Our Economy Was Broken & Now the Coronavirus Is Going to Expose It
A deeper look at the house of cards our modern economy rests on
If you’ve been paying attention you’ve likely noticed the markets tumbling down for the past few days now as apprehension solidifies regarding the coronavirus’ (Covid-19) potential mutation into a global pandemic. This week the S&P 500 experienced its worst 2-day plunge since 2018. Several Asian economies are currently on the brink of recession as economic activity grinds to a halt in China and elsewhere in the region. Gold prices have now reached a 7-year high in response. President Trump is presently panicking since any prolonged recession occurring between now and November would spell death for his reelection bid, and as a result was furious when 14 U.S citizens who tested positive for the virus were allowed re-entry into the country. In fact, it has been reported the president told advisers that he does not want the administration to do or say anything that would further “spook the markets”, in essence rendering the U.S response to Covid-19 one of no response since apparently that is the market-friendly response. The Center for Disease Control and Prevention, a branch of the federal government that Trump has defunded coincidentally, has stated that it is not a matter of if Covid-19 spreads to and within the U.S but a matter of when. Given the dismal state of sick leave in the U.S, workers will continue to report to work even if they feel sick making the spread of the virus within the U.S a virtually guaranteed eventuality. Cementing this was a new case discovery, the first in the U.S without any ties to a known outbreak, occurring just minutes after Trump's coronavirus press conference tonight, in which he heavily downplayed the potential pandemic, as well as strangely appointed Mike "Evolution is a Myth" Pence as the frontman for handling the crisis. Also today, the World Health Organization announced more new cases of the virus occurring outside of China than inside, marking the transition of the virus from a regional epidemic to global pandemic in all but name. Adding fuel to the fire are current estimates which place the viability of any widely deployable vaccine to over a year from now at the earliest.
Due to decades of globalization and offshoring, the U.S is heavily reliant on overseas production for basically everything, including key ingredients in over 150 prescription drugs. With China, Italy, and South Korea shutting down major production centers, the global supply chain will likely dry up in a matter of weeks with the emptying of manufacturer inventories following shortly thereafter. A devastating Q2 will likely be unavoidable as America deals with a crisis of production for the first time in 80 years. Mark Stoller has an excellent piece articulating how Covid-19 will mark the end of ‘affluence politics’ as it exists in America today, remarking the following:
Regardless, the end of affluence politics means focusing on whether medicine is on shelves, not bitter disputes over bloated and wasteful hospital and insurance billing departments. It means caring about bureaucratic competence in government, and accuracy in media, not because these are nice things to have but because they are necessary to avoid immense widespread suffering. It means understanding that pharmaceutical mergers that benefit shareholders while laying off scientists are destructive, not just because they are unfair, but because they make us less resilient to disease. (Shareholders, as it turns out, also have lungs.) Finally, it means recognizing that wealth, real wealth, is not defined by accounting games on Wall Street, but the ability to meet the needs of our own people.
Stoller also mentions the historic importance of this kind of event converging upon the runup to a presidential election and the significance that it will bear on it. Likewise, this bout of uncertainty brought by the spread of Covid-19 provides a valuable exposé on the fragility of the contemporary economic system, a fragility of which long predates the emergence of Covid-19.
The Stock Market isn’t The Economy
Contrary to what Donald Trump might think, the stock market is not the economy. If the stock market were reflective of the economic well being of Americans, well then, I wouldn’t be writing this piece. As it stands, close to 90% of all shares are owned by the wealthiest 10%, with the wealthiest 0.1% and 1% of Americans owning about 17% and 50% respectively. You can expect those numbers to grow if any kind of recession follows in the coming months as ‘ma and pa’ investors are forced to capitulate and sell off what little shares they own while those in the upper echelons buy the dip, consolidating more wealth just as they did in the wake of 2008. Excluding the past few days, the stock market has been on an absolute tear since December 2018 when the Federal Reserve announced an increase in interest rates before quickly lowering them back down (more on this later), and before that was on an equally impressive run going back to 2010. This begs the question, what is fueling the madness in the equities market? On account of most price fundamentals, the market is heavily overvalued. In October of last year, Apple reached a market cap valuation of $1 Trillion USD for the second time after a rough end to 2018. Just four months later, Apple eclipsed a $1.4 trillion market cap in February of this year. It’s just one microcosm of the stupendous bull run this market is undergoing, so again, what gives? The answer lies in the Fed’s continuation of historically low interest rates as well as the 2017 Trump tax cuts. In the case of the former, the Fed’s low interest rates have made debt virtually cost-free for large borrowers.
Typically, low interest rates are cyclically employed in response to an economic contraction in order to encourage spending and are gradually increased as inflation rises to prevent the overheating of an economy. The problem is people aren’t spending primarily because people don’t have any money. Over half of America would be unable to pay an unexpected $500 expense in the event of an emergency. Despite this, the Fed has kept the effective federal funds rate at historically low levels for a decade now in order to stimulate growth. And Trump has made it clear across several twitter tantrums that he wants the Fed to set rates even lower. So, where is all that cheap money going? The stock market is the simple answer. Instead of a consumer-inflation, we now have an overinflated equities market (and real estate market too to a large extent) long since divorced from reality and it shows when you stop to look at the bloated corporate debt bubble we’re currently in. This phenomenon stretches across borders too as the International Monetary Fund reported in 2019 that roughly 40% of corporate debt in eight leading countries would be impossible to pay in the event of an economic downturn half as bad as 2008’s. Netflix is the perfect distillation of this corporate debt gluttony. Victor Look explains how Netflix’s junk bonds illustrate the corporate debt bubble we’re in:
About 12 of the 14 billion dollars of Netflix debt is made of junk bonds. Netflix has had impressive growth since 2014. Its yearly net income has gone from 266 million to 1.8 billion. It will need to double that in order to pay its first round of bonds starting in 2027. Anything less than a continued parabolic growth for 7 more years is defeat. The real catch is, their competitors have to do the same thing.
Second is the issue of Trump’s $1.5+ trillion tax cuts. The cuts, which have greatly enriched the rich further via a flat 21% corporate tax rate, have also exploded the deficit to over $1 trillion. Keep in mind, real GDP growth was only 2.3% in 2019. The real GDP closed out at $19.2 trillion as of Q4 2019 equating to a 5.2% deficit-spending to GDP ratio. This means we're spending over twice as much as we’re getting back in growth. It would be one thing if the increased deficit was being utilized to rebuild our crumbling infrastructure or provide people with healthcare (like the rest of the developed world does), but instead, we’re going into debt so that Trump and his wealthy Mar-a-Lago buddies can get even more wealthy, and so that we can continue to wage unwinnable abstract wars.
The Reality for Most Americans
The reality is that most Americans never recovered from the crisis in 2008 and that many weren’t doing well before that. Black households were hit especially hard by the recession, with black net worth and homeownership figures regressing since the end of the recession. Real wages have flatlined for decades now when taking Consumer Price Index into account. The Bureau of Labor Statistics released a 2019 yearly report in which it cited total earnings for hourly workers rising by half a percent at the same time that total hours were reduced by half a percent — a resulting net zero increase in earnings. Oh, and by the way, the stock market rose 29% over the same year-long period — in case more evidence was needed that the stock market’s success says practically nothing of the well-being of average Americans. In addition, productivity has skyrocketed over the past half-century leading to record-breaking profits in the private sector with virtually none of the gains being shared with workers. A worker earning $4 an hour in 1973 would need to be earning $23 per hour in 2020 to hold the same purchasing power today.
Furthermore, with employment as low as it is right now (3.6%) we would expect to see wages rising as employers become more compelled to compete for workers as well as outbid competitors to keep from losing their current employees to them. But, Small businesses didn’t hire any new workers in 2019 according to a report done by Moody Analytics. Headcount at businesses with fewer than 20 employees remained basically unchanged in 2019. Moody’s chief economist Mark Zandi had this to say:
The demographics are overwhelming. Unless we change immigration laws significantly, all businesses will be struggling to find workers . . . This will become a significant brake on economic growth.
This is because labor force participation is near an all-time low only barely beginning to rebound recently. This has spawned a novel side-hustle fetishization also referred to as the precarious ‘gig-economy’. The unemployment number also says nothing of the quality of these jobs. These jobs often offer no benefits and will refuse to grant workers more than a certain number of weekly hours in order to render them part-time (typically 30 or less). Increasingly, more Americans are having to work multiple of these low-security jobs just to get by.
The end result is Americans are increasingly going into debt to make ends meet. Medical debt is especially burdensome for Americans. According to new research done by the Journal of General Internal Medicine, 137 million Americans are struggling with medical debt. Separate research has also found 66.5% of all personal bankruptcies to be tied to medical issues. And the sad reality is that even with the U.S outspending the rest of the developed world by far for medical care, life expectancy has been decreasing since 2016 — something not seen anywhere else before in the developed world. This is largely due to the rise in deaths of despair, often manifested in the opioid crisis. There also exists a disconcerting gap in life expectancy between the top and bottom half of earners. Unsurprisingly, U.S happiness is steadily decreasing.
Of course, this debt isn’t limited to just medical expenses. According to the New York Fed’s recent credit and debt report, total U.S Household debt surpassed $14 trillion for the first time ever. To that end, Americans have been increasing their borrowing for 22 straight quarters according to the report. Debt for young people ages 18 to 29 also eclipsed $1 trillion for the first time ever. Alex Tanzi breaks the numbers down further in an article for Bloomberg:
Auto loans rose to $1.33 trillion, while credit card debt rose to a record $930 billion. Auto debt, which has risen for 35 consecutive quarters, increased $16 billion from the previous quarter. Almost 5% of auto loans are 90 days of more delinquent. This is the highest percentage since the third quarter of 2011.
Seeing this many auto loan delinquencies is especially worrying since one of the key takeaways for economists after 2008 was that auto loans were one of the last bills people stopped paying. For many, this was due to their car being the sole mode of transportation available to them for getting to work, and because as a last resort, they could live in their car. Credit card delinquencies also rose to an 18-month high.
The student loan debt crisis continued to worsen as well. Total student debt crossed over a threshold of $1.5 trillion with more than $100 billion of that belonging to people over the age of 60.
Among student debt, one in nine borrowers were 90+ days delinquent or in default in 2019, and this figure may be understated. About half of student loans are currently in deferment, in grace periods or in forbearance and therefore temporarily not in the repayment cycle. Once these loans enter that cycle, delinquency rates are projected to be roughly twice as high, according to the Fed report.
Leila Ettachfini has a poignant piece in Vice that details how the U.S Army handily beat it’s recruitment goals last year by targeting students in debt. The student debt crisis being cynically employed to link debt forgiveness to military service is sinister to fathom and a modern-day form of debt peonage. This makes the calls for canceling all student debt by Democratic presidential candidates Bernie Sanders and Elizabeth Warren all the more crucial.
While Republican boomers might try to blame a general lack of fiscal responsibility and boot-strap pulling, it is actually the case that millennials started saving earlier than other generations, yet they still have less wealth than their parents did at their age. All of this has culminated in a dejected and frustrated bloc of working people nationwide.
Unfortunately, these are but a few symptoms of the economy's underlying plague. Financialization, increased short-termism, extreme complexity, and as mentioned previously, the utilization of credit to mask rising inequality, have all contributed to exposing this economy to a dangerous amount of downside going forward.
Due to increased short-termism, average share-holding periods have eroded over the past half-century. In 1960, the average holding period was eight years; 4 months. Today, holding periods range from just 4 to 8 months on average depending on the model used.
As a result, corporations don’t invest as they once did. With investors no longer invested (no pun intended) in the long-term, corporations ceased to see the importance to invest as they once did, instead prioritizing more immediate profits. Certainly, one of the fastest ways to increase profits (aside from the private equity playbook of cutting workers, wages, and hours) is to simply not invest them. Instead, profits are essentially handed back to shareholders via dividends and buybacks. From the 1950s until the 70s, corporations were giving away 35% to 45% of profits to shareholders via dividends (buybacks were rare then and illegal in many places). Since 2000, that number has risen to 95%. There is simply no money left for investment.
Synthetic financial products like the ABS, CDO, CDO², CDO³, etc. and the credit default swaps that were meant to insure them, are ultimately what led to the subprime mortgage crisis in 2008. In the case of the Asset Backed Security, thousands of loans of various types are neatly repackaged as a single security thus removing the idiosyncrasies of the individual loans from the purview of the investor. From this came the Collateralized Debt Obligation which concatenated several hundred ABSs and carved them up into tranches based on risk profile. CDO² builds upon this and from there on its anyone’s guess as to how the hell any of it actually works. The idea, in theory, was to pool risk together to make the products secure as well as serve individual investors’ needs — in theory. The reality was that this complexity quickly grew beyond any reasonable measure. Andy Haldane, the Chief Economist of the Bank of England, once calculated that if one wanted to read all of the information contained within one CDO² product, one would need to read the equivalent of one billion pages of documentation.
The solution is simple. Ban overly complex products and force issuers of these instruments to prove beyond a reasonable doubt that they are in fact safe. Regulations often require food and drink suppliers to prove beyond any reasonable doubt the safety of any novel chemical before they are allowed to introduce it into their manufacturing process or final product. A similar stance must be taken in the financial sector in order to curb creeping overly clever complexification.
The Credit Safety Valve
The income and wealth disparities ensconced in the capitalist mode of production are rapidly worsening globally. Hard to see on the figure below is a small rising blip in the average real income of the top 1% in the 1920s leading up to the Great Depression. That small divergence in income growth between the top 1 and bottom 90% beginning in the late 19th century, led to intense agitation and social unrest. Populist, socialist, and fascist movements all sprouted in response to this. Strikes, riots, and revolutions served as the backdrop for much of this time period. Conversely, hard to miss is the very sharp rise in income inequality visible in the 1980s — the early height of the neoliberal period. This was one of the desired outcomes of neoliberalism. Important to remember is that the neoliberal order metastasized under the auspices of four central operands which were deregulation, privatization, liberalization of trade, and austerity. Among the four, austerity is of special note as the slashing of social programs equated to a reduction in the income (spending power) of workers. Curiously, right around the same time, relatively easy to access credit became widely available and household debt exploded from 30% of GDP in 1980 to roughly 105% today. This was crucial as without the financialization revolution and the credit bubble that followed there would be widespread mass social unrest in response to such a drastic decoupling of average real income growth between the top and bottom income brackets. Massive amounts of loans being offered, often at a steep price, became a political safety valve. The more “individualistic” solution of borrowing money became the preferred alternative to flooding the streets in protest as a means of applying pressure on politicians to improve material conditions.
Only in recent times have agitations begun to resurge. It was 2008 that marked the widescale puncturing of this credit sustained safety valve as now many cannot even afford to borrow their problems away anymore. Beginning with the Occupy movement and maturing into the modern-day resurgence of socialist consciousness in America, the fed-up state of workers nationwide is reflected in avenues such as the grassroots power of the Bernie Sanders campaign. Likewise, this same working-class malaise has been manipulated and wielded to manifest in oppositely grotesque manners culminating in the rise of clown-fascists U.S President Donald Trump and Brazilian President Jair Bolsonaro. This is an important dynamic at work as pointed out by the U.N. in a new report which warns that runaway inequality is destabilizing democracies worldwide. Undeniably, Fascism and authoritarianism are on the rise globally. Meanwhile, half of Americans ages 18–35 view socialism positively.
Regardless, this shift towards a debt-buoyed society is one of the more recent demonstrations of the inherent contradiction of infinite growth required under capitalism on a planet with finite resources. It is also one of the main contributors to the 2009 European debt crisis, of which Greece is only now beginning to emerge. Verily, if there is anything to take away from this writing it is the following: the recession of 2008 never ended. It merely shifted away from certain American sectors onto the nations and sectors of the periphery. And unfortunately, due to being beholden to the limited European Central Bank’s monetary policy, Greece had no recourse (i.e devaluing their proprietary currency to encourage foreign investment) to prevent the nation from collapsing under its own weight.
Moreover, there is inherently a zero-sum quality to the importance placed on societal institutions. A poorly implemented, overly globalized, overly complex financial system siphoned attention away from many of society’s key productivity wells. Dimitrios Kyriakou states as much in his 2018 Cadmus journal analysis which focused on the European debt crisis:
Underlying all this [the Euro debt crisis], there has been a total (public+private) debt bubble that has been growing since the 1980s, and an implicit promise of higher standards of living through large market deregulation experiments (chief among them are capital markets and capital mobility deregulation). Delivering on this implicit promise called for an increasing assumption of debt . . . Unfortunately, not only did debt growth prove to be too rapid, the growth of finance ended up attracting grey matter away from science and technology, the ultimate productivity-growth booster, and giving finance the grey matter to engineer ever-cleverer ways to raise debt. (emphasis added)
To be clear, this is not an indictment of Modern Monetary Theory style social-democratic deficit spending nor a deficit-hawk cry for “balancing the budget”. Governments with proprietary currencies ought to take advantage of the fact that they cannot default on a currency that they hold a monopoly to print. Deficits should be wielded to benefit a nation’s citizens in the form of socialized healthcare, retirement income, infrastructure projects, scientific research, and more. Doing so ensures GDP growth well into the future beyond what was paid today. The problem lies in the aforementioned ailments of the current economic system which allocate resources away from a society’s key productive sectors, as well as place an undue burden on a society’s households.
Perhaps the most potentially destructive element residing in the fragile economic system at this moment is the existential threat of climate change. Built into the negative feedback loop of anthropic climate change is the increased frequency of unpredictable extreme weather patterns as well as an increase in their severity. If Covid-19 doesn’t spark an economic recession than it will likely be an extreme weather event the likes of which we’ve never seen before that does. Despite the abundance of clear science, much of the risk of climate change simply hasn’t been priced into the market at this time.
The Good News
Let’s be clear, with any economic downturn it is working people and vulnerable populations who will suffer disproportionately. However, if Covid-19 ends up being the excuse needed for this house-of-cards economy to come crashing down then there are some notable upsides. Firstly, an economic recession is unavoidable and given historical trends we are long overdue for one. Prolonging the inevitable will only serve to worsen the recession when it does occur. Secondly, a recession might be the solitary thing that can actually get Trump ousted from office. With a Bernie Sanders nomination appearing more certain by the day, if a president Sanders takes office on the heels of a recession, as Obama once did, then he will be able to leverage a great deal of power to reform the corrupted financial system and rigged economy in a way that benefits Labor and not Capital. Essentially, fulfilling the exact dream that Obama failed to deliver on a little over a decade ago. I cannot think of a more fitting beginning to a hypothetical Sanders presidency.
Let us hope that the damage done by Covid-19 is contained soon and that the nations of the world can come together in a display of unity. Who knows, maybe an international coordinated undertaking on this scale can be parlayed into greater international cooperation on issues such as climate change. Whatever the case, if Covid-19 is in fact the catalyst for our next recession, we must not let it be in vain. Indeed, the worst thing we can do is not learn our lesson a second time.