanation of this relationship there’s my 2016 book, ‘Systemic Fragility in the Global Economy’ and specifically chapters on the need to distinguish between financial asset investing and real investing and how late capitalism’s financial structure has changed such that the inter-causal effects of financial-real investment have deepened and intensified.) Financial crashes accelerate and deepen the contraction of the real economy. Recessions turn into ‘Great Recessions’ as in 2008-09. They may even turn into bona fide ‘Depressions’ as in the 1930s should the banking system not get bailed out quickly.

Corporate Bonds & Credit Markets Next?

The feedback effect of the current financial asset price deflation–now underway in stocks, commodity futures, forex, (and derivatives)–on the real economy will soon emerge as the financial markets deflation affects the various credit markets. The key credit market is the corporate bond market. Bond markets are far more important to capitalism than equity-stock markets. The credit markets to watch now are the corporate junk bonds (sometimes called high yield corporates). Junk bonds are debt issued to companies that have been performing poorly for years. They are kept alive by banks helping them issue their bonds at high interest rates. Investors demand a high rate because the companies may not survive. In good times they do. But when markets and economies turn down, companies over loaded with junk financing typically default–i.e. can’t pay the interest or principal on their bonds. They go under. The investors that bought their risky bonds are then left holding their debt that becomes near worthless. The US junk bond market today is ‘worth’ more than $2 trillion. At least a third of that is oil & energy (fracking) companies. A large part of their bonds must be rolled over, refinanced, in 2021. But many of them will not be able to refinance. Why? Because global oil prices have just collapsed to $30 a barrel, perhaps falling further to $20 a barrel. At that price, the oil-energy junk bond laden companies will not be able to refinance. They will default. That will spread fear and contagion to other sectors of the $2 trillion junk bond sector–especially big box and other retail companies (e.g. JC Penneys, etc.) that also loaded up on junk financing in recent years. Investors will disgorge themselves of junk bonds in general.

The fear of a crash in junk bonds will almost certainly spread to other corporate bonds, first to what’s called BBB grade corporates. That’s another $3 trillion market. But most of BBBs are really also junk that’s been improperly reclassified as BBB, the lowest (unsafe) level of corporate Investment grade bonds (the safest). So at least $5 trillion in corporate credit is at risk for potential default. If even a part defaults, it will send shock waves throughout the corporate economy that will have very serious implications–for both the financial and real economies, US and global, which are increasingly fragile.

Is Another ‘Great Recession’ on the Horizon?

For example, Japan is already in recession as of late last year. Now it’s contracting, reportedly, by 7% more. Europe was stagnant at best, with Italy and Germany slipping into recession before the virus hit. So. Korea and Australia are in recession now, as other economies in Asia and Latin America are now contracting as well. China economy reportedly will come to a halt in terms of GDP this quarter, or even contract, according to some sources. Meanwhile, Goldman Sachs forecasts the US economy growth will stall to 0% in the second quarter 2020.

So a collapse in risky corporate bonds will occur overlaid on this already weak real economic scenario. Should that happen, then the recession could easily morph into another ‘great recession’ as in 2008-09; maybe even worse if the banking system freezes up and central banks cannot bail them out quickly enough. Or if banks in a major economy elsewhere experience a crash–as in India or even Europe or Japan where more than $10 trillion in non-performing bank loans exist–and the contagion spreads rapidly to banking systems elsewhere

Failed Monetary & Fiscal Policies, 2009-2019

Which leads to the question can central banks now do so? After the 2008-09 crash, the Fed bailed out the US banks by 2010. But it kept interest rates near zero under Obama for six more years. Banks could still get free money from the Fed at 0.15% interest. (The Fed then paid them 0.25% if they left the money with the Fed). The Fed bailed out other financial companies to the tune of $5 trillion more as it bought up bad loans and Treasuries from investors at above then market rates. That is, it subsidized them. And did so for six more years. All this free money flowed, mostly into financial markets in the US and worldwide, creating the stock bubbles that are now imploding. So the Fed and other central banks went on a binge subsidizing banks for years, and in the process broke their own interest rate tool needed for instances like the present crisis. The Fed tried desperately to raise interest rates in 2017-18 so it could have a cushion for times like this. But it then capitulated to Trump and began reducing interest rates again in 2019–as it had under Obama for six years.

The free money from the Fed artificially boosted stock prices. On top of this Trump added a further subsidization of banks and non-bank corporations, businesses, and investors with his $4.5 trillion 10 year tax cuts passed January 2018. Most of that went as a windfall to corporate-business bottom lines. 23% of the 27% rise in corporate profits in 2018 is attributable to the windfall tax cuts. And where did that go? It too was redirected to stock and other financial markets,further inflating the bubbles. Here’s the channel and proof: Fortune 500 corporations in the US alone spent $1.2 trillion in both 2018 and 2019 in stock buybacks and dividend payouts to their shareholders. The stock buybacks inflated the stock markets, and most of the dividend payouts did as well. (Buybacks+dividends under Obama were nearly as generous, averaging more than $800 billion a year for six years).

In other words, the 25% run up in US stock markets in 2017-19 under Trump was totally artificial, driven by the tax cuts and by the Fed capitulating to Trump and lowering rates again in 2019. Very little of the annual $1.2 trillion went into the real US economy. For the past year real investment in structures, plant, equipment, etc. actually contracted for nine months in 2019, and is now contracting even faster in 2020.

Just as the Fed has busted its own interest rate monetary tool as it continually subsidized banks and businesses with low interest rates for years, the chronic corporate-investor tax cutting has busted fiscal policy responses to recession as well. Since 2001 the US has provided $15 trillion in tax cuts, the vast majority of which have gone to corporations, banks, and wealthy investors. That has led to government deficits averaging more than $1 trillion a year since 2008. And accelerated the US federal debt to more than $22 trillion. Fiscal policy is now seriously constrained by the deficits and debt–just as monetary policy as interest rates is now constrained by virtually all Treasury bond rates below 1% in the US and negative rates in Europe and Japan.

Interest rate policy responses to today’s emerging crisis is thus dead in the water. (As this writer predicted it would become in 2016 in the book, ‘Central Bankers at the End of Their Rope: Monetary Policy and the Coming Depression’). After years of monetary policy used as a tool to subsidize banks, it is now ineffective as a tool to stabilize the economy. Ditto for fiscal policy as tax policy. Used by Obama and even more so by Trump to subsidize corporations, stock buybacks, and financial markets, it is confronted by massive annual US budget deficits and accelerating national debt.

The likely responses by politicians and policy makers to the current emerging financial crisis and recessions in the real economy will be to cut taxes even further for businesses. It will have little effect, however. But will exacerbate levels of deficit and debt. That means the follow up will be to attack and reduce government spending, especially targeting social security, medicare, healthcare and education in 2021. Trump has already publicly indicated his intent to do so. On the Fed side, expect more injection of money directly into the economy and failing businesses by means of another major round of ‘quantitative easing’ (QE). That’s coming soon. Ditto for Europe and Japan where negative rates already exist. Watch China too should its economy contract for the first time in 30 years. And watch India, where it’s banking system is already fracturing due to causes totally separate from the virus effect. A banking crash in India is on the agenda. It could result in yet another financial blow to the global economy, adding to the current Saudi-produced oil price shock and the virus effect on supply chains and demand.

Summary and Conclusions

In summary, the global capitalist economy is unraveling financially, and soon further in real terms. Massive job layoffs in coming months in the US are a growing possibility. That will drive the US economy deep in contraction as household consumption, the only area holding up the US economy in 2019, now joins the contraction. It remains to be seen how US monetary and fiscal policy can restore economic stability given its self-destruction by US politicians since 2008. Trump policies have been no different than Obama’s-just more generous to corporate America and investors. Trump’s policies are best described as ‘Neoliberalism 2.0’ or ‘Neoliberal on steroids’. (see my just published 2020 book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’).

The US and global economies are well on their way to a repeat of the ‘great recession’ (or worse) of 2008-09. Only this time traditional monetary-fiscal policy is much less effective. More radical policy responses will likely be developed to try to stabilize the capitalist economies both in USA and elsewhere (where problems are even more severe). Watch closely as the crisis on the financial side moves on from equity (stock), commodities, and forex financial markets into derivatives markets and credit markets–especially junk bond and other corporate bond markets. Watch as the Fed tries desperately to provide liquidity to business and markets via its Repo channel and QE since its traditional rate channels are now ineffective. And watch as US and global capitalist advanced economies try to coordinate new fiscal policy responses to the general dual crisis in financial and real economic sectors of global capital.

Dr. Jack Rasmus
March 9, 2020

Dr. Rasmus is author of the just published book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, Clarity Press, January 2020. His website is http://kyklosproductions.com. He blogs at jackrasmus.com and tweets @drjackrasmus. Dr. Rasmus hosts the weekly radio show, Alternative Visions, on the Progressive Radio Network, fridays, at 2pm eastern.