How Do We Defeat COVID-19?

Popular Economics Weekly 

St.LouisFRED

Economists are beginning to predict the worst due to the COVID-19 outbreak that has become a worldwide pandemic.  Former Fed Vice-Chairman Alan Blinder said recently on CNBC that a recession may have already begun this March; and Jason Furman, the chief economist of Obama's Council of Economic Advisors, told Lawrence McDonnell on MSNBC that the recent record-breaking sttock and bond market volatility feels more like 1929, and the onset of the Great Depression.

The U.S. Treasury Bond market even seemed to seize up over the past several days; so the New York Fed just announced that it may buy up to $1 trillion in U.S. Treasury bonds to inject liquidity into the bond markets, which enabled the bond market to continue to function as well as injecting more money into the general economy.

Another sign just out of a looming recession is sharply falling commodity prices.  The PPI Index of Final Demand for Commodity prices has risen just 1.28 percent YOY in February, per the St. Louis Fed graph, signaling a huge drop in the demand for such products amid declining world trade; while the coronavirus has as yet no timeline for recovery.

History books say the starting point of the Great Depression is usually listed as October 29, 1929, commonly called Black Tuesday. This was the date when the stock market fell dramatically 12.8 percent. It was after two previous stock market crashes on Black Tuesday (October 24), and Black Monday (October 28).

Sound familiar?  The current market gyrations saw the stock indexes plunge 10 percent just yesterday, after several severe plunges last week. 

If such predictions prove true, then policymakers should really be looking at the need to implement  that which brought us out of said Great Depression.

It was called the New Deal that gave us good government policies and kept Americans out of serious downturns since then—until the Great Recession. The obstacle to implementing similar New Deal policies that provided federal jobs to the jobless in infrastructure building, education, and research; while protecting more than one million homeowners in danger of losing their homes; has been conservative Republican administrations since the 1980s that have worked to dilute those safeguards limiting the power of Big Business, and protecting the rights of workers.

There was also another important ingredient that created the New Deal. It was the leadership of Franklin Delano Roosevelt, one of our greatest presidents, because he inspired Americans to work together with his words.

He said, “The only thing we have to fear, is fear itself...This is preeminently the time to speak the truth, the whole truth, frankly and bold. Nor need we shrink from honestly facing conditions in our country today,” in his first Inaugural Address.

Right now, the coronavirus is an unknown fear that is devastating whole economies as businesses and individuals go into quarantine.

Yet there is no coherent national leadership today to address its spread, “to speak the truth,” just attempts to deceive and deflect from the reality of COVID-19's contagious affects.

We will need a new leader and leaders that have this capability to speak the truth to its sufferers as the coronavirus spreads to all states, and possibly one million victims.

Let us hope that the upcoming Presidential election brings us such a leader.

Harlan Green © 2020

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Where is the Inflation?

Financial FAQs

If we would listen to the Europeans advocating austerity measures to punish Greece and Italy in particular for their profligacy, then inflation is right around the corner, according to the Germans, at least. Germany’s Finance Minister Wolfgang Schaubele is the most hawkish in advocating that the Greeks won’t get the next installment of their rescue package unless they shave off 130M euros in spending cuts to bring down their some 400M euros in debt.

Herr Schaubele is the principal advocate of what Paul Krugman calls the “confidence fairy”. The confidence fairy is the myth that too much debt causes the loss of confidence in a sovereign currency, driving up interest rates and inflation, even during recessions. It is the rationalization extreme fiscal conservatives use to justify their ideology that all debt is bad (though it is their wealthy supporters who do the most lending), and so debtors must be punished for their borrowing.

That is behind Herr Schaubele’s attempts to drive Greece out of the euro by insisting on such draconian austerity measures that Greece cannot possibly fulfill. Herr Schaubele’s efforts have succeeded instead in pulling several EU countries back into recession, as prices and output are falling, which is what one would expect, because such austerity measures cause a huge drop in incomes, and so any stimulus to grow economies. Great Britain, Ireland, Italy the Netherlands, and Spain are just a few countries suffering from its effects.

“We doubt that the euro zone will be able to avoid further contraction in the first quarter and very possibly the second as well in the face of tighter credit conditions, a further tightening in fiscal policy in many countries, the ongoing pressures facing consumers (high and rising unemployment, and still squeezed purchasing power) and limited global growth,” said Howard Archer, chief European economist at IHS Global Insight, said in a Marketwatch interview.

Economists have been discussing the dangers of inflation since the beginning of economics, but don’t really spell out that there are at least 2 kinds of inflation. There is consumer inflation measured by such as the Consumer Price Index, and there are many commodity price indexes that measure asset inflation.

Graph: Econoday

Consumer price inflation was nonexistent in December at the headline and core levels. The consumer price index in December was unchanged for the second month in a row with lower energy costs playing a key role. Excluding food and energy, the core CPI decelerated to a modest 0.1 percent increase after gaining 0.2 percent in November, and is up just 2.2 percent year-over-year. 

Graph: The World Bank

For the U.S., commodity prices are best measured by the U.S. Producer Price Index for producer goods, which at the producer level in December was tugged down by gasoline and food costs but the core was warmer than expected.  Producer prices edged down 0.1 percent after rebounding 0.3 percent the prior month.

The two are not necessarily related, because producers cannot always pass on their costs to consumers, though economists still take sides. The so-called monetarists, or neo-classicists tend to be fiscal, small government conservatives that believe all economic activity depends on the size of the money supply. And government should not be in the business of boosting the money supply with stimulus, which only causes more inflation.

Whereas Keynesians, or neo-Keynesians, believe that there is really no danger of inflation as long as unemployment is high, which happens during recessions. That’s because consumers who power some 67 percent of aggregate demand cannot create inflationary pressures as long as personal incomes, wages and salaries and the like are stagnant.

In fact, Keynesians maintain from their Great Depression experience that the overall money supply doesn’t increase during recessions, but is hoarded, causing deflationary pressures. And deflation is the hardest to root out, as Japan found out since their bubbles burst in 1990. In fact, corporations are the largest hoarders of cash (some $2 trillion to date), so don’t expect much hiring from them.

Yet, it is really small businesses that provide 70 percent of new hires, so that is where we should look for jobs’ improvement. A good measure of small business is the National Federation of Business Optimism Index, which hasn’t yet risen above recession levels. But the jobs market is tightening, in line with U.S. overall improved employment.

“Reports of workforce reductions are at their lowest level since October 2007,” said the latest NFIB report. “Forty-one percent of owners hired or tried to hire in the past three months, but 31 percent reported few or no qualified applicants for the position(s). The increase in the percent of owners with hard to fill job openings indicates that job markets are tightening somewhere, and correctly anticipated a decline in the unemployment rate.”

So beware of the confidence fairies, says Nobelist Paul Krugman. If you believe in them, you will surely lose confidence in the very institutions that create economic growth.

Harlan Green © 2012