Why Our Economy May Be Headed for a
Decade of Depression
In September 2006, Nouriel Roubini told the
International Monetary Fund what it didn’t want to hear. Standing before an
audience of economists at the organization’s headquarters, the New York
University professor warned that
the U.S. housing market would soon collapse — and, quite possibly, bring the
global financial system down with it. Real-estate values had been propped up by
unsustainably shady lending practices, Roubini explained. Once those prices
came back to earth, millions of underwater homeowners would default on their
mortgages, trillions of dollars worth of mortgage-backed securities would
unravel, and hedge funds, investment banks, and lenders like Fannie Mae and Freddie
Mac could sink into insolvency.
At the time, the global economy had just recorded
its fastest half-decade of growth in 30 years. And Nouriel Roubini was just
some obscure academic. Thus, in the IMF’s cozy confines, his remarks roused
less alarm over America’s housing bubble than concern for the professor’s
psychological well-being.
Of course, the ensuing two years turned Roubini’s
prophecy into history, and the little-known scholar of emerging markets into a
Wall Street celebrity.
A decade later, “Dr.
Doom” is a bear once again. While many investors bet on a “V-shaped
recovery,” Roubini is staking his reputation on an
L-shaped depression. The economist (and host of a biweekly economic news broadcast) does expect things to get
better before they get worse: He foresees a slow, lackluster (i.e., “U-shaped”)
economic rebound in the pandemic’s immediate aftermath. But he insists that
this recovery will quickly collapse beneath the weight of the global economy’s
accumulated debts. Specifically, Roubini argues that the massive private debts
accrued during both the 2008 crash and COVID-19 crisis will durably depress
consumption and weaken the short-lived recovery. Meanwhile, the aging of
populations across the West will further undermine growth while increasing the
fiscal burdens of states already saddled with hazardous debt loads. Although
deficit spending is necessary in the present crisis, and will appear benign at
the onset of recovery, it is laying the kindling for an inflationary
conflagration by mid-decade. As the deepening geopolitical rift between the
United States and China triggers a wave of deglobalization, negative supply
shocks akin those of the 1970s are going to raise the cost of real resources,
even as hyperexploited workers suffer perpetual wage and benefit declines.
Prices will rise, but growth will peter out, since ordinary people will be
forced to pare back their consumption more and more. Stagflation will beget
depression. And through it all, humanity will be beset by unnatural disasters,
from extreme weather events wrought by man-made climate change to pandemics
induced by our disruption of natural ecosystems.
Roubini allows that, after a decade of misery, we
may get around to developing
a “more inclusive, cooperative, and stable international
order.” But, he hastens to add, “any happy ending assumes that we find a way to
survive” the hard times to come.
Intelligencer recently spoke with Roubini about
our impending doom.
You predict that the coronavirus
recession will be followed by a lackluster recovery and global depression. The
financial markets ostensibly see a much brighter future. What are they missing and why?
Well, first of all, my prediction is not for 2020.
It’s a prediction that these
ten major forces will, by the middle of the coming decade, lead
us into a “Greater Depression.” Markets, of course, have a shorter horizon. In
the short run, I expect a U-shaped recovery while the markets seem to be
pricing in a V-shape recovery.
Of course the markets are going higher because
there’s a massive monetary stimulus, there’s a massive fiscal stimulus. People
expect that the news about the contagion will improve, and that there’s going
to be a vaccine at some point down the line. And there is an element “FOMO”
[fear of missing out]; there are millions of new online accounts — unemployed
people sitting at home doing day-trading — and they’re essentially playing the
market based on pure sentiment. My view is that there’s going to be a
meaningful correction once people realize this is going to be a U-shaped
recovery. If you listen carefully to what Fed officials are saying — or even
what JPMorgan and Goldman Sachs are saying — initially they were all in the V
camp, but now they’re all saying, well, maybe it’s going to be more of a U. The
consensus is moving in a different direction.
Your prediction of a weak
recovery seems predicated on there being a persistent shortfall in consumer
demand due to income lost during the pandemic. A bullish investor might counter
that the Cares Act has left the bulk of laid-off workers with as much — if not
more — income than they had been earning at their former jobs. Meanwhile,
white-collar workers who’ve remained employed are typically earning as much as
they used to, but spending far less. Together, this might augur a surge in
post-pandemic spending that powers a V-shaped recovery. What does the bullish
story get wrong?
Yes, there are unemployment benefits. And some
unemployed people may be making more money than when they were working. But
those unemployment benefits are going to
run out in July. The consensus says the unemployment rate is
headed to 25 percent. Maybe we get lucky. Maybe there’s an early recovery, and
it only goes to 16 percent. Either way, tons of people are going to lose
unemployment benefits in July. And if they’re rehired, it’s not going to be
like before — formal employment, full benefits. You want to come back to work
at my restaurant? Tough luck. I can hire you only on an hourly basis with no
benefits and a low wage. That’s what every business is going to be offering.
Meanwhile, many, many people are going to be without jobs of any kind. It took
us ten years — between 2009 and 2019 — to create 22 million jobs. And we’ve
lost 30 million jobs in two months.
So when unemployment benefits expire, lots of
people aren’t going to have any income. Those who do get jobs are going to work
under more miserable conditions than before. And people, even middle-income
people, given the shock that has just occurred — which could happen again in
the summer, could happen again in the winter — you are going to want more
precautionary savings. You are going to cut back on discretionary spending.
Your credit score is going to be worse. Are you going to go buy a home? Are you
gonna buy a car? Are you going to dine out? In Germany and China, they already
reopened all the stores a month ago. You look at any survey, the restaurants
are totally empty. Almost nobody’s buying anything. Everybody’s worried and
cautious. And this is in Germany, where unemployment is up by only one percent.
Forty percent of Americans have less
than $400 in liquid cash saved for an emergency. You think they are
going to spend?
Graphic: Financial Times
Graphic: Financial Times
You’re going to start having food riots soon
enough. Look at the luxury stores in New York. They’ve either boarded them up
or emptied their shelves, because they’re worried people are going to
steal the Chanel bags. The few stores that are open, like my Whole Foods, have
security guards both inside and outside. We are one step away from food riots.
There are lines three miles long at food banks. That’s what’s happening in
America. You’re telling me everything’s going to become normal in three months?
That’s lunacy.
Your projection of a “Greater
Depression” is premised on deglobalization sparking negative supply shocks. And
that prediction of deglobalization is itself rooted in the notion that the U.S.
and China are locked in a so-called Thucydides trap, in which the geopolitical tensions
between a dominant and rising power will overwhelm mutual financial
self-interest. But given the deep interconnections between the American and
Chinese economies — and warm relations between much of the U.S. and Chinese
financial elite — isn’t it possible that class solidarity will take precedence over Great Power
rivalry? In other words, don’t the most powerful people in both countries
understand they have a lot to lose financially and economically from
decoupling? And if so, why shouldn’t we see the uptick in jingoistic rhetoric on both sides as mere posturing for a
domestic audience?
First of all, my argument for why inflation will
eventually come back is not just based on U.S.-China relations. I actually have
14 separate arguments for why this will happen. That said, everybody agrees
that there is the beginning of a Cold War between the U.S. and China. I was in
Beijing in November of 2015, with a delegation that met with Xi Jinping in the
Great Hall of the People. And he spent the first 15 minutes of his remarks
speaking, unprompted, about why the U.S. and China will not get caught in a
Thucydides trap, and why there will actually be a peaceful rise of China.
Since then, Trump got elected. Now, we have a
full-scale trade war, technology war, financial war, monetary war, technology,
information, data, investment, pretty much anything across the board. Look at
tech — there is complete decoupling. They just decided Huawei isn’t going to
have any access to U.S. semiconductors and technology. We’re imposing total
restrictions on the transfer of technology from the U.S. to China and China to
the U.S. And if the United States argues that 5G or Huawei is a backdoor to the
Chinese government, the tech war will become a trade war. Because tomorrow,
every piece of consumer electronics, even your lowly coffee machine or
microwave or toaster, is going to have a 5G chip. That’s what the internet of
things is about. If the Chinese can listen to you through your smartphone, they
can listen to you through your toaster. Once we declare that 5G is going to
allow China to listen to our communication, we will also have to ban all
household electronics made in China. So, the decoupling is happening. We’re
going to have a “splinternet.” It’s only a matter of how much and how fast.
And there is going to be a cold war between the
U.S. and China. Even the foreign policy Establishment — Democrats and
Republicans — that had been in favor of better relations with China has become
skeptical in the last few years. They say, “You know, we thought that China was
going to become more open if we let them into the WTO. We thought they’d become
less authoritarian.” Instead, under Xi Jinping, China has become more state
capitalist, more authoritarian, and instead of biding its time and hiding its
strength, like Deng Xiaoping wanted it to do, it’s flexing its geopolitical
muscle. And the U.S., rightly or wrongly, feels threatened. I’m not making a
normative statement. I’m just saying, as a matter of fact, we are in a
Thucydides trap. The only debate is about whether there will be a cold war or a
hot one. Historically, these things have led to a hot war in 12 out of 16
episodes in 2,000 years of history. So we’ll be lucky if we just get a cold
war.
Some Trumpian nationalists and
labor-aligned progressives might see an upside in your prediction that America
is going to bring manufacturing back “onshore.” But you insist that ordinary
Americans will suffer from the downsides of reshoring (higher consumer prices)
without enjoying the ostensible benefits (more job opportunities and higher
wages). In your telling, onshoring won’t actually bring back jobs, only
accelerate automation. And then, again with automation, you insist that
Americans will suffer from the downside (unemployment, lower wages from
competition with robots) but enjoy none of the upside from the productivity
gains that robotization will ostensibly produce. So, what do you say to someone
who looks at your forecast and decides that you are indeed “Dr. Doom” — not a
realist, as you claim to be, but a pessimist, who ignores the bright side of
every subject?
When you reshore, you are moving production from
regions of the world like China, and other parts of Asia, that have low labor
costs, to parts of the world like the U.S. and Europe that have higher labor
costs. That is a fact. How is the corporate sector going respond to that? It’s
going to respond by replacing labor with robots, automation, and AI.
I was recently in South Korea. I met the head of
Hyundai, the third-largest automaker in the world. He told me that tomorrow,
they could convert their factories to run with all robots and no workers. Why
don’t they do it? Because they have unions that are powerful. In Korea, you
cannot fire these workers, they have lifetime employment.
But suppose you take production from a
labor-intensive factory in China — in any industry — and move it into a
brand-new factory in the United States. You don’t have any legacy workers, any
entrenched union. You are going to design that factory to use as few workers as
you can. Any new factory in the U.S. is going to be capital-intensive and
labor-saving. It’s been happening for the last ten years and it’s going to
happen more when we reshore. So reshoring means increasing production in the
United States but not increasing employment. Yes, there will be productivity
increases. And the profits of those firms that relocate production may be
slightly higher than they were in China (though that isn’t certain since
automation requires a lot of expensive capital investment).
But you’re not going to get many jobs. The factory
of the future is going to be one person manning 1,000 robots and a second
person cleaning the floor. And eventually the guy cleaning the floor is going
to be replaced by a Roomba because a Roomba doesn’t ask for benefits or
bathroom breaks or get sick and can work 24-7.
The fundamental problem today is that people think
there is a correlation between what’s good for Wall Street and what’s good for
Main Street. That wasn’t even true during the global financial crisis when we
were saying, “We’ve got to bail out Wall Street because if we don’t, Main
Street is going to collapse.” How did Wall Street react to the crisis? They
fired workers. And when they rehired them, they were all gig workers,
contractors, freelancers, and so on. That’s what happened last time. This time
is going to be more of the same. Thirty-five to 40 million people have already
been fired. When they start slowly rehiring some of them (not all of them), those
workers are going to get part-time jobs, without benefits, without high wages.
That’s the only way for the corporates to survive. Because they’re so highly
leveraged today, they’re going to need to cut costs, and the first cost you cut
is labor. But of course, your labor cost is my consumption. So in an
equilibrium where everyone’s slashing labor costs, households are going to have
less income. And they’re going to save more to protect themselves from another
coronavirus crisis. And so consumption is going to be weak. That’s why you get
the U-shaped recovery.
There’s a conflict between workers and capital.
For a decade, workers have been screwed. Now, they’re going to be screwed more.
There’s a conflict between small business and large business.
Millions of these small businesses are going to go
bankrupt. Half of the restaurants in New York are never going to reopen. How
can they survive? They have such tiny margins. Who’s going to survive? The big
chains. Retailers. Fast food. The small businesses are going to disappear in
the post-coronavirus economy. So there is a fundamental conflict between Wall
Street (big banks and big firms) and Main Street (workers and small
businesses). And Wall Street is going to win.
Clearly, you’re bearish on the
potential of existing governments intervening in that conflict on Main Street’s
behalf. But if we made you dictator of the United States tomorrow, what
policies would you enact to strengthen labor, and avert (or at least mitigate)
the Greater Depression?
The market, as currently ordered, is going to make
capital stronger and labor weaker. So, to change this, you need to invest in
your workers. Give them education, a social safety net — so if they lose their
jobs to an economic or technological shock, they get job training, unemployment
benefits, social welfare, health care for free. Otherwise, the trends of the
market are going to imply more income and wealth inequality. There’s a lot we
can do to rebalance it. But I don’t think it’s going to happen anytime soon. If
Bernie Sanders had become president, maybe we could’ve had
policies of that sort. Of course, Bernie Sanders is to the right of the CDU
party in Germany. I mean, Angela Merkel is to the left of Bernie Sanders. Boris
Johnson is to the left of Bernie Sanders, in terms of social democratic
politics. Only by U.S. standards does Bernie Sanders look like a Bolshevik.
In Germany, the unemployment rate has gone up by
one percent. In the U.S., the unemployment rate has gone from 4 percent to 20
percent (correctly measured) in two months. We lost 30 million jobs. Germany
lost 200,000. Why is that the case? You have different economic institutions.
Workers sit on the boards of German companies. So you share the costs of the
shock between the workers, the firms, and the government.
In 2009, you argued that
if deficit spending to combat high unemployment continued indefinitely, “it
will fuel persistent, large budget deficits and lead to inflation.” You were
right on the first count obviously. And yet, a decade of fiscal expansion not
only failed to produce high inflation, but was insufficient to reach the Fed’s
2 percent inflation goal. Is it fair to say that you underestimated America’s
fiscal capacity back then? And if you overestimated the harms of America’s
large public debts in the past, what makes you confident you aren’t doing so in
the present?
First of all, in 2009, I was in favor of a bigger
stimulus than the one that we got. I was not in favor of fiscal consolidation.
There’s a huge difference between the global financial crisis and the
coronavirus crisis because the former was a crisis of aggregate demand, given
the housing bust. And so monetary policy alone was insufficient and you needed
fiscal stimulus. And the fiscal stimulus that Obama passed was smaller than
justified. So stimulus was the right response, at least for a while. And then
you do consolidation.
What I have argued this time around is that
in the short run, this is both a supply shock and a demand shock. And, of
course, in the short run, if you want to avoid a depression, you need to do
monetary and fiscal stimulus. What I’m saying is that once you run a budget
deficit of not 3, not 5, not 8, but 15 or 20 percent of GDP — and you’re
going to fully monetize it (because that’s what
the Fed has been doing) — you still won’t have inflation in the
short run, not this year or next year, because you have slack in goods markets,
slack in labor markets, slack in commodities markets, etc. But there will be
inflation in the post-coronavirus world. This is because we’re going to see two
big negative supply shocks. For the last decade, prices have been constrained
by two positive supply shocks — globalization and technology. Well,
globalization is going to become deglobalization thanks to decoupling,
protectionism, fragmentation, and so on. So that’s going to be a negative
supply shock. And technology is not going to be the same as before. The 5G of
Erickson and Nokia costs 30 percent more than the one of Huawei, and is 20
percent less productive. So to install non-Chinese 5G networks, we’re going to
pay 50 percent more. So technology is going to gradually become a negative
supply shock. So you have two major forces that had been exerting downward
pressure on prices moving in the opposite direction, and you have a massive
monetization of fiscal deficits. Remember the 1970s? You had two negative
supply shocks — ’73 and ’79, the Yom Kippur War and the Iranian Revolution.
What did you get? Stagflation.
Now, I’m not talking about hyperinflation — not
Zimbabwe or Argentina. I’m not even talking about 10 percent inflation. It’s
enough for inflation to go from one to 4 percent. Then, ten-year Treasury bonds
— which today have interest rates close to zero percent — will need to have an
inflation premium. So, think about a ten-year Treasury, five years from now,
going from one percent to 5 percent, while inflation goes from near zero to 4
percent. And ask yourself, what’s going to happen to the real economy? Well, in
the fourth quarter of 2018, when the Federal Reserve tried to raise rates above
2 percent, the market couldn’t take it. So we don’t need hyperinflation to have
a disaster.
In other words, you’re saying
that because of structural weaknesses in the economy, even modest inflation
would be crisis-inducing because key economic actors are dependent on near-zero
interest rates?
For the last decade, debt-to-GDP ratios in the
U.S. and globally have been rising. And debts were rising for corporations and
households as well. But we survived this, because, while debt ratios were high,
debt-servicing ratios
were low, since we had zero percent policy rates and long rates close to zero —
or, in Europe and Japan, negative. But the second the Fed started to hike
rates, there was panic.
In December 2018, Jay Powell said, “You know what.
I’m at 2.5 percent. I’m going to go to 3.25. And I’m going to continue running
down my balance sheet.” And the market totally crashed. And then, literally on
January 2, 2019, Powell comes back and says, “Sorry, I was kidding. I’m not
going to do quantitative tightening. I’m not going to raise rates.” So the
economy couldn’t take a Fed funds rate of 2.5 percent. In the strongest economy
in the world. There is so much debt, if long-term rates go from zero to 3
percent, the economy is going to crash.
You’ve written a lot about
negative supply shocks from deglobalization. Another potential source of such
shocks is climate change. Many scientists believe that rising temperatures
threaten the supply of our most precious commodities — food and water. How does
climate figure into your analysis?
I am not an expert on global climate change. But
one of the ten forces that I believe will bring a Greater Depression is
man-made disasters. And global climate change, which is producing more extreme
weather phenomena — on one side, hurricanes, typhoons, and floods; on the other
side, fires, desertification, and agricultural collapse — is not a natural
disaster. The science says these extreme events are becoming more frequent, are
coming farther inland, and are doing more damage. And they are doing this now,
not 30 years from now.
So there is climate change. And its economic costs
are becoming quite extreme. In Indonesia, they’ve decided to move
the capital out of Jakarta to somewhere inland because they
know that their capital is going to be fully flooded. In New York, there are
plans to build a wall all around Manhattan at the cost of $120 billion. And
then they said, “Oh no, that wall is going to be so ugly, it’s going to feel
like we’re in a prison.” So they want to do something
near the Verrazzano Bridge that’s going to cost another $120
billion. And it’s not even going to work.
The Paris Accord said 1.5 degrees. Then they say
two. Now, every scientist says, “Look, this is a voluntary agreement, we’ll be
lucky if we get three — and more likely, it will be four — degree Celsius
increases by the end of the century.” How are we going to live in a world where
temperatures are four degrees higher? And we’re not doing anything about it.
The Paris Accord is just a joke. And it’s not just the U.S. and Trump. China’s
not doing anything. The Europeans aren’t doing anything. It’s only talk.
And then there’s the pandemics. These are also
man-made disasters. You’re destroying the ecosystems of animals. You are
putting them into cages — the bats and pangolins and all the other wildlife —
and they interact and create viruses and then spread to humans. First, we had
HIV. Then we had SARS. Then MERS, then swine flu, then Zika, then Ebola, now
this one. And there’s a connection between global climate change and pandemics.
Suppose the permafrost in Siberia melts. There are probably viruses that have
been in there since the Stone Age. We don’t know what kind of nasty stuff is
going to get out. We don’t even know what’s coming.
Car rental giant Hertz files for bankruptcy protection with $19BILLION
of debt after share prices plummet and 10,000 staff are laid off amid the
coronavirus pandemic
·
Hertz filed for bankruptcy protection Friday
after skipping car-lease payments last month
·
The coronavirus pandemic has crippled the
Florida-based company, which was already struggling with billions of dollars in
debt
·
The company laid off around 10,000 North
American workers amid the coronavirus crisis and their share price has
plummeted more than 80% this year
Car rental company
Hertz filed for Chapter 11 on Friday after failing to reach a standstill
agreement with its top lenders.
The Wall Street Journal reports
that Hertz has roughly $19 billion of debt.
That staggering
amount is made up of '$4.3billion in corporate bonds and loans and $14.4
billion in vehicle-backed debt held at special financing subsidiaries'.
Florida-based Hertz
began bankruptcy protection proceedings in the U.S. Bankruptcy Court in
Wilmington,
Delaware, in an
attempt to avoid a forced liquidation of its vehicle fleet after bookings
dropped off overnight due to the coronavirus pandemic.
'Today's action will
protect the value of our business, allow us to continue our operations and
serve our customers, and provide the time to put in place a new, stronger
financial foundation to move successfully through this pandemic and to better
position us for the future,' Chief Executive Paul E. Stone said.
Amazon CEO Jeff Bezos, who is
rescinding a $2-an-hour hazard pay increase for his warehouse workers at the
end of the month, led the pack, increasing his personal wealth by $34.6 billion
since the onset of the pandemic. Facebook CEO Mark Zuckerberg was close behind,
adding $25 billion to his fortune. Tesla CEO Elon Musk, who reopened his
California auto plant in defiance of state regulators and with the support of
President Trump, saw a 48 percent increase in his wealth to $36 billion in just
eight weeks as the stock market rebounded from its collapse. All told, the
nation’s 620 billionaires now control $3.382 trillion, a 15 percent increase in
two months.
US unemployment claims approach 40
million since March
22 May 2020
The United States
Department of Labor reported on Thursday that more than 2.4 million Americans
applied for unemployment insurance last week, bringing the total number of new
claims to 38.6 million since mid-March, when social distancing measures and
statewide stay-at-home orders were first implemented in an effort to slow the
spread of the coronavirus.
Even with the push by
the Trump administration since then to reopen the economy and the easing of
lockdown orders in all 50 states—despite a continued rise in COVID-19
infections and deaths—the US marked its ninth straight week in which more than
2 million workers filed for unemployment. While this is down from the peak at
the end of March when 6.8 million applied for unemployment insurance, it still
dwarfs the worst weeks of the Great Recession in 2008.
It is expected that the
official unemployment rate for May, which is to be reported by the federal
government in the first week of June, will approach 20 percent, up from 14.7
percent last month. This is a significant undercount, with millions of
unemployed immigrants unable to apply for benefits, and many other workers who
are not currently looking for work and therefore are not counted as unemployed.
Fortune magazine
estimates that real unemployment has already hit 22.5 percent, which is nearing
the peak of unemployment reached during the Great Depression in 1933, when the
rate rose above 25 percent. Millions more are expected to apply in the coming
weeks, pushing the numbers beyond those seen during the country’s worst
economic crisis.
But even these figures
do not capture the extent of the crisis now unfolding across the country.
Millions have been blocked for weeks from applying for unemployment
compensation because of antiquated computer systems, and a significant share of
those who have applied have been denied any payments. On top of this there are
significant delays in processing applications in multiple states, including
Indiana, Missouri, Wyoming and Hawaii. Meanwhile, Florida, which has some of
the most stringent restrictions, has refused to extend its paltry three-month
limit on payments for the few who manage to qualify.
Sparked by the
pandemic, the greatest economic crisis since the 1930s is already having a
devastating impact on the millions who have seen their jobs suddenly disappear,
while millions more will see wages, benefits and hours dramatically curtailed
whenever they are able to return to work. Optimistic projections that the US
economy would quickly bounce back once stay-at-home orders were lifted are now
becoming much gloomier.
A University of Chicago analysis from
earlier this month projects that 42 percent of lost jobs will be permanently
eliminated. At the current record number, this will mean a destruction of 16.2
million jobs, nearly double the number of jobs which were lost during the Great
Recession just over a decade ago.
“I hate to say it, but
this is going to take longer and look grimmer than we thought,” Nicholas Bloom,
a Stanford University economist and one of the co-authors of the study, told
the New York
Times.
A survey by the Census
Bureau carried out at the end of April and beginning of this month found that
47 percent of adults had lost employment since March 13 or had someone in their
household do so, and 39 percent expected that they or someone else in the home
would lose their job in the next month. Nearly 11 percent reported that they
had not paid their rent or mortgage on time and more than 21 percent had slight
or no confidence that they would do so next month.
With millions missing
their rent or mortgage payments, tens of thousands of families will be thrown
out on the street in the coming weeks and months, leading to a dramatic rise in
homelessness even as the coronavirus continues to spread. While many states
took steps in March to place a moratorium on evictions, and eviction notices
were unable to be filed due to court closures, those measures are now expiring
and courts are reopening.
The Oklahoma County
Sheriff announced Tuesday via their Twitter page that the department would
resume enforcing evictions on May 26. Nearly 300 eviction cases were filed in
Oklahoma City between Monday and Tuesday. This process is being repeated in
cities and counties across the country. Evictions are also set to resume in
Texas next week, where many families were ineligible for aid due to the
undocumented status of one or another parent. The CARES Act provision, which
blocks evictions from properties with federally subsidized mortgages, expires
on July 25; in Texas this only accounts for one-third of homes.
Meanwhile, another wave
of layoffs and furloughs is expected by the Congressional Budget Office at the
end of June, when the multi-billion-dollar Payment Protection Program (PPP)
expires. Sold as a bailout which would help small businesses keep workers on
their payroll in the course of necessary shutdowns, the PPP was in fact a
boondoggle for large corporations, their subsidiaries and those with
connections to the Trump administration. Many small business owners have not
seen any aid, and many do not qualify for loan forgiveness.
Amid historic levels of
social misery in the working class, times have never been better for those at
the heights of society, with America’s billionaires adding $434 billion to
their total net worth since state lockdowns began. Financial markets have
soared, underwritten by $80 billion per day from the Federal Reserve.
Amazon CEO Jeff Bezos,
who is rescinding a $2-an-hour hazard pay increase for his warehouse workers at
the end of the month, led the pack, increasing his personal wealth by $34.6
billion since the onset of the pandemic. Facebook CEO Mark Zuckerberg was close
behind, adding $25 billion to his fortune. Tesla CEO Elon Musk, who reopened
his California auto plant in defiance of state regulators and with the support
of President Trump, saw a 48 percent increase in his wealth to $36 billion in
just eight weeks as the stock market rebounded from its collapse. All told, the
nation’s 620 billionaires now control $3.382 trillion, a 15 percent increase in
two months.
US unemployment claims approach 40
million since March
22 May 2020
The United States
Department of Labor reported on Thursday that more than 2.4 million Americans
applied for unemployment insurance last week, bringing the total number of new
claims to 38.6 million since mid-March, when social distancing measures and statewide
stay-at-home orders were first implemented in an effort to slow the spread of
the coronavirus.
Even with the push by
the Trump administration since then to reopen the economy and the easing of
lockdown orders in all 50 states—despite a continued rise in COVID-19
infections and deaths—the US marked its ninth straight week in which more than
2 million workers filed for unemployment. While this is down from the peak at
the end of March when 6.8 million applied for unemployment insurance, it still
dwarfs the worst weeks of the Great Recession in 2008.
It is expected that the
official unemployment rate for May, which is to be reported by the federal
government in the first week of June, will approach 20 percent, up from 14.7
percent last month. This is a significant undercount, with millions of
unemployed immigrants unable to apply for benefits, and many other workers who
are not currently looking for work and therefore are not counted as unemployed.
Fortune magazine
estimates that real unemployment has already hit 22.5 percent, which is nearing
the peak of unemployment reached during the Great Depression in 1933, when the
rate rose above 25 percent. Millions more are expected to apply in the coming
weeks, pushing the numbers beyond those seen during the country’s worst
economic crisis.
But even these figures
do not capture the extent of the crisis now unfolding across the country.
Millions have been blocked for weeks from applying for unemployment
compensation because of antiquated computer systems, and a significant share of
those who have applied have been denied any payments. On top of this there are
significant delays in processing applications in multiple states, including
Indiana, Missouri, Wyoming and Hawaii. Meanwhile, Florida, which has some of
the most stringent restrictions, has refused to extend its paltry three-month
limit on payments for the few who manage to qualify.
Sparked by the
pandemic, the greatest economic crisis since the 1930s is already having a
devastating impact on the millions who have seen their jobs suddenly disappear,
while millions more will see wages, benefits and hours dramatically curtailed
whenever they are able to return to work. Optimistic projections that the US
economy would quickly bounce back once stay-at-home orders were lifted are now
becoming much gloomier.
A University of Chicago analysis from
earlier this month projects that 42 percent of lost jobs will be permanently
eliminated. At the current record number, this will mean a destruction of 16.2
million jobs, nearly double the number of jobs which were lost during the Great
Recession just over a decade ago.
“I hate to say it, but
this is going to take longer and look grimmer than we thought,” Nicholas Bloom,
a Stanford University economist and one of the co-authors of the study, told
the New York
Times.
A survey by the Census
Bureau carried out at the end of April and beginning of this month found that
47 percent of adults had lost employment since March 13 or had someone in their
household do so, and 39 percent expected that they or someone else in the home
would lose their job in the next month. Nearly 11 percent reported that they
had not paid their rent or mortgage on time and more than 21 percent had slight
or no confidence that they would do so next month.
With millions missing
their rent or mortgage payments, tens of thousands of families will be thrown
out on the street in the coming weeks and months, leading to a dramatic rise in
homelessness even as the coronavirus continues to spread. While many states
took steps in March to place a moratorium on evictions, and eviction notices
were unable to be filed due to court closures, those measures are now expiring
and courts are reopening.
The Oklahoma County
Sheriff announced Tuesday via their Twitter page that the department would
resume enforcing evictions on May 26. Nearly 300 eviction cases were filed in
Oklahoma City between Monday and Tuesday. This process is being repeated in
cities and counties across the country. Evictions are also set to resume in
Texas next week, where many families were ineligible for aid due to the
undocumented status of one or another parent. The CARES Act provision, which
blocks evictions from properties with federally subsidized mortgages, expires
on July 25; in Texas this only accounts for one-third of homes.
Meanwhile, another wave
of layoffs and furloughs is expected by the Congressional Budget Office at the
end of June, when the multi-billion-dollar Payment Protection Program (PPP)
expires. Sold as a bailout which would help small businesses keep workers on
their payroll in the course of necessary shutdowns, the PPP was in fact a
boondoggle for large corporations, their subsidiaries and those with
connections to the Trump administration. Many small business owners have not
seen any aid, and many do not qualify for loan forgiveness.
Amid historic levels of
social misery in the working class, times have never been better for those at
the heights of society, with America’s billionaires adding $434 billion to
their total net worth since state lockdowns began. Financial markets have
soared, underwritten by $80 billion per day from the Federal Reserve.
Amazon CEO Jeff Bezos,
who is rescinding a $2-an-hour hazard pay increase for his warehouse workers at
the end of the month, led the pack, increasing his personal wealth by $34.6
billion since the onset of the pandemic. Facebook CEO Mark Zuckerberg was close
behind, adding $25 billion to his fortune. Tesla CEO Elon Musk, who reopened
his California auto plant in defiance of state regulators and with the support
of President Trump, saw a 48 percent increase in his wealth to $36 billion in
just eight weeks as the stock market rebounded from its collapse. All told, the
nation’s 620 billionaires now control $3.382 trillion, a 15 percent increase in
two months.
Further details emerge on the extent
of the mid-March financial crisis
By Nick Beams
22 May 2020
An article in the Wall Street Journal (WSJ)
earlier this week provided further details on how close financial markets came
to a meltdown in the middle of March.
Entitled “The Day
Coronavirus Nearly Broke the Financial Markets,” the article recorded how
markets in financial assets, usually regarded as being almost as good as cash,
froze when “there were almost no buyers.”
“The financial system
has endured numerous credit crunches and market crashes, and the memories of
1987 and 2008 crises set a high bar for marker dysfunction. But long-time investors
… say mid-March of this year was far more severe in a short period. Moreover,
the stresses to the financial system were broader than many had seen,” it said.
In testimony and
interviews, US Federal Reserve chair Jerome Powell has been at pains to
emphasise that regulatory mechanisms and policies introduced after the 2008
crisis have strengthened the financial system.
In his interview on the
CBS “60 Minutes” program last Sunday, for instance, Powell downplayed the
threat of unemployment reaching levels not seen since the Great Depression. In
the 1930s, he said, the financial system had “really failed,” but that today
“our financial system is strong [and] has been able to withstand this. And we
spent ten years strengthening it after the last crisis. So that’s a big
difference.”
In his interview on the
CBS “60 Minutes” program last Sunday, for example, when asked about the
prospect of US unemployment rising to levels not seen since the Great
Depression, Powell stated that at that time the financial system “really
failed.”
He claimed that in
contrast to the 1930s, “Here, our financial system is strong [and] has been
able to withstand this. And we spent ten years strengthening it after the last
crisis. So that’s a big difference.”
In fact, Powell’s
reassurances are contradicted by the Fed’s own Financial Stability Report
issued last Friday. Focusing on the mid-March crisis, it noted: “While the
financial regulatory reforms adopted have substantially increased the
resilience of the financial sector, the financial system nonetheless amplified
the shock, and financial sector vulnerabilities are likely to be significant in
the near term.”
The events in mid-March
revealed what has actually taken place. While the Fed has taken limited
measures to try to curb some of the riskier activities of the banks that
sparked the 2008 crash, the dangers have simply been shifted to other areas of
the financial system.
The speculation of the
banks may have been curtailed somewhat, but it is now being carried out by
hedge funds and other financial operators. They are financed with ultra-cheap
money provided by the Fed through its low-interest rate regime and market
operations, such as quantitative easing and, more recently, its massive
interventions into the overnight repo market.
The WSJ report, based
on interviews with Wall Street operatives, provided some insights into how the
financial system “amplified” the shock of the pandemic.
Ronald O’Hanley, CEO of
the investor services and banking holding company State Street, recounted the
situation that confronted him on the morning of Monday, March 16. On Sunday
evening, before markets opened, the Fed had announced it was cutting its base
rate to zero and was planning to buy $700 billion in bonds, but with no effect.
According to the
report, a senior deputy told O’Hanley that “corporate treasurers and pension
managers, panicked by the growing economic damage from the COVID-19 pandemic,
were pulling billions of dollars from certain money-market funds. This was
forcing the funds to try to sell some of the bonds they held. But there were
almost no buyers. Everybody was suddenly desperate for cash.”
The article noted that
rather than take comfort from the Fed’s extraordinary Sunday evening actions,
“many companies, governments, bankers and investors viewed the decision as
reason to prepare for the worst possible outcome from the coronavirus
pandemic.” The result was that a “downdraft in bonds was now a rout.”
It extended into what
had been regarded as the most secure areas of the financial system.
The WSJ article
continued: “Companies and pension managers have long-relied on money-market
funds that invest in short-term corporate and municipal debt holdings
considered safe and liquid enough to be classified as ‘cash equivalents.’ … But
that Monday, investors no longer believed certain money funds were cash-like at
all. As they pulled their money out, managers struggled to sell bonds to meet
redemptions.”
So severe was the
crisis that Prudential, one of the largest insurance companies in the world,
was “also struggling with normally safe securities.”
The article provided a
striking example of how, when a fundamentally dysfunctional and rotting system
seeks to undertake a reform, it generally only exacerbates its underlying
crisis. This phenomenon has been long-known in the field of politics, but the
events of mid-March show it applies in finance as well.
On the Monday morning
when the crisis broke, Vikram Rao, the head of the debt-trading desk at the
investment firm Capital Group, contacted senior bank executives for an
explanation as to why they were not trading and was met with the same answer.
“There was no room to
buy bonds and other assets and still remain in compliance with tougher
guidelines imposed by regulators after the previous financial crisis. In other
words, capital rules intended to make the financial system safer were, at least
in this instance, draining liquidity from the markets,” the WSJ report stated.
The crisis had a major
impact on investors who had leveraged their activities with large amounts of
debt—one of the chief means of accumulating financial profit in a low-interest
rate regime.
According to the WSJ
article: “The slump in mortgage bonds was so vast it crushed a group of
investors that had borrowed from banks to juice their returns: real-estate
investment funds.”
The Fed’s actions,
have, at least temporarily, quelled the storm. But it has only done so by
essentially becoming the backstop for all areas of the financial
market—Treasury bonds, municipal debt, credit card and student loan debt, the
repo market and corporate bonds, including those that have fallen from
investment-grade to junk status.
And, as Powell made
clear in his “60 Minutes” interview, the Fed plans to go even further if it
considers that to be necessary.
“Well, there’s a lot
more we can do,” he said. “I will say that we’re not out of ammunition by a
long shot. No, there’s really no limit to what we can do with these lending
programs that we have. So there’s a lot more we can do to support the economy,
and we’re committed to doing everything we can as long as we need to.”
The claim the Fed is
supporting the “economy” is a fiction. It functions not for the economy of
millions of working people, but as the agency of Wall Street, ready to pull out
all stops so that the siphoning of wealth to the financial oligarchy, which it
has already promoted, can continue.
An indication of what
“more” could involve is provided in the minutes of the Fed’s April 28–29
meeting.
There was a discussion
on whether the Fed should organise its purchases of Treasury securities to cap
the yield on short and medium-term bonds. This is a policy employed by the Bank
of Japan that has also recently been adopted by the Reserve Bank of Australia.
No immediate decision
was reached, but the issue is certain to be raised again. Over the next few
months, the US Treasury will issue new bonds to finance the operation of the
CARES Act that has provided trillions of dollars to prop up corporations while
providing only limited relief to workers.
By itself, the issuing
of new debt would lead to a fall in the prices of bonds because of the increase
in their supply, leading to a rise of their yields (the two move in opposite
directions) and promoting a general rise in interest rates—something the Fed
wants to avoid at all costs in the interests of Wall Street.
The only way the Fed
can counter this upward pressure is to intervene in the market to buy bonds,
thereby keeping their yield down. This would formalise what is already de facto
taking place, where one arm of the capitalist state, the US Treasury, issues debt
while another arm, the Fed, buys it.
This would further
heighten the mountain of fictitious capital which, as the events of mid-March
so graphically revealed, has no intrinsic value and is worth essentially zero.
The ruling class cannot
restore stability to the financial system by the endless creation of still more
money at the press of a computer button. Real value must be pumped into
financial assets through the further intensification of the exploitation of the
working class and a deepening evisceration of social programs.
Financial crises are
presented in the media and elsewhere as being about numbers. But behind the
economic and financial data are the interests of two irreconcilably opposed
social classes—the working class, the mass of society, and the ruling corporate
and financial oligarchy whose interests are defended by the state of which the
Fed is a crucial component.
As 2008 demonstrated,
what emerges from a financial crisis is a deepening class polarisation. That
will certainly be the outcome of the mid-March events. A massive social
confrontation, already developing long before the pandemic arrived on the
scene, is looming in which the working class will be confronted with the
necessity to fight for political power in order to take the levers of the
economy and financial system into its own hands.
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