The Jalopy Economy

This post The Jalopy Economy appeared first on Daily Reckoning.

There is absolutely nothing wrong with this economy that a miracle cannot fix… to fine-tune a phrase of Alexander Woollcott.

We believe the economy was going at partial throttle even before the pestilence ran it down.

It gave the appearance of an exotic racing auto — sleek, finely lined, waxed to a blinding sheen…

Unemployment had plunged to 50-year lows. The stock market knocked down one record after the other. The consumer was flush… and eager to drain his wallet.

But beneath this racer’s shining surface lurked a lemon…

The Look Under the Hood

The transmission slipped gears. Cracks ran through the pistons. Rust corrupted the engine block… and oil oozed from every seam.

The record-low unemployment was more statistical gimmickry than actual record-low unemployment.

Account for those hopeless unemployed who had abandoned the search, argues ShadowStats… and the true unemployment rate may have scaled 20%.

Meantime, much employment last decade came within the low-wage service and hospitality industry.

That is the same service and hospitality industry knocked out by the virus… incidentally.

But these are not, in the main, “breadwinner jobs.”

And our consumer, superficially flush, was gulping loads of debt to keep him floating.

GDP growth did not attain 3% one year during this past decade. From 1996–2005 — conversely — GDP exceeded 3% seven years of the ten.

If Not the Virus, It Would Have Been Something Else Eventually

This gaudy but citrusy roadster was bound to go wrong soon or late. The post-financial crisis expansion already ran to record distances.

The virus finally sent the smoke billowing from the hood. But if not the coronavirus… another bugaboo would have sent it veering off the asphalt.

We hazard the deceleration would have been far less sudden, the jolt far less violent, the breakdown less dramatic.

But a mechanical discombobulation of one sort or other was long past due. And here it is.

Of course here is the question on all lips:

When will the economy retake the road?

Savings Will Save Us

Worry not, coo the glass-half-fullers. The economy is recuperating in the auto shop.

Once we turn the key, it will come busting to life like a stallion from the barn. We will have a V-shaped recovery. You watch.

They inform us, for example, that the consumer has been storing in cash. Trading Economics reports the savings rate has stretched to a walloping 13.1%.

It had averaged 7.6% in 2019… as a counterexample.

These savings will go flooding into the economy once the doors swing open. This spending will drive the recovery along. It will cut a lovely “V” into the road.

But will it? We have questions. Here is one:

Do these savings actually exist?

Phony Savings

Statistics are often lovely liars. They tell fabulous tales beyond compare.

As Lance Roberts reports — he of Real Investment Advice — the 13.1% savings rate represents a gorgeous fiction.

These savings are densely concentrated within the utmost income brackets. The bottom 80% are so loaded down… they can scarcely save a jot. Their tanks are empty.

And the lower 90% have maintained negative savings rates since the 1990s:


Penetrating the Statistical Fogs

Here Roberts drives a shaft of light through the statistical fogs:

Since the top income earners have more than enough income to maintain their standard of living, the balance falls into savings. This disparity in incomes also generates a “skew” to the savings rate…

“Savings” are confined to the top 10% of income earners, as the bottom 90% struggle to make ends meet by increasing debt levels.

While government numbers suggest average Americans are saving 13% of their income, the majority of “savings” is coming from the differential in incomes between the top 20% and the bottom 80%.

In other words, if you aren’t in the “top 20%” of income earners, you probably aren’t saving a chunk of money.

Over 38 million Americans are presently off the job. And so the fuel tank of savings runs drier yet.

How will their nonexistent savings drive the economy back?

Don’t Look to the Top 20%

The upper 20%, meantime, will not likely raise their spending above existing levels. Roberts:

The issue with the lack of savings for the bottom 80–90% is that economic growth is roughly 70% consumption. Those in the top 10%, which have capacity to spend, have little need to substantially increase their rate of spending.

In conclusion:

Americans are not “saving more money” Unless, of course, you are in the top 20% of income earners.

By the time the current recession and bear market are over, it will take much longer than anticipated for the economy and markets to bounce back. Each recovery has already been slower, and weaker, than the last, and the next recovery will be no different.

With growth rates below 2% on average, wage growth suppressed and a large contingent of boomers withdrawing assets to sustain their living requirements, the ability to generate higher levels of economic growth will be limited.

We cannot therefore expect savings to haul us up.

An Unbalanced Economy

In a balanced economy with piles of savings in back of it, they very well could.

The economy could have held on until the trial passed… and sidelined cash would have come pouring back in.

But the economy is not a balanced economy. And piles of savings are not in back of it. Piles of debt are instead on top of it.

And so limited progress is likely ahead of it.

An economy swaybacked under piles of debt cannot make much headway. The load is simply too heavy.

As we have maintained before, productivity is the spring of authentic long-term prosperity…

Productivity, Productivity, Productivity

For centuries the United States went up on a rising tide of productivity. Leaping productivity gains of the 19th and early 20th centuries lifted it from stump-toothed backwater to global colossus.

These advances continued past midcentury…

Productivity growth averaged 4–6% for the 30 years following the Second World War. But since 1980?

Average productivity has languished between 0–2% — a 40-year running in place.

What about American labor productivity? Has the American worker kept up?

No… he has not.

Labor productivity averaged 3.2% annual growth from World War II through the close of the 20th century. But since 2011?

A mere 0.7%.

Look to the Federal Reserve

We do not believe worker productivity has declined because the American worker took to snoozing on the job.

We point our finger in another direction entirely… to institutions beyond his control.

Analyst Michael Lebowitz robs our thunder when he writes:

The stagnation of productivity growth started in the early 1970s. To be precise it was the result, in part, of the removal of the gold standard and the resulting freedom the Fed was granted to foster more debt… Over the last 30 years the economy has relied more upon debt growth and less on productivity to generate economic activity.

And now the Federal Reserve is fostering debt growth on a scale beyond all belief…

More of Everything, Except Growth and Productivity

It has once again nailed interest rates to zero. And it has ballooned its balance sheet to $6.96 trillion — far past its previous $4.5 trillion limit.

It is likely stretching to $10 trillion… and beyond.

Meantime, each fresh dollar of debt gives less economic thump than the last.

But it will not turn back now. It is already too far down the roadway.

Where will the productivity originate? We cannot say.

Yet until it comes, we can expect more of the same…

More debt, more warfare against savers, more monetary and economic bedlam, more of all of it  — only more so.


Brian Maher
Managing editor, The Daily Reckoning

The post The Jalopy Economy appeared first on Daily Reckoning.

The Biggest Economic Threat Today

This post The Biggest Economic Threat Today appeared first on Daily Reckoning.

Kind heaven, no! A fresh economic scourge is upon the land. Announces CNN:

“New Threat to the Economy: Americans Are Saving Like It’s the 1980s.”

Is a higher evil possible? Thus we are informed:

Americans are slashing their spending, hoarding cash and shrinking their credit card debt as they fear their jobs could disappear during the coronavirus pandemic…

Although caution is a logical response to that uncertainty, hunkering down also poses a risk to the recovery in an economy dominated by consumer spending. A so-called V-shaped recovery can’t happen if consumers are sitting on the sidelines…

The savings rate in the United States climbed from 8% in February to 13.1% in March. That was the highest savings rate since November 1981.

The article further reminds us that consumer spending constitutes some 70% of the United States economy.

And so the old bugaboo rises from the grave yet again — the “paradox of thrift.”

The Evils of Saving

The individual saver may be the model of prudence, of frugality, of forbearance… of thrift itself.

But if the entire nation tied down its money?

A savage cycle would feed and feed upon itself… until the economy is devoured to the final crumbs.

Consumption would dwindle to near-nonexistence. GDP would collapse in a heap. Waves of bankruptcies would wash through.

All this because the selfishness of savers. They refuse to untie their purse strings… and spend for the greater good.

This paradox of thrift is perhaps the mother myth of economists in the Keynesian line.

Yet no paradox exists whatsoever.

Today we maintain — again — that saving is an unvarnished blessing, at all times, under all circumstances.

Let us first plunge a stake through the squirming heart of another myth:

The myth that consumer consumption constitutes 70% of the United States economy…

Lying Statistics

Much of what goes under the banner “consumer spending”… is not consumer spending.

It is government spending. Medicare and Medicaid, for example, are included.

Meantime, official GDP calculations do not include tremendous piles of economic doings.

These piles include business investment and spending on “intermediate” goods.

These of course are inputs required for the production of final goods — hence intermediate. They must first come in before consumer goods can go out.

The steel in the automobile, the sugar in the candy, the wood of the furniture… these are intermediate goods.

Consumer Spending Is Only 30% of GDP?

Yet their purchase does not classify as consumer spending — else they would be double-counted. Explains economist Mark Skousen:

GDP only measures the value of final output. It deliberately leaves out a big chunk of the economy — intermediate production or goods-in-process at the commodity, manufacturing and wholesale stages — to avoid double counting.

Now mix in expenditures on intermediate goods. What do we find?

We find that consumer consumption only constitutes perhaps 30% of GDP. Skousen:

I calculated total spending (sales or receipts) in the economy at all stages to be more than double GDP… By this measure — which I have dubbed gross domestic expenditures, or GDE — consumption represents only about 30% of the economy, while business investment (including intermediate output) represents over 50%.

We might add that Americans purchase heaps of foreign goods. These purchases add little to the gross domestic product.

Perhaps consumer spending accounts for less than 30% of GDP. We speculate of course. We have not interrogated the figures.

We now revisit our central claim — that saving is an unvarnished blessing, at all times, under all circumstances.

Remember Say’s Law

“From time immemorial proverbial wisdom has taught the virtues of saving,” wrote Henry Hazlitt 74 years ago, “and warned against the consequences of prodigality and waste.”

But to the anti-savers… prodigality and waste are near-virtues at times as these.

They have forgotten their Say’s law — perhaps purposefully.

Say’s law holds that supply creates its own demand. “Products are paid for with products,” argued Jean-Batiste Say over two centuries ago.

Production must precede consumption.

Here we return to an example we have previously cited…

The Baker and the Shoemaker

One man produces bread. Another produces shoes.

Let us say the baker bakes a baker’s dozen — 13 loaves of bread. He consumes two of them.

The remaining 11 loaves represent his savings. He can peddle them for other goods: shoes in our little example.

Meantime, the cobbler cobbles together 13 pairs of shoes. He requires one new pair for himself. He further sets aside two pairs for his growing children.

This fellow “consumes” three pairs of shoes, that is. The remaining ten constitute his savings. Like our baker, he can exchange his savings for goods.

To proceed…

Buying Is Actually a Form of Barter

The cobbler who requires bread for his dinner appears before the baker. And the baker who must clad his feet comes before the baker.

They may transact in money — direct barter is primitive. But upon closer examination we see their transactions in fact constitute an indirect barter.

Money merely throws an illusory veil across the transactions.

Ultimately the baker purchases his shoes with the bread he has baked. And the cobbler purchases his bread with the shoes he has cobbled.

That is, each has paid for his items through savings.

Concludes Monsieur Say:

Money performs but a momentary function in this double exchange; and when the transaction is finally closed, it will always be found that one kind of commodity has been exchanged for another.

What is more, the goods a man acquires through savings sees him through… and allows him to produce more loaves, more shoes.

We must conclude that there can be no excess of savings. Savings equal stored wealth.

To argue that savings injure society is to argue that wealth injures society.

And savings spring from production.

“Lack of Demand”

Yet the enemies of savings turn Say’s law upon its head. They sob not about a lack of production but a “lack of demand.”

That is, they place the wagon cart of consumption before the draft horse of production.

The government must race the printing press to make the shortage good, to furnish the lacking demand.

But no new production accompanies the flood of money. The additional money merely chases the existing stock of goods.

It is the pursuit of alchemy, of lead into gold, of the free lunch. It is the half-conscious belief that the print press is the spark plug of prosperity.

It neglects production.

“But what about times like these?” counter the author of the CNN article. “If everybody saved, the economy would collapse. Remember the paradox of thrift. If government doesn’t step in and spend, who will?”

But the old dead economists argue there is no paradox whatsoever…

No Paradox of Thrift

What applies to the individual applies to society at large, they insist. What is society but a collection of individuals, after all?

If saving during depressed times is such a vicious economic crime… how has any economy gotten back up?

The standard logic assumes all such economies corkscrew down and down into oblivion.

Yet as history demonstrates abundantly, they recover. As we have also explained before…

When society saves in lean times, it is not eliminating consumption — it is merely delaying it.

The demand that is supposedly lost is not lost at all. It is simply shifted toward the future.

Today’s savings are therefore tomorrow’s spending, tomorrow’s consumption. By reducing consumption today… society allows greater consumption tomorrow.

Or according to Hazlitt:

“‘Saving,’ in short, in the modern world, is only another form of spending.”

Perhaps someone can whisper those words into the ear of a certain CNN economics writer…


Brian Maher
Managing editor, The Daily Reckoning

The post The Biggest Economic Threat Today appeared first on Daily Reckoning.

“We’ll Never See the March Lows Again”

This post “We’ll Never See the March Lows Again” appeared first on Daily Reckoning.

“We’ve seen the lows in March and we will never see those lows again.”

So concludes Dr. Jeremy Siegel. Dr. Siegel is a finance professor at the superexcellent Wharton School of Business.

But why will we never see March lows again?

Is it because the economy has loads of latent energy packed in? That it will come snapping back when freed… like a coiled spring let go?

No. That is not the reason. What then is the reason? MarketWatch:

According to Siegel, unprecedented support for the economy by the Federal Reserve and the U.S. government make it nearly impossible for the stock market to revert to its late March lows.

What is more, the professor ladles out free investment advice. Fix your sights on 2021:

I think 2021 could be a boom year. With the liquidity that the Fed is adding — unprecedented — it could be a really good year.

It may well be a good year… and for the reason given.

But will 2021 be “a really good year” for the economy? We harbor the severest doubts…

Stuck in a Ditch

We hazard the economy will require years to climb from its current ditch.

Thousands and thousands of businesses — and their millions and millions of employees — may never come up.

Besides… the Federal Reserve’s vast machinery of credit creation worked little economic improvement before.

Why should it work now?

For years we have hollered that the stock market was a false economic indicator. It could not stay up without generous central bank nurturing, we argued.

The Wall Street cheer section disagreed.

It insisted instead the stock market went along under its own steam, that it packed its own oomph. Look at unemployment, they would croon. Not in 50 years had it been so low.

No, the stock market merely reflected the rambunctious economy beneath it.

Yet now — with 33 million jobless and the stock market up 25% — even Wall Street’s loudest boosters must concede our point.

The Truth Comes Out

We present, for example, money man David Zervos. This fellow is chief marketing strategist for investment banking outfit Jefferies. He concedes:

Since there is a robust Fed liquidity backstop and we do not know the depth or duration of the current economic downturn, spending any time looking at economic data releases or focusing on corporate earnings is a colossal waste of time.

For economic data, the signal-to-noise ratio is essentially zero, and for corporate earnings… results are meaningless… The item to focus on is the Fed and its direct support for the financial and nonfinancial [investment-grade] corporate sectors.

What is this but an admission? An admission that the Federal Reserve has set the stock market and the economy going in two separate directions?

“Wall Street Has Very Little to Do With Main Street”

The stock market — in theory — should fairly mirror the economy from which it springs.

It was never a perfect reflection. At times Wall Street might distort the image… as a funhouse mirror distorts the human image before it.

But now the image has nearly inverted.

Main Street moves one way, Wall Street shifts the other. Main Street frowns, Wall Street smiles. Main Street tumbles, Wall Street jumps.

“Wall Street has very little to do with Main Street,” affirms Joachim Klement of Liberum Capital…

“And less and less so.”

Less and less so strikes us as just about right. Why less and less so?

More Quantitative Easing, Less Economic Gain

BMO — a bank — has shoveled through the data. Its riddle-solvers have concluded that each dose of quantitative easing kicks less than the last.

As the addict requires ever-increasing stimulant to attain a lift… the economy requires ever-increasing quantitative easing.

Explains BMO’s Daniel Krieter:

QE has fed through to the real economy in a slower manner than previous QE campaigns… The expansionary policy thus far has mostly resulted in increased asset prices.

Here Zero Hedge deepens the diagnosis. QE1 and QE2 proved equal to purposes, they maintain. But the potion wore off with QE3:

As QE leads to a direct increase in bank reserves, only a fraction is translated into money supply growth, and thus potentially consumption and investment. QE1 was highly effective and an important factor behind pulling the economy out of recession. QE2 had a marginally lower but still high follow-through… We observe elevated inflation and personal consumption rates during the period of QE2 as evidence of its effectiveness. However, during Q3… [it] resulted in very little inflation of GDP growth. Through this lens, the impact of QE on the real economy has diminished over time.

“Hyperinflation for Asset Prices Even as the Broader Economy Collapses”

And now the Federal Reserve has inflated its balance sheet from a QE3 high of $4.5 trillion… to a truly fantastic $6.7 trillion.

It will likely swell to $10 trillion or higher.

Yet each dollar does less duty than the last. In conclusion:

The marginal utility of debt is collapsing, with ever more debt required to generate an increase in underlying GDP…

The marginal utility of every new QE is now declining to the point where soon virtually none of the money created by the Fed out of thin air will enter the economy and instead will be stuck in capital markets, resulting in hyperinflation for asset prices even as the broader economy collapses.

And so we confront a dangerous gap:


Monetary Policy Yields to Fiscal Policy

Will Main Street take another decade of scraps while Wall Street feasts?

We are not certain it will — far from certain it will.

The Federal Reserve’s economic medicine has proven a weak brew. This is why we are convinced monetary policy will give way to fiscal policy.

The federal government will shoot adrenaline directly into the bloodstream. That is, it will attempt to jolt the economic heart through spending.

But not even direct government spending may generate a beat…

All Buck, No Bang

The United States government borrowed some $12 trillion between the last financial crisis and last June.

The American economy expanded only $5.1 trillion across that frame. That is, GDP increased 35%. But the national debt rose 122%.

Pre-COVID-19, the Federal Reserve Bank of San Francisco estimated the “new normal” for economic growth would range between 1.5% and 1.75%.

Now the United States has entered a newer, more abnormal normal. It is an inverted normal of skyshooting debt… and shrinking growth.

This year’s budget deficit may run to $4.2 trillion. And GDP may shrivel 8%.

The Broken Keynesian Multiplier

Meantime, evidence indicates fiscal policy does not stimulate when the debt-to-GDP ratio exceeds 90%. The United States debt-to-GDP ratio scales 105%. And it is increasing.

From what direction will the growth come in?

Each dollar of new debt yields under $1 of economic growth. Thus the Keynesian “multiplier” has taken up division… as we have written before.

What is more, much of today’s debt is unproductive. It goes to the service of “entitlements.”

That is, it holds no theoretical promise of return.

But it is too late to turn around. “Inflate or die,” as our co-founder Bill Bonner enjoys saying.

The authorities have chosen to inflate. We all may die regardless…


Brian Maher
Managing editor, The Daily Reckoning

The post “We’ll Never See the March Lows Again” appeared first on Daily Reckoning.

Rickards: This Time IS Different

This post Rickards: This Time IS Different appeared first on Daily Reckoning.

Stocks stumbled out of the gate today, at least partially on fears about a resurgence in coronavirus cases.

South Korea, which did an excellent job containing the virus, has reported a new batch of cases. Japan and Singapore also reported new cases. Infections are increasing in Germany as well, where lockdown restrictions are being lifted.

We can also expect a rise in U.S. cases as several states lift their own restrictions.

From both epidemiological and market perspectives, the pandemic has a long way to go. Its economic effects are already without precedent…

In the midst of this economic collapse, many investors and analysts return reflexively to the 2008 financial panic.

That crisis was severe, and of course trillions of dollars of wealth were lost in the stock market. That comparison is understandable, but it does not begin to scratch the surface.

This collapse is worse than 2008, worse than the 2000 dot-com meltdown, worse than the 1998 Russia-LTCM panic, worse than the 1994 Mexican crisis and many more panics.

You have to go back to 1929 and the start of the Great Depression for the right frame of reference.

But even that does not explain how bad things are today. After October 1929, the stock market fell 90% and unemployment hit 24%. But that took three years to fully play out, until 1932.

In this collapse the stock market fell 30% in a few weeks and unemployment is over 20%, also in a matter of a few weeks.

Since the stock market has further to fall and unemployment will rise further, we will get to Great Depression levels of collapse in months, not years. How much worse can the economy get?

Well, “Dr. Doom,” Nouriel Roubini, can give you some idea.

Roubini earned the nickname Dr. Doom by predicting the 2008 collapse. He wasn’t the only one. I had been warning of a crash since 2004, but he deserves a lot of credit for sounding the alarm.

The factors he lists that show the depression will get much worse include excessive debt, defaults, declining demographics, deflation, currency debasement and de-globalization.

These are all important factors, and all of them go well beyond the usual stock market and unemployment indicators most analysts are using. Those economists expecting a “V-shaped” recovery should take heed. That’s highly unlikely in the face of all these headwinds.

I’ve always taken the view that getting a Ph.D. in economics is a major handicap when it comes to understanding the economy.

They teach you a lot of nonsense like the Phillips curve, the “wealth effect,” efficient markets, comparative advantage, etc. None of these really works in the real world outside of the classroom.

They then require you to learn complex equations with advanced calculus that bear no relationship to the real world.

If economists want to understand the economy, they should talk to their neighbors and get out of their bubble.

The economy is nothing more than the sum total of all of the complex interactions of the people who make up the economy. Common sense, anecdotal information and direct observation are better than phony models every time.

So what are everyday Americans actually saying?

According to one survey, 89% of Americans worry the pandemic could cause a collapse of the U.S. economy. This view is shared by Republicans and Democrats alike.

Ph.D. economists dislike anecdotal information because it’s hard to quantify and does not fit into their neat and tidy (but wrong) equations. But anecdotal information can be extremely important.

With so many Americans fearing a collapse, it could create a self-fulfilling prophesy.

If enough people believe something it becomes true (even if it was not true to begin with) because people behave according to the expectation and cause it to happen.

The technical name for this is a recursive function, also known as a “feedback loop.” Whatever you call it, it’s happening now.

Based on that view and a lot of other evidence, we can forecast that the depression will get much worse from here despite the initial severity.

But as usual, the Ph.D. crowd will be the last to know.

Below, I show you why you shouldn’t believe the happy talk. We’re in a deflationary and debt death spiral that has only just begun. Read on for details.


Jim Rickards
for The Daily Reckoning

The post Rickards: This Time IS Different appeared first on Daily Reckoning.

Why Assets Will Crash

This post Why Assets Will Crash appeared first on Daily Reckoning.

The increasing concentration of the ownership of wealth/assets in the top 10% has an under-appreciated consequence: when only the top 10% can afford to buy assets, that unleashes an almost karmic payback for the narrowing of ownership, a.k.a. soaring wealth and income inequality: assets crash.

Most of you are aware that the bottom 90% own very little other than their labor (tradeable only in full employment) and modest amounts of home equity that are highly vulnerable to a collapse of the housing bubble.

(The same can be said of China’s middle class, only more so, as 75% of China’s household wealth is in real estate, more than double the percentage of wealth held in housing in U.S. households.)

As the chart illustrates, the top 10% own 84% of all stocks, over 90% of all business equity and over 80% of all non-home real estate. The concentration of ownership of assets such as vintage autos, collectibles, art, pleasure craft and second homes in the top 10% is likely even greater.

The more expensive the asset, the greater the concentration of ownership, as the top 5% own roughly 2/3 of all wealth, the top 1% own 40% and the top 0.1% own 20%.

In other words, the more costly the asset, the narrower the ownership. Total number of U.S. households is about 128 million, so the top 5% is around 6 million households and the top 1% is 1.2 million households.

This means the pool of potential buyers is relatively small, even if we include global wealth owners.

Since price is set on the margins, and assets like houses are illiquid, then we can anticipate all the markets for assets owned solely by the wealthy to go bidless — yachts, collectibles, vacation real estate — because the pool of buyers is small, and if that pool gets cautious due to a drop in net worth/unearned income, there won’t be any buyers except at the margins, at incredible discounts.

As we know, in a neighborhood of 100 homes currently valued at $1 million each, when a desperate seller accepts $500,000, the value of the other 99 homes immediately drops to $500,000.

Since few of the current bubble-era asset valuations are supported by actual income fundamentals, then the sales price boils down to a very small number of potential buyers and what they’re willing to pay.

Houses have a value based on rent, of course, but rents will drop very quickly for the same reason: prices are set on the margins. The most desperate landlords will drop rents and re-set the rental market from the margins.

If demand plummets (which it will as people can no longer afford rents in hot urban markets once they lose their jobs), then vacancies will soar and rents will crash as a few desperate landlords will take $1200/month instead of $2500/month.

Due to the multi-year building boom of multi-family buildings in hot job markets which inevitably leads to an oversupply once the boom ends, there are now hundreds of vacancies where there were once only a few dozen, and thousands where there were previously only hundreds.

As millions of wait staff, bartenders, etc. who made good money in tips find their jobs have vanished, all the urban hotspots will see mass out-migration: Seattle, Portland, the S.F. Bay Area, L.A., NYC, Denver, etc. as demand for rentals will evaporate and rents will be set on the margins by the most desperate landlords. Everyone holding out for the previous bubble-era rent will have $0 income as their units are vacant.

Tech start-ups and Unicorns are melting like ice cubes in Death Valley, and tech-sector layoffs are already in the tens of thousands. This wave of highly paid techies losing their jobs will become a tsunami, further reducing the pool of people who can afford rents of $2,500 to $3,000 for a studio or one-bedroom apartment.

The concentration of ownership generates a self-reinforcing feedback that further depresses prices: since the top 10% own most of the assets of the nation, they are most prone to a reversal of “the wealth effect.”

As their assets soared in value, the top 10% felt wealthier and more confident in future gains, enabling them to borrow and spend freely on second homes, pleasure craft, new vehicles, collectibles, luxury travel, etc.

Once even one class of assets plummets in value–for example, the recent decline in the stock market — the wealth effect reverses and the top 10% feel poorer and less confident about future gains, and thus less enthused about borrowing and spending.

The demand for other costly assets quickly evaporates, further reducing the wealth of the “ownership class,” which further reduces their desire and ability to buy bubble-era assets.

The high-priced assets owned by the top 10% will be the assets least in demand due to their high cost and potential for enormous losses: nothing loses value faster in a recession that narrowly owned assets such as vintage cars, art, vacation homes, yachts, etc.

Once assets start sliding in value, the reverse wealth effect quickly dries up demand for all asset classes with narrow ownership. Since these assets are illiquid — that is, the market for them is thin, with buyers few and far between–the prices are set by a very shallow pool of buyers and desperate sellers.

Consider a pleasure craft that retails new for $120,000. In the boom era of rising stocks and housing, a used boat might fetch $65,000. But as the wealth of the small pool of households able to buy and maintain a costly craft evaporates, the number of qualified buyers evaporates, too.

The seller might be aghast by an offer of $35,000 and reject it angrily. Six months later, he’s praying someone will take it off his hands for $15,000, and in another six months, he’ll accept $500 just to get out from underneath the insurance, slip-rental and licencing fees.

This is how it happens that boats that were once worth tens of thousands of dollars are set adrift by owners who can no longer afford to pay slip fees, and vacation homes are abandoned and auctioned off for overdue property taxes: the market for these luxuries dries up and blows away, i.e. goes bidless — there are no buyers at any price.

Once housing and real estate valuations fall, that will trigger a decline in the value of all other costly, narrowly owned assets, which will reinforce the reverse wealth effect.

This is the systemic payback for concentrating ownership of assets in the hands of the few: when their bubble-era priced assets plummet in value, the bottom falls out of all assets with narrow ownership.

The price of superfluous assets such as boats, vintage cars, collectibles, art and vacation homes can quickly fall to a fraction of bubble-era valuations, destroying much of what was always fictional capital.

The Federal Reserve reckons it can “save” the bubble-era valuations of junk bonds by being the “buyer of last resort,” but it will end up being the “only buyer,” effectively making the system even more fragile and prone to collapse.

The public will eventually have to decide if the nation’s central bank should be bailing out assets owned by the financial elite while the upper-middle class watches its assets collapse in value.


Charles Hugh Smith
for The Daily Reckoning

The post Why Assets Will Crash appeared first on Daily Reckoning.

Recovery by the End of the Year?

This post Recovery by the End of the Year? appeared first on Daily Reckoning.

Will the recession end by the close of 2020?

One “economic expert” boasting a “perfect record calling recessions” believes it will.

Will it? Today we mount the judge’s bench, hear evidence… and render verdict.

First to the verdict of the marketplace. How did the stock market fare today?

Main Street Goes One Way, Wall Street the Other

The Dow Jones jumped 211 points today. The S&P gained 32, the Nasdaq 125.

The Nasdaq — if you can believe it — is now positive on the year.

But Wall Street is far removed from Main Street. Today’s spree once again follows bleak economic data…

The United States Department of Labor reveals another 3.169 million Americans filed unemployment claims for the week ended May 2.

They join the existing 30 million Americans recently turned out upon their ears.

But rejoice — the Nasdaq is once again in green.

Let us now turn to the question swirling in the air:

Will the recession end by the close of 2020?

A “Perfect Record Calling Recessions”

Dr. Campbell Harvey professes finance at Duke University. MarketWatch claims he enjoys a “perfect record calling recessions.”

Last summer — we are informed — this fellow projected recession for “2020 or early 2021.”

What was the rock of his case?

The yield curve. Specifically, an inverted yield curve.

Explains MarketWatch:

The yield on the 3-month Treasury bill was higher than the yield on the 5-year Treasury note for the entire second quarter of 2019. That “inverted yield curve” had been the harbinger of the previous seven recessions. Harvey first identified the inverted yield curve’s predictive power in his 1986 doctoral dissertation at the University of Chicago.

A Prediction Even More Accurate

We must be formidable future-seers as well. We began yelling about an inverted yield curve one full year before the professor — in July 2018.

We forecast possible recession “sometime in mid-2020.”

What is the expression — close enough for government work?

Twice last summer we hollered similar warnings.

In reminder, recession is commonly defined as two consecutive quarters of minus growth.

Q1 GDP contracted 4.8%. The Q2 count is not yet in.

But GDP will likely vanish at an annualized 30–47% rate… depending which crystal-gazers you choose to believe.

And so you will have your two consecutive quarters of contraction. That is, you will have your recession.

An Act of Self-Destruction

Of course, this recession is an act of self-destruction, a deliberate shooting of a bullet into the foot.

Let us not forget: Government chose recession in the broader interest of public health.

We cannot claim recession would have come in this year without the virus. Even if it did… it would not have raised one fraction of the hell.

A standard-issue recession does not plunge 33 million into unemployment within seven weeks. Nor does it dynamite GDP at a 30–47% annualized rate.

These times lack all precedent, all reference markers.

We will nonetheless claim the laurel as master economic psychic.

The Lesson of the Yield Curve

But why is an inverted yield curve such a menace? As we have explained prior:

The yield curve is simply the difference between short- and long-term interest rates.

Long-term rates normally run higher than short-term rates. It reflects the structure of time in a healthy market…

Longer-term bond yields should rise in anticipation of higher growth… higher inflation… higher animal spirits…

But when short- and long-term yields begin to converge, it is a powerful indication the bond market expects lean times ahead.

When the long-term yield falls beneath the short-term yield, the yield curve is said to invert.

A Nearly Perfect Recessionary Omen

As we have also explained before, an inverted yield curve is a nearly perfect recessionary omen.

An inverted yield curve has foretold recession seven of seven prior occasions… as confirms MarketWatch.

Only once did it spot a phantom — in the mid-1960s.

And now this recession fortune teller has foretold eight of the past eight recessions… regardless of the circumstances behind the eighth.

Next we come to this question:

Will this economy go backward four straight quarters, five straight quarters, six — or more?

A “skinny U” Recovery

Dr. Harvey, the man with the spotless record, says no. You can expect robust recovery early next year.

Not the “V-shaped” recovery the sunshine-blowers have projected — but a “skinny U” nonetheless. A vaccine will be the spark plug.


“In the global financial crisis [in 200809], we never could tell when it was going to end,” [Harvey] said in a telephone interview. This time, he said, “The cause is clear — it’s a biological event, and the solution is also clear: another biological event”

He doesn’t anticipate the V-shaped recovery that Wall Street touted a few weeks ago. “I think it’s more what I call the ‘skinny U,’ because I do believe that we will have a vaccine by the first quarter [of 2021],” he said.

Just so. But is a vaccine likely by the first quarter of 2021?

We instructed our minions to research the literature on vaccination. Are vaccines effective against viruses such as this? When can the world expect one, with history as our guide?

We ordered them off in pursuit of answers.

They returned with answers. But their findings did not encourage.

Do Not Count on a Vaccine

COVID-19 is of course a coronavirus. Not once — despite all the angels and saints — have medical men brewed a successful vaccine against a coronavirus.

Decades of effort have led them down blind alley after blind alley after blind alley.

We were further informed that the respiratory system is generally unreceptive to vaccination… as a round hole is unreceptive to a square peg.

It is walled off, inaccessible to the vaccinary machinery.

Dr. Ian Frazer — a scientist — has himself helped develop vaccines. According to him:

It’s a separate immune system, if you like, which isn’t easily accessible by vaccine technology. It’s a bit like trying to get a vaccine to kill a virus on the surface of your skin.

Not only are these vaccines poor fighters. They are turncoats who aid and comfort the enemy:

One of the problems with corona vaccines in the past has been that when the immune response does cross over to where the virus-infected cells are it actually increases the pathology rather than reducing it. So that immunization with SARS corona vaccine caused, in animals, inflammation in the lungs, which wouldn’t otherwise have been there if the vaccine hadn’t been given.

In conclusion:

I think it would be fair to say even if we get something which looked quite encouraging in animals, the safety trials in humans will have to be fairly extensive before we would think about vaccinating a group of people who have not yet been exposed to the virus.

They might hope to get protection but certainly wouldn’t be keen to accept a possibility of really serious side effects if they actually caught the virus.

A Drug Therapy Is More Likely

Of course it is possible the professionals will mix a vaccine that is both safe and effective. Heaps and heaps of scientists labor furiously for that purpose.

But the history is against them — at least to our understanding.

And the possibility of a functioning vaccine by the first quarter of 2021 appears… unlikely.

We hazard a workable drug regimen, or regimens, will emerge far ahead of a vaccine. They may not work a cure. But they might pack enough wallop to hold the killer off.

And a dependable therapeutic would likely coax Americans from their bunkers, from their foxholes. When this therapeutic comes on scene, we cannot say of course.

Americans Might Just Take Their Chances

But the economy — or greater segments of it — will swing open before long. The states are making plans.

And millions of Americans may choose to test their luck at work… rather than remain chained down at home, jobless and hopeless, waiting for a drug.

They will fare out into a changed America with their eyes open, their tread light… and their fingers crossed.


Brian Maher
Managing editor, The Daily Reckoning

The post Recovery by the End of the Year? appeared first on Daily Reckoning.

This “Cure” for the Economy Could Kill It

This post This “Cure” for the Economy Could Kill It appeared first on Daily Reckoning.

The economy remains under lockdown, although some states are beginning to relax restrictions. As with so many other aspects of American life, there’s been a red state/blue state divide.

Red states are generally more willing to reopen their economies, while harder-hit coastal blue states are generally more reluctant to open theirs.

Regardless, the economic consequences of the lockdown have been devastating, and we’ll be feeling their effects for a very long time. We’ll also be feeling the effects of the massive monetary and fiscal responses to the crisis for a long time.

There are so many government “stimulus” programs underway to deal with the New Depression it’s hard to keep track.

The Federal Reserve has at least 10 asset purchase programs going including purchases of corporate debt, Treasury debt, municipal bonds, commercial paper, mortgages and more.

Many of these are being done in a “special-purpose vehicle” using $425 billion given to the Fed by the Treasury as a kind of Fed bailout. (Of course, the Treasury money comes from the taxpayers, so you’re paying for all of this.)

Regardless of the legal structure, the Fed is on its way to printing $5 trillion of new money on top of the $5 trillion it has already printed to keep the lights turned on at the banks.

On the fiscal side, Congress has authorized $2.2 trillion of new spending on top of the baseline $1 trillion deficit for fiscal year 2020, and just authorized another $600 billion last week.

A new bill for $1.5 trillion of added spending is now being debated. Added together, that’s $5 trillion of deficit spending for this year, and possibly more next year.

Meanwhile, stimulus supporters hope that the checks Americans are getting from the government will give the economy a boost by way of increased consumer spending.

But a recent survey showed that 38% of recipients saved the money and 26% paid off debt. So the stimulus really isn’t stimulating. It’s main effect is to increase the deficit and the national debt.

But don’t worry, say the supporters of Modern Monetary Theory (MMT). We know how to stimulate the economy and who cares about the debt? It hasn’t been a problem yet and we can expand it a lot more.

Until a few months ago, MMT was a quirky idea known to very few and understood by even fewer.

It actually wasn’t modern (the idea has been around for over 100 years) and it wasn’t much of a theory because there was no way to test it in a controlled environment.

The basic idea is that the U.S. government could merge the balance sheets of the Treasury and the Federal Reserve and treat them as if they were a consolidated entity. (That’s not legally true, but never mind.)

The Treasury could spend as much money as it wanted on anything it wanted. MMT asks, if the Treasury doesn’t spend money, how are people supposed to earn any?

Ideas like hard work, innovation and entrepreneurship don’t enter the discussion. In MMT, all wealth comes from the government and the more they spend, the richer we get.

The Treasury finances this spending by issuing bonds. That’s where the Fed comes in.

If the private sector won’t buy the bonds or wants too high an interest rate, the Fed can just crank up the printing press, buy the bonds with money created from thin air, stick the bonds on its balance sheet and wait.

So the Fed can just give the Treasury an unlimited line of credit to spend as much as it wants.

When the bonds come due in 10 or 30 years, the Treasury can repeat the process and use new printed money to pay off the old printed money.

It all sounds nice in theory, but it’s an invitation to disaster.

If inflation breaks out, it will be too late to get it under control. You can’t just flip a switch. Inflation is like a tiger. Once it gets out of its cage, it’s very difficult to get it back in.

If confidence in the dollar is lost (something the Fed and Treasury can’t control), hyperinflation could wreck the economy. That could lead to social unrest, riots and looting, especially if the wealth disparities created by the Fed’s support of the stock market continue to grow.

Would there be any winners if MMT ran off the rails? There would be one big winner – gold.


Jim Rickards
for The Daily Reckoning

The post This “Cure” for the Economy Could Kill It appeared first on Daily Reckoning.

This Isn’t Just Another Crash

This post This Isn’t Just Another Crash appeared first on Daily Reckoning.

Like addicts who cannot control their cravings, financial analysts cannot stop themselves from seeking some analog situation in the past which will clarify the swirling chaos in their crystal balls.

So we’ve been swamped with charts overlaying recent stock market action over 1929, 1987,2000 and 2008 — though the closest analogy is actually the Oil Shock of 1973, an exogenous shock to a weakening, fragile economy.

But the reality is there is no analogous situation in the past to the present, and so all the predictions based on past performance will be misleading. The chartists and analysts claim that all markets act on the same patterns, which are reflections of human nature, and so seeking correlations of volatility and valuation that “worked” in the past will work in 2020.

Does anyone really believe the correlations of the past decade or two are high-probability predictors of the future as the entire brittle construct of fictional capital and extremes of globalization and financialization all unravel at once?

Here are a few of the many consequential differences between all previous recessions and the current situation:

1. Households have never been so dependent on debt as a substitute for stagnating wages.

2. Real earnings (adjusted for inflation) have never been so stagnant for the bottom 90% for so long.

3. Corporations have never been so dependent on debt (selling bonds or taking on loans) to fund money-losing operations (see Netflix) or stock buybacks designed to saddle the company with debt service expenses to enrich insiders.

4. The stock market has never been so dependent on what amounts to fraud — stock buybacks — to push valuations higher.

5. The economy has never been so dependent on absurdly overvalued stock valuations to prop up pension funds and the spending of the top 10% who own 85% of all stocks, i.e. “the wealth effect.”

6. The economy and the stock market have never been so dependent on central bank free money for financiers and corporations, money creation for the few at the expense of the many, what amounts to an embezzlement scheme.

7. Federal statistics have never been so gamed, rigged or distorted to support a neo-feudal agenda of claiming a level of wide-spread prosperity that is entirely fictitious.

8. Major sectors of the economy have never been such rackets, i.e. cartels and quasi-monopolies that use obscure pricing and manipulation of government mandates to maximize profits while the quality and quantity of the goods and services they produce declines.

9. The economy has never been in such thrall to sociopaths who have mastered the exploitation of the letter of the law while completely overturning the spirit of the law.

10. Households and companies have never been so dependent on “free money” gained from asset appreciation based on speculation, not an actual increase in productivity or value.

11. The ascendancy of self-interest as the one organizing directive in politics and finance has never been so complete, and the resulting moral rot never more pervasive.

12. The dependence on fictitious capital masquerading as “wealth” has never been greater.

13. The dependence on simulacra, simulations and false fronts to hide the decay of trust, credibility, transparency and accountability has never been so pervasive and complete.

14. The corrupt linkage of political power, media ownership, “national security” agencies and corporate power has never been so widely accepted as “normal” and “unavoidable.”

15. Primary institutions such as higher education, healthcare and national defense have never been so dysfunctional, ineffective, sclerotic, resistant to reform or costly.

16. The economy has never been so dependent on constant central bank manipulation of the stock and housing markets.

17. The economy has never been so fragile or brittle, and so dependent on convenient fictions to stave off a crash in asset valuations.

18. Never before in U.S. history have the most valuable corporations all been engaged in selling goods and services that actively reduce productivity and human happiness.

This is only a selection of a much longer list, but you get the idea. Basing one’s decisions on analogs from the past is entering a fool’s paradise of folly.

While the stock market euphorically front-runs the Fed and a V-shaped recovery, the reality is the crash has only just begun. To understand why, look at income and debt. Income, earned and unearned, is in free-fall, while debt — which must be serviced by income — is exploding higher.

Bailouts are not a permanent substitute for income. In the short-term, bailouts are a necessary substitute for lost income. But longer term, subsidizing income with borrowed money weakens the currency and the economy, as productivity stagnates.

As for servicing debt — the unemployed working class is getting an extra $600 a week not out of kindness but to make sure these households can continue to service their debts: auto and truck loans, student loans, credit cards, etc. Absent a federal bailout, millions of unemployed would cease making loan payments, creating a financial crisis for lenders.

Investment income is also crashing as companies slash dividends and stock market gains dry up. Oil exporters are facing a $1.2 trillion cut in annual income, and institutional property owners are facing steep declines as tenants stop paying rent and structural declines in employment will pressure rents lower in housing and commercial properties.

As the housing market implodes, capital gains from flipping houses will also collapse. As Corporate America realizes it no longer needs vast office spaces for its (reduced) workforce as millions are working from home, the demand for commercial properties will fall off a cliff, and the rental income generated by commercial property will also fall off a cliff.

Even if interest rates fall to zero, the interest paid by borrowers will not be zero. But even if borrowers get very low rates, they still have to make the monthly principal payments, which can each run into the hundreds of dollars. Lowering interest rates doesn’t reduce the principal payments or reduce the interest due to zero.

Indeed, the student loan and credit card rackets are experts at sucking borrowers dry with late fees and much higher rates than initially advertised.

Capital isn’t flowing into productive investments; it’s front-running the Federal Reserve’s free money for financiers in grossly overvalued stocks and seeking “dead money” safe havens.

The money that’s being sent to unemployed workers is borrowed, and small businesses are being offered loans, much of which will be forgiven if the funds are used to pay wages. In other words, all of these trillions of dollars being substituted for earned income are borrowed.

And with capital going to grossly overvalued Big Tech stocks and “dead money” safe havens, there are no capital flows which will support a return to commerce and productivity that will pay wages or generate investment income (unearned income).

Bulls can argue that “this time it’s different,” that debt doesn’t matter and earnings don’t matter, but where is the history to support their claim that capital flowing into overvalued stocks is going to generate earned income that can service the exploding debt load?

The crash has only just begun. Everything, including a rational, connected-to-reality, effective financial system, is on back-order and unlikely to ship any time soon.


Charles Hugh Smith
for The Daily Reckoning

The post This Isn’t Just Another Crash appeared first on Daily Reckoning.

True Courage

This post True Courage appeared first on Daily Reckoning.

Under half of all working-age Americans will collect a wage next month.

This we learn from Mr. James Knightley, ING chief international economist.

A portion of them have received — or will receive — $1,200 from the United States Treasury.

But $1,200 does not extend very far. And our men inform us that only 15% of federal assistance is emptying into pockets of “everyday” Americans.

The remaining 85% charts a course for Wall Street… and large business.

Perhaps the percentages should run the other way.

The Value of Bankruptcy

A string of corporate bankruptcies would teach a lesson. A severe lesson it would teach — but a crucial lesson.

That assuming excessive debt is reckless, for example. That it pays to take the long view.

That is, stock buybacks to lift the short-term stock price may not represent the most prudent use of capital.

And that keeping a “rainy day” fund is sound business. It represents the purchase of an umbrella against the inevitable squall.

A rescue — the second in under 12 years — informs them they do not require the umbrella.

The Federal Reserve will simply hand them one when the water starts down.

Thus it powerfully discourages thrift, prudence… and forbearance.

But comes the objection:

“The present crisis is unlike 2008 when banks brought trouble upon themselves. Wall Street did not cause the pandemic. A string of bankruptcies would only punish the innocent.”

Just so. But the future is always full of rainstorms.

The Rain Will Come Eventually

The sky overhead may be bright and cloudless today. But a responsible business always keeps a weather eye upon the horizon. It knows the clouds will come across one day. It does not know if they will blow in from east, west, south or north.

But it knows it must ready for eventual rain — from whichever direction — and however distant.

Wall Street instead basked in perpetual sun for one entire decade, believing the Federal Reserve would push away the clouds forever.

Or — if the rains did come — that it would bring everyone in under cover.

Their assumptions have proven correct. And what conclusions can they draw?

That the Federal Reserve — and the United States government — will have the same umbrellas ready for the next downpour.

Why then should they purchase their own? And so the evil cycle perpetrates.

A Steep Price to Pay

The rescues may keep the stock market and the corporations going. But they come at a mighty price…

The financial system will sag and groan under even heavier loads of debt.

They nearly ensure that no meaningful recovery is in prospect. That is because the claims of the past and the present will prove too great.

Corporations must funnel future earnings off into the service of existing debt. They cannot invest in the future… because they will be paying too dearly for the past.

As a vessel overloaded with cargo cannot make much headway… neither can an economy overloaded with unproductive debt.

Might it be best to heave much of the deadweight over the side?

A rash of bankruptcies would clear out a pile of unproductive debt. It would restructure remaining debts.

The economy would then sit higher in the water. And maybe it could begin to rebuild its steam. It could go somewhere.

But that is not the option the monetary and fiscal authorities selected. And so they tossed aside a spectacular opportunity.

“Governments and Central Banks Have Missed a Great Opportunity for a Reset”

Mr. Guy Haselmann formerly directed global macro strategy at Scotiabank. Says he:

“Governments and central banks have missed a great opportunity for a reset.” More:

Financial markets play an important role in the economic growth of a country. They act as intermediary between lenders and borrowers providing for the efficient deployment of capitala critical role for businesses, employment and economic expansion. It’s supposed to be a place where supply and demand factors combine to determine equilibrium prices. Unfortunately, trouble arises when government institutions like the Federal Reserve manipulate and distort this process…

The recent bailout(s) has turned this… on its head. Those who were willing to accept higher market risk have already been rewarded for many years through higher returns. The bailout rewards the risk-seekers a second time and socializes their losses… Losses should be borne by the risk-taker and not be distributed or financed by the taxpayer. After all, it was the risk-taker’s decision to assume the risk in the first place…

And what about our preferred option of Chapter 11 bankruptcy?

Would it be better to allow bankruptcy that wipes out equity and debtholders? After all, companies often continue to function with employees keeping their jobs, and with new management operating from a stronger position. Allowing bankruptcies would help refocus investors on the true meaning of risk and encourage stronger corporate management in the future.

What is more, when the laggards go under the water, resources are then channeled into more productive lines:

New beneficial technologies would come along improving productivity that eventually wipes out the profits of the “old.” Necessity is a great motivation for innovation, so bad and insolvent companies should go under. When they do, labor and capital are redirected to more productive sources and away from “zombie companies.” Entrepreneurial innovation then operates at its fullest, making higher standards of living possible.

Alas, the authorities have chosen more of the same — only more so. No previous bailout comes within miles and miles of the rescue presently unfolding.

Thus there will be no reset. Nor can you expect a reset come the next calamity… whenever it may be.

We have already traveled too far in this direction.

True Courage

Mr. Bernanke could have allowed the system to reset nearly 12 years ago. He congratulates himself for finding the courage to act.

But he would have required far greater courage not to act. It was not in him.

Interest rates would have gone soaring. Marginal businesses dependent on low interest rates and cheap credit would have gone to the bottom.

The agony of bankruptcy would have been acute. But the agony of bankruptcy would have likely been brief.

A new, sturdier economy could have risen upon stronger anchorings. And business could have clawed its way back up.

Soaked by the recent crisis, it would have been sure to purchase the umbrella. After all, hard experience would have taught it that the Federal Reserve would not offer one.

And corporations may have stored in adequate cash reserves to see them through the present rainfall.

Instead the taxpayer must keep them dry.

Meantime, the stock market may not have boomed the past 11 years. But it likely would not have bubbled either. It could have found its own way… at its own pace.

In brief, a far saner system could have emerged from the previous crisis. But Mr. Bernanke lacked the courage to sit upon his hands.

And it is not in Mr. Powell…


Brian Maher
Managing editor, The Daily Reckoning

The post True Courage appeared first on Daily Reckoning.

Government Won’t Solve This Crisis

This post Government Won’t Solve This Crisis appeared first on Daily Reckoning.

I’m not a medical expert. But having watched scores of experts’ YouTube videos and blog posts on the COVID-19 crisis, I feel ready to draw some important conclusions.

I believe the truth on the coronavirus will become obvious fairly soon. That is, the crisis of the epidemic will be over, and it will become merely our chronic political crisis. It will become a crisis of narrative rather than a crisis of knowledge.

The Experts Weigh in

The two experts I have found most knowledgeable and convincing are William “Matt” Briggs, who earned a PhD in statistics from Cornell and taught there, and Rockefeller University and German epidemiologist Knut Wittkowski.

These are two voices in the wilderness shouting against the prevailing wisdom.

I drew ten conclusions. Since I am neither statistician nor epidemiologist nor professor nor politician, I can oversimplify their arguments without violating any academic or professional norms. Here they are:

    1. COVID–19 is basically another respiratory virus like many others. Yes, it can be fatal to the elderly and those with serious health risks. No doubt. But fearsome death rates are largely a function of testing biased toward acute cases. The tests are flawed by false positives and false negatives. Asymptomatic spread is speculative in the absence of antibody surveys that measure immunity.
    2. All respiratory viruses end through herd immunity, whether through direct exposure or artificial vaccination.
    3. Social distancing, closed schools, and obsessive masking prolong the epidemic and ensure a second peak comparable to the first. By flattening the curve, they widen it and thus render it more menacing to more people.
    4. The more that young people get exposed, the better. They are the vessel of herd immunity. Closing schools delays the immunity and tends to expose vulnerably old and frail grandparents in the home.
    5. By delaying herd immunity and assuring secondary peaks in the fall, school closings and other lockdowns will increase the number of deaths among the population of vulnerable and old people.
    6. As Briggs writes: “The H1N1 virus responsible for many deaths is still with us. The 2020 data from the Center for Disease Control (CDC) affirms, “Nationally, influenza A(H1N1) pdm09 viruses are now the most commonly reported influenza viruses this season.”
    7. Given the ease with which coronavirus spreads, it’s reasonable to suppose variants of COVID–19, like common colds and other respiratory distresses, including deadly pneumonia, will be with us for years to come.
    8. Briggs and Wittkowski agree that most testing is unreliable because of false positives, especially in initial testing. Fewer are misclassifications of deaths due to the bug but there is a tendency to suppose that deaths with the virus are caused by it.
    9. The conclusion, says Briggs, “is that it’s nuts to implement large–scale testing on a population. It will lead to huge numbers of false positives — which will be everywhere painted as true positives — and more panic.”
    10. Although closing down the private economy may seem plausible to physicians and politicians, it is an extreme overreaction to viruses that we will always have with us and provides a dreadful precedent for future crises.

Wrong Predictions

The worst projections turned out to be woefully wrong. We were told hundreds of thousands would die even with lockdowns and radical social distancing measures.

The Italians scared everybody with their haphazard health system and one of the oldest populations on the planet.

The crammed-together New Yorkers in subways and tenements registered a brief blip of extreme cases. Intubations and ventilators turned out not to help (80% died), sowing fear and frustration among medical personnel.

But the latest figures on overall death rates from all causes show no increase at all. Deaths are lower than in 2019, 2018, 2017, and 2015, slightly higher than in 2016.

I won’t make light of anyone’s death from this or any other disease, but deaths have been far below initial projections.

It was these wild projections that prompted the panicked lockdown. But it would have been an outrage even if the assumptions were not wildly wrong.

People Need to Get Outside

Flattening the curve was always a fool’s errand that only widened the damage.

In fact, by impeding herd immunity, particularly among students and other young people, the lockdown has prolonged and exacerbated the medical problem. As Briggs concludes, “People need to get out into virus–killing sunshine and germicidal air.”

This flu like all previous viral flus will give way only to herd immunity, whether through natural propagation of an extremely infectious pathogen, or through the success of one of the hundreds of vaccine projects.

Meanwhile, we all heard from politicians about a so–called “ventilator crisis.”

Governor Andrew Cuomo got $80 million worth of the contraptions and suggested he needed $800 million worth.

“More Money Is Always the Answer”

But that’s how governments think. More money is always the answer. More of the same. But what we need is entrepreneurial thinking.

Economist Gale Pooley of BYU in Honolulu and The Discovery Institute alerts me to the development in India of a new $200 smartphone–based ventilator system that fits in the palm of your hand.

Bypassing healthcare professionals, it uses machine learning to adapt to the rhythms of breathing and to adjust air flow to the lung conditions of patients.

It replaces the $2 million manually managed machines that have been widely deployed (ineffectively) to fight acute cases of lung failure from the coronavirus. According to urgent testimony from the front, these costly ventilators may have actually been killing patients as much as saving them.

Besides, the increasing recognition of herd immunity as the key to overcoming viral epidemics represents a huge advance over closing down businesses, schools, and economies.

We can’t leave the big decisions to government. The real solutions will come from the private sector.

The Private Sector Is the Answer

Wealth is knowledge and growth is learning. Learning accelerates in crises. Creativity always comes as a surprise to us. It is the result of free enterprise, which responds more quickly in the face of urgent needs than government.

Government guarantees tend to thwart the surprises of learning and growth. For example, if the government guarantees $2 million ventilators, there is no push to develop $200 devices like the one I mentioned.

The ventilator makers get rich, but no one else really benefits. It only deters innovation rather than spurs it.

On the optimistic side, the coronavirus crisis can well emerge as a time of new learning and economic growth rather than depression and paralysis.

Nassim Taleb’s theme of “anti–fragility” means crisis does not break free economies. It strengthens them, spurring invention and inspiring entrepreneurs.

The key is to leave open as many paths of learning and entrepreneurship as possible. Shutdowns and closures only inhibit the surprises of creativity and experiment that have saved humanity over the centuries of the capitalist miracle.

It’s possible that the economy, and your investments, will ultimately be enhanced by this crisis if we let the private sector work its magic.


George Gilder
for The Daily Reckoning

The post Government Won’t Solve This Crisis appeared first on Daily Reckoning.