The Great Depression of 2020 Has Begun

By Sinclair Noe

The Federal Reserve has promised to spend $700 billion to buy bonds to save the economy – according to Brian Williams’ math made easy formula, that works out to $2 million per US citizen. Mitt Romney said it wasn’t enough; he called for the government to send out $1,000 checks to everybody. (Andrew Yang is spinning in his grave.) Why did the Fed decide to spend all that money? Clearly, they are trying to corner the market on toilet paper. But it wasn’t enough. With each passing day, the bailout grows (it should be noted here that the bailout has not actually begun as of this writing, but it will soon.)

Treasury Secretary Steven Mnuchin warned senators that without swift and decisive action, the economy could fall into a depression, with 20% unemployment. Too late. The Great Depression of 2020 has already begun.

The greater San Francisco Bay Area is sheltering in place – that is over 7 million people; you will soon see the same for New York, New Jersey, Connecticut – maybe another 20 million, maybe more. Maybe Chicago, maybe LA. Many workers will work from home; essential workers are still on the job. A whole lot of people are not working, not collecting paid leave – out of work, at least temporarily. There were approximately 158 million people working in the US before the pandemic hit. Within the next few days, we will hit the 20% unemployment rate – we might already be there.

The financial markets are reflecting the economic damage. Oil prices have dropped from the mid $60 per barrel range in January to about $20 per barrel. Trump thinks it is a good idea to buy some 77 million barrels to add to the Strategic Petroleum Reserve. Another stupid idea. Oil prices have cratered because people are sheltering in place – or they are locked down. Satellite pictures of northern Italy show air pollution has cleared up dramatically because the roads are empty, and the factories are idle. It’s almost as if Mother Nature has built-in auto correct. Demand has dried up; it will return at some point – we just don’t know when.

The US stock market has lost somewhere in the range of $15-trillion dollars since hitting a high in February. Trump says the economy will rebound when Covid-19 is eventually contained (actually, Trump still calls it the China virus because he is still a racist); pent-up demand will result in a “pop”. No, it won’t. Many people not working now will have to find new work after the containment; many businesses will dissolve; many business and individual workers are going into debt. There will be some pent-up demand, but economic recovery will be a long and difficult slog. A truism of the markets is that a trend in place is likely to remain in place (until it changes). Eventually the downtrend will end; until then, it is messy and dangerous.

All that debt that is building up has the bond market freaked. If companies can’t access capital to finance operations, then business freezes. If lenders become fearful the borrowers can’t repay, they slow or stop lending. If debt freezes and companies can’t refinance, they will draw down existing credit lines – if they can, and then things get ugly. We’re not there yet. Financial reforms post- 2008 mean the banks are better capitalized but certainly not invincible. And the risk did not just disappear from the banks balance sheets, rather it was transferred to shadow banks and an odd assortment of less regulated financial players.

The Federal Reserve’s actions to shore up the short-term credit markets only offers a backstop, it does nothing to actually contain the coronavirus pandemic. So far, the Fed’s rate cuts have done nothing to unfreeze lending – this is contrary to the reality that banks are indeed much better capitalized in the post-2008 world. So why the illiquidity? Most likely answer is that the assets the banks hold as collateral are sketchy or could become sketchy. So, why take the risk of a loan? As rates have dropped to near zero, and lenders try to make sense of the possibility of negative rates, the response has been an increase in risk aversion. For now, better to step back and let the dust clear - which sounds reasonable and prudent but actually results in a bunch of damage.

And then we come to fiscal policy – or the lack thereof. Congress is still largely dysfunctional. Nancy Pelosi has been pushing through good proposals, although she will need to do much more. Mitch McConnell has moved with the alacrity of an arthritic turtle. Trump is likely crazed with the idea that the stock market has now lost all gains since he took office. The Trump Bump has become the Trump Dump. Anticipate even more lies and more insanity from the White House (a trend in place…) Viruses do not respond to jingoism and gaslighting. I think we all knew, in our heart of hearts, that it was going to end in a bigly badly kind of way. George W crashed the economy on his way out. You knew Trump was going to drive into a ditch before he exits.

There will always be those who dismiss the idea of another Great Depression. We will be reminded that the US has withstood great and terrible challenges, including World Wars, pandemics, and depressions. Beware the prophets of doom and gloom. America will always prevail (until it doesn’t). Fair enough. I make no claim to be a Cassandra. My crystal ball is as faulty as yours. No one knows the future. . . , but I can see what is plainly in front of me.

Today, I went to my neighborhood grocer to restock on coffee and some fresh bread. I had no delusion that I would find toilet paper; sure enough, those shelves were empty. The coffee shelf was sparse but not empty. I snagged an extra bag. The next aisle over, the bread shelves were bare. Several shoppers milled about in disbelief. A worker came by and said they would restock in 15 minutes. A line formed.

A bread line.

The Great Depression of 2020 has begun.