EC Reaching The End Of Early Stimulus – What’s Ahead?

Many people thought that COVID-19 would be gone with a short shutdown. They also thought that the world’s economic problems could be cured with a six month “dose” of stimulus.

It is increasingly clear that neither of these assumptions is correct. Despite the claims of epidemiologists, our best efforts have never been able to reduce the number of newly reported COVID-19 cases for the world as a whole for any significant period of time. In fact, the latest week seems to be the highest week so far.

(Click on image to enlarge)

Figure 1. Chart of worldwide COVID-19 new cases, in chart prepared by Worldometer with data through September 20, 2020.

At the same time, the economy, despite all of the stimulus, is not doing very well. Airlines are doing very poorly. The parts of the economy that are dependent upon tourism are having huge problems. This reduces the “upside” of economic recovery, pretty much everywhere, until it can be corrected.

Another part of the world economy doing poorly is clothing sales. For example, many fewer people are attending concerts, weddings, funerals, out-of-town business meetings and conventions, leading to a need for fewer “dressy” clothes. Also, with air travel greatly reduced, people don’t need new clothing for visiting places with different climates, either. Most clothing is bought by people from rich countries but made by people in poor countries. This cutback in clothing purchases disproportionately affects people who are already very poor. The loss of jobs in these countries may lead to an inability to afford food, for those who are laid off.

Besides these difficult to solve problems, initial programs set up to help mitigate job losses are running out. What kinds of things might governments do, if they are running short of borrowing capacity, and medical solutions still seem to be far away?

In Section A of this post, I outline what I see as some approaches that governments might take to try to “kick the can down the road” a while longer, as well as some general trends regarding near term outcomes.

In Section B, I explain how our current problems seem to be related to the more general “overshoot and collapse” problems of many prior economies. I show that historically, these overshoot and collapse situations seem to have played out over a number of years. In many ways, the outcome might look more like “overshoot and decline” than “overshoot and collapse” from the point of view of an observer at the time.

In Section C, I explain two different types of “breakage” we can expect going forward, if we are really dealing with an overshoot and collapse situation. In the first, oil production is likely to fall because of the collapse of some of the governments of oil exporters. In the second, the international trade system breaks down because of problems with the financial system and countries no longer trusting each other’s currencies.

[A] Ideas for “Sort of” Dealing with the Economic Problems at Hand 

The following are a few ideas regarding possible mitigation approaches, and the expected results of these attempted solutions:

[1] Programs to keep citizens in their homes will likely be extended. Mortgage repayment programs will be extended. Renters will be allowed to stay where they are, even if they cannot afford the rent.

[2] New programs may be added, allowing those without adequate income to pay for electricity, heat, water and sewer connections. These programs may be debt-based. For example, homeowners and renters may be given loans to pay for these programs, with the hope that eventually the economy will bounce back, and the loans can be repaid.

[3] More food bank programs will be added, with governments buying food from farmers and donating it to food banks. There is even an outside chance that people will be given loans so that they can “buy” food from the food bank, with the hope that they can someday repay the loans. All of these loan-based programs will appear to be “cost free” to the government, since “certainly” the crisis will go away, and borrowers will be able to repay the loans.

[4] Loans to students will increasingly be put in forbearance, to be repaid when the crisis is over. Auto loans and credit card debt may be also be put into forbearance, if the person with the debt has inadequate income.

[5] Even with all of these actions, families will tend to move back together into a smaller total number of residences. This will happen partly because citizens won’t want to be burdened with even more debt, if they can avoid it. Also, older citizens won’t want to move into facilities offering care for the elderly because they know that COVID restrictions may limit who they can have contact with. They will much prefer moving in with a relative, if anyone will take them in return for a suitable monthly payment.

[6] As extended families move in together, the total number of housing units required will tend to fall. Prices of homes will tend to fall, especially in areas where citizens no longer want to live. Governments will encourage banks and other mortgage holders to look the other way as prices fall, but as homes are sold, this will be increasingly difficult to do. In many cases, when homes are sold, the selling prices will fall below the balance of the debt outstanding. Governments will pass laws not allowing financial institutions to try to obtain the shortfall from citizens, at least until the crisis is over.

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Comments

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William K. 4 weeks ago Member's comment

Interesting but rather depressing as well. One thing about those "high paying jobs" is that it is the fed constantly pushing inflation for the benefit of the stock markets that has helped push them up so high. Some few jobs do require skill and insight but many high paying jobs can be learned quite well in less than an hour. That includes most assembly line work.

The fact is that most folks are patient enough that their level of misery can grow quite large before the revolution, but once some level has been exceeded the response would not be very nice at all, and the actions will not be well thought out at all. At that point the fight will continue until the bullets run out and all the knives are too dull. And most of that 1% that is not dead may find that the dead are the lucky ones.

The one hope is that prior to reaching that level, wisdom will arise and things will somehow improve.

Moon Kil Woong 1 month ago Contributor's comment

There is not a shortage of goods and services and won;t be in the US for a while. The issue is more a consumption one which was predicted as the baby boomer cycle ends. Unfortunately Covid is speeding up this transition. Likewise, the concept that housing demand will rise will be put to the test in the coming years in the US as the baby boomers pass away lowering demand, with the government stopping stimulus it will drag the economy down until stimulus is resumed and it starts to have an effect, and as Covid persists demand will wane. This is why I believe we will hit a housing crisis before a major stock meltdown, although there will be downturns here and there. The stock market it the best hope you have of generating decent returns and potentially growing in this environment and is why it is being blown up along with other assets bubbles.

Gary Anderson 4 weeks ago Contributor's comment

The demand for fossil fuels is increasing, while prices decrease. Americans will not go for electric cars. They are not wired that way.

Moon Kil Woong 4 weeks ago Contributor's comment

In California it will be forced legally. Still they will need more gas or LNG to generate the electricity.

Gary Anderson 4 weeks ago Contributor's comment

I doubt it. People will just buy cars out of state.

Gary Anderson 1 month ago Contributor's comment

Brilliant but unnerving.

Andrew Armstrong 4 weeks ago Member's comment

Seems we're all on the same page here.

Derek Snyder 1 month ago Member's comment

Agreed.