By now, it is very likely not news to you that the world is facing an invisible threat, COVID19, that has led to significant pressure on not only our healthcare systems and emotional state of mind but also our economic and financial systems. The world is already in the midst of the deepest and fastest recession likely ever seen in modern history with some estimates of annualized GDP declines for Q2 in the realm of -20% or more. This is far worse than 2008. To say this is just worse might be an understatement.
This morning, the US government released the latest data point on jobless claims (published weekly), and the data is not encouraging. Another 5.3 million people filed, bringing the total to >20 million over the last 4 weeks:
More than 5 million Americans filed for unemployment benefits last week, bringing the total in the month since the coronavirus pandemic throttled the U.S. economy to 22 million and effectively erasing a decade worth of job creation.
Initial jobless claims of 5.25 million in the week ended April 11 followed 6.62 million the prior week, according to Labor Department figures Thursday. The median estimate of economists was for 5.5 million, with projections ranging as high as 8 million.
The four-week sum compares with roughly 21.5 million jobs added during the expansion that began in mid-2009.
This certainly makes Capital Flywheel’s assertion just a month ago that COVID19 is unlikely to have as deep of an impact as the 2008 recession look outright wrong.
While the numbers are the numbers, the recession today is very different from the 2008 recession in a number of important ways. And these differences are likely to mean a very different long-term impact on our economic and financial systems than what the world experienced in the aftermath of the 2008 financial crisis.
One of the most important differences is that the current economic situation is more or less self-induced. While humanity certainly did not choose to be targeted by a dangerous new virus, the recession we are in now is a choice. Collectively, society has chosen to prioritize health over economics. The global economy is not heading into the deepest recession in modern history because the virus has materially changed the world’s demand for products and services (e.g. Massive deaths leading to long-term demand destruction. I don’t want to downplay the number of deaths that have happened, but ultimately social distancing is working and the number of deaths likely to happen is limited in comparison to the size of the world’s 7 billion people). The virus has also not materially changed the world’s collective ability to produce products to meet underlying demand. Our factories, assets, and human knowledge are still intact.
While the world has temporarily chosen to suppress demand (in some places, effectively outlaw demand), we should not make the mistake of assuming that the demand has been destroyed.
The moment it is safe for people to go out again, is there any doubt that people will want to go back to doing the things they normally do? Is there any doubt that people will go visit their favorite restaurants or travel to their favorite destinations? It will not happen immediately and will take time, but the underlying fundamental demand has not changed. Some things will change. Perhaps more ecommerce. More digital services. But most things will likely stay the same.
However, what people do does depend on their financial situation. Can the world evolve in such a way / can this recession be deep enough in such a way that people can’t go back to doing what they want to do even when it becomes safe to do so?
No one really knows for certain since no one alive has ever lived through a similar experience, but it is highly likely that a society-induced problem is also a problem that society can undo. Society can and will eventually reverse the decisions to shut down global economies and allow people to spend again.
What about all of the people that have lost their jobs? Unlike the 2008 financial crisis in which many people had incomes based on activities that should have never happened (e.g. construction workers building houses in parts of the world that are still unoccupied today, mortgage bankers that originated loans that should have never been originated), there was no significant excess in our economy prior to this recession. Very few people were doing things that they shouldn’t be doing. It only makes sense that when businesses can reopen, that there will be work for people to return to. Again, this virus has not changed society’s underlying demand for products and services. People will want to consume again and people will have work to meet that demand.
What about all of the businesses that may never reopen because of debt? How will businesses that no longer exist employ people? This is a fair argument. There will be businesses that won’t reopen. But there is no law that requires people to return back to the same businesses that they worked for prior to being laid off. As long as there is demand, businesses will need to provide. It may not be the same business, but is there any doubt that if the demand is there, sooner or later someone entrepreneurial that does have the ability to step in will step in to meet that demand? Maybe your favorite restaurant will not exist. But as long as you want to spend, someone entrepreneurial will (eventually) offer a replacement to take the money that you already want to spend.
2008 was a painful experience for vast swaths of society. But what made it painful wasn’t just because it was a recession. It was painful because both demand and supply were illusory. Demand for a material portion of goods were not sustainable such as housing/construction. This meant that income for a lot of workers were also not sustainable. This affected not only the supply of goods, but also the supply of money. A lot of capital providers (including diligent savers with money saved in banks or invested in stocks and bonds) discovered that a lot of their wealth did not exist. And this was not just on a temporary basis but on a permanent basis. The house that someone overpaid for was wealth that never existed. And consumption based on that illusory wealth was also unsustainable.
None of these things are true today. Demand is largely real. Incomes are also largely real. People may not have incomes in this very moment, but the production of value (of goods and services) that created that income is and will be largely real.
Credit is a very sensitive thing. When credit collapses, it feeds on itself. The less money you have, the less credit you have, leading to even less money that you will have. But when credit grows, it also feeds on itself. The more money you have, the more credit you have, leading to even more money that you will have. The world may look like it is collapsing today, but the moment the wheel reverses, credit expansion will also lead to a positive feedback loop that will likely surprise people at the breadth and speed of recovery.
I don’t know when it will happen. It may take time. But the moment the world realizes that it is happening, it will be too late to react.
Capital Flywheels will emphasize again that COVID19 has led to a sharper impact than expected. But how many people would have thought that democracies (China is a different story) around the world would command ordinary citizens of the free world to stop doing business and stay home 1 or 2 months ago? Even now it seems very much like a dream that this is all happening.
But this is a self-induced problem. Humanity has always conquered every problem this natural world has ever thrown at it. Humanity will very likely conquer COVID19. The self-induced aspects of this problem (e.g. forced social distancing) almost seems like the easiest part of the problem to solve, in Capital Flywheel’s opinion.
While the economy is likely to recover and demand is likely to recover, businesses and value creation may look very different. Capital Flywheels believes that this crisis will accelerate forces that have already been in motion for decades: More digitization/consumption of digital goods, more technology adoption even in lagging enterprises, and, sadly but surely, more consolidation of business within the largest companies over the smallest companies. This is an exercise in efficiency – the most efficient businesses (both from a labor and capital perspective) will gain, while inefficient businesses will decline. Efficient businesses tend to be large and technology-driven. Inefficient businesses tend to be small and/or legacy.
There will still be a place for your favorite local business, but increasingly local businesses need to be artisans, masters at craft. Turnover is always uncomfortable, but change also gives the world an opportunity to improve.
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