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Richard Koo Details ‘The Many Irreversible Impacts Of COVID-19’
"I think the most appropriate economic policy response to the pandemic would be for the government to supply adequate 'survival funds' to the private sector while the central bank helps with monetary financing of the resulting deficits", Richard Koo, of "balance sheet recession" fame, writes, in a note dated Tuesday.
That is, of course, precisely what's unfolding across the world. We are "simulating" incomes, both for individuals and businesses, in an effort to avert a scenario where a liquidit
This is dire. I was of the “moral hazard” school in February. By March, I jettisoned that thinking. “Moral hazard” any longer is retro thinking. Richard Duncan helped changed my thinking, Then I found H.
it doesn’t matter that someone bought a luxury watch. It doesn’t matter if reporters around the country find 1,000 people who bought luxury watches with their $600. (The 10,000 people who sold the watches each received $600 income.) This is a depression. There will be some unsavory uses of the funds. So what. It beats a deflationary winter.
I was in the same boat as you. I didn’t trust the rally the past couple years as I saw corporate debt balloon and thought I would wait patiently in cash along with Buffett until we had some sort of crisis. I was admittedly frustrated at first seeing the market rebound so quickly as I didn’t move quickly enough to take advantage, but agree that H has helped make sense of all that’s happening and why all these support programs are critical.
H, I greatly appreciate your writing and have found myself much calmer and less resentful as I watch the markets. Now I feel like I have a much better grasp of the dynamics driving the market and also have taken a much less judgmental view of the fed. There are people and businesses that need all the help they can get right now which is far more important than me making a couple extra bucks on their backs.
I have no idea where we go from here, but I’ll just continue to be patient as we assess the ongoing damage and hope that things don’t get worse.
Not wearing a mask in a privately held public place of business being a trampling of rights??? Moral hazards always abound. Morals are what we grew up on. Adult humans have many decisions to make and prefer to defer and use the age old survival mechanism; Denial. Powell mentioned the fiscal side right from the beginning. Politics is the ultimate ongoing denial of reality. We have a hard road ahead, no denying. Religionism and nihilism are currently the strange bedfellows we are up against. That has got to be wrong and so what, may trump foresight and wisdom. Very many investors and economists are coming around to sudden realizations about what we are up against. Jealousy about a watch is so trite. Trees and forest.
Really interesting reading and a lot of ideas to think about here.
INFO for those who didn’t Google Richard Koo…..He is Taiwanese , American Educated Economist….Grew up in Japan and is currently at Nomura (with Charlie)…after working with Fed in US…
Anyway , what comes to mind is this Pandemic and how it exploits different parts of the World in different ways based on the characteristics of different economies and their relative position as regards development and prosperity..
Here in the US a developed economy relatively prosperous the large portion of the GDP is Consumer Spending (generally quoted at 70% ) This creates a situation where the jobs especially in the lower 50% (earnings wise that is) are in services and thus nonessential to the functioning of a society except as regards people having income and perpetuating the system. When the apple cart is upset (as currently it is) the magnitude of the problem is phenomenal in it’s scale . Elsewhere the dynamics change based on the ratio of services to essential activity.. It as I recall was my initial argument against Globalization which was a trend during the Clinton Years and was a factor in American Prosperity for 4 decades to come… It will be interesting to watch the Recovery Rate of different economies on the Global scale… I sort of see this feature as being a relevant part of future discussions and Political trends…..Actually it already is……!!
Can you imagine what the Bundesbank would be doing if they were still independent? No doubt they would be cranking up rates and tightening monetary conditions!!
Otherwise healthy/viable companies.. is like saying a person has a tumor which will eventually kill him, but he’s otherwise healthy, or an animal that didn’t eat up to survive next hunger season, but otherwise healthy.
No matter where you look in a world around us, you will find examples of moving fast but dying quickly, or moving slowly but surviving dangers.
It’s the same with humans. We either spend like there is no tomorrow, enjoy life in beautiful places – or we brace for long run, we sacrifice ability to live in places we like with places less developed, but economically more viable.
It is impossible to fix the fact that people in USA, and large cities like NY, SF, LA, are living paycheck to paycheck. An attractive place always brings enough population that competes with each other to the point of worst possible quality of living conditions, and worst possible savings. You can’t demand higher salaries, you can’t save, because there is always someone else willing to accept a job and living on less sqft and saving less.
And so there are people who recognize how deadly these places are, and they purposely build their families and life in remote and harsh places.
It’s the same with companies. Company as a whole represents psychology of it’s owners and managers.
When someone starts speaking about “saving” population, or a business, or an economy – to me it looks like a God complex. Wanna play with rules of the nature? Simulate this and that? Save those who’ve been more greedy and less prepared for end of a party? You can do it, for some time, but there will be consequences.
By “patching” the system with money, we just extend lifespan of a broken policy and unhealthy individuals and organizations. But sooner or later change will happen anyway.
I think Sociological like Economic phenomenon are played out in generational cycles .. Witness the mood and actions of people (next 2-3 generations) following the Great Depression of the 1930’s..and compare to today … Those lessons are going to be relearned as we will likely see.
So your contention is that any company which cannot ride out a 3-month cessation of all economic activity should be pushed into bankruptcy? Do you have any idea what that would entail? This is like the people on Twitter who suggest the Fed shouldn’t have reinstated the commercial paper funding facility. What you’re suggesting is economic oblivion. If that’s what you really think you’re prepared for, then more power to you. But my guess would be you’re like the rest of us: Not really excited about the notion of the ATMs going dark and tens of millions of businesses closing their doors forever, leaving entire communities with nothing left other than a lonely gas station and abandoned store fronts.
There’s lots of talk about the coming change in consumer behavior, moving from profligate spending to saving where this new saving pattern will represent a drag on economic recovery. The oft-quoted “only $000 away from disaster”, where that amount is in the hundreds of dollars, is misunderstood I think.
I think I heard around 50% as the portion of the population is in this situation.
I’m going to say that this was not due to their spending but rather because that’s all they COULD save.
If that’s true I’m not sure that will change in the new normal. What effect will that have on the savings assumptions? As more policies continually shift wealth to the top it will be more difficult for a great part of society to save or possibly even be employed.
I also have a problem with minimizing the idea that inflation is only occurring in groceries. Not because it’s wrong but because groceries constitute such a large portion of many people’s income. Grocery inflation is not nothing and shouldn’t be relegated to parentheses. It’s more blatant in the “core CPI ex food and energy”
“I’m going to say that this was not due to their spending but rather because that’s all they COULD save.”
Agree with this and would add that many of the folks who struggle with buying groceries pay more for groceries because they don’t all have access to businesses like Costco to help maximize their grocery budget.
The other thing I would add is that they also don’t have a reliable way to grow whatever savings they can scrape together. If you barely have enough to cover a few weeks, let alone a few months, of expenses, you surely aren’t and shouldn’t be putting that money in the market, but you also can’t earn any sort of interest either.
I agree with you on the poorest people. But I know lots of middle class people that live from paycheque to paycheque, have the latest iPhone, live in the biggest house they can mortgage, eat in restaurants, and wear nice clothes because their friends do. My grandfather grew up scarred from the Great Depression, and even when he was older and well off, couldn’t freely part with money. Society is going to change.
I don’t buy the argument regarding that’s all people COULD save. Is there a portion of the population in that boat? Of course. There’s also a lot of people who have decent salaries and yet spend more than they earn.
I think the belief people will dramatically change their spending/saving habits due to the pandemic is wrong. A few will. Most won’t and a few will go the opposite direction (stop saving and start spending).
Agreed.
The truth is that the savings rate in the United States has been decreasing over the last half a century. To be sure the lack of a living wage at the low end of the socio-economic ladder is partially responsible for this trend. Personally, I find the fact that the federal minimum wage is not indexed profoundly troubling. Regardless, the phenomenon of Americans living paycheck to paycheck extends well beyond the lowest income strata of society. It is only mildly hyperbolic to say that for a large segment of the population of the United States living at the limit of their means is part of the national psyche.
Through mass media – primarily entertainment – Americans are conditioned to celebrate the trappings of wealth from early childhood. I am not suggesting that Americans are unique in this regard, after all human beings are naturally drawn to shiny things. That said, whether the all-out pursuit of material possessions has been focused by ideas like American exceptionalism or ideals like the American Dream it is, at this point, very much a part of the national fabric.
While (outside of dystopian novels) corporate culture is not monolithic, I don’t believe that it is exaggeration to say that, in general, big business has reinforced the ‘keeping up with the Joneses’ phenomenon in popular culture to such a degree that only large scale social upheaval might lead to a new paradigm.
No H… I do not view this as a blame game or criticism of actions taken the last three months. I was strictly talking about the fact that we as a Nation forgot about the lessons of the past and were grossly unprepared for this virus as if something like this would never occur… Lack of Preemptive actions in Health care as well as the trajectory on the Economic front creating vulnerabilities that we all see and talk about on this site need to be put on the Political and Legislative table seriously so situations like this can hopefully be avoided.. Corporate Tax breaks ,as well the excessive stock buybacks of the last half decade as well as role of Politics in the Fed need a serious second look potentially avoiding issues that once again destabilize an already fragile Economic structure.
As the public goes they will hopefully adjust their priorities based on this last years experiences as well…
Reply was to the other commenter — the one you replied to.
Whoops my screw up.. Lol
Before the pandemic there were millions of Americans living on the edge with little choice to do anything else. After the pandemic is over, even if NO businesses went bankrupt, they would still be looking at nothing better than picking up where they left off. A huge problem before and an even bigger problem looming on restart. (And an even bigger problem if Trump and the GOP remain in office ready to continue to siphon off their billions on whatever governmental programs that are put in place to try to put the masses to work again). We are just now coming to grips with how hard life is going to be in the coming decades for a hell of a lot of people. God help us.
Besides the permanent closure of otherwise viable businesses, if there’s another thing this house of cards of an economy cannot withstand, it is a significantly higher rate of savings from regular consumers. That would likely set in motion the endgame of a deflationary spiral, and a debt jubilee as the only way out. Barring some radical fiscal changes, and soon, I think that is likely already baked in the cake. The problem continues to be skyrocketing levels of insecurity, and an almost total lack of visibility even to the near future. Every fiscal move so far has been life support, as H-man correctly points out. Unfortunately, the nature of the life support is temporary, and it has generally been too little, too late. Not to mention the fact that tens of millions of families have also just lost their health insurance along with their incomes. If every life line comes a day late and a dollar short, as they say, with a short sunset attached, all but the most irresponsible will ask, “but what about next month, next year?” and likely save as much as they can. Like I said, I think we’ve baked the cake we’re just not eating it yet.
I’ll add to those of you above who believe that saving is somehow unAmerican, or that Americans simply cannot help but continue to spend beyond their means ad infinitum, or that saving is some vague, Asian cultural phenomenon, that your position stands against all of biology (it may also be Orientalist). It is anti-biological. When the horizon darkens and winter approaches, squirrels bury their treasure of acorns, bears fatten up to hibernate until it’s over, and humans preserve the harvest: they pickle, they ferment, they salt, they fill the root cellars. This is the same phenomenon, and it really is that simple, regardless of what propaganda CNBC is spewing at the moment.
When it comes to Economic cycles and equity pricing the system managed to do away with reversion to the mean in less than 10 years…. I suspect , as you state , peoples basic instincts will not altered quite so easily once the Wolf shows up at the door on a repetitive basis.