Post-Pandemic Economic Scenarios (Interview #1)

8 June 2020 — Jack Rasmus

This past April, in the midst of the surging pandemic and collapsing US economy, I was interviewed by three sources in Europe for a US perspective on the events. The following is the first part of an interview with Polish social commentator, Konrad Stachnio, that will appear in a collection of interviews later this summer. Subsequent interview topics with Stachnio, and others in April, will be posted here in coming weeks as well.

(APRIL 2020)

Interviewer: I would like to speak with you about this pandemic and the long-term scenario for Europe and United States, China. What will happen? Because we are facing a really serious situation.

Dr. Jack Rasmus: Well, let me take that question on. What will it look like after, or what will happen between now and after? There’s really a couple phases here. We’re right in the middle of it right now, in its more intense contraction phase, and we now are seeing the real economy everywhere virtually shutting down except for basic necessities.

That’s true in Europe, that’s true here in the U.S. It looks like same for much of Asia, although it looks like Asia may be coming back in terms of activity a little bit. Although it’s not clear whether that will be temporary too. There are reports of a second wave of infection beginning to occur in Asia. It’s not verified yet, but there’s some indication of that. Of course, the big risk is that if you go back to work too soon and more people get infected, then you do have a second wave.

There are forces in the U.S., I’m sure in Europe too but especially in the U.S., that want us to go back to work because they don’t like the fact they’re not making any money, and they really don’t care about how many workers get sick and die because they’re just, like good capitalists, thinking of their own bottom line here. I’ve heard there are thousands of workers in the US meatpacking industry that are now being infected.

It appears these business forces have had some influence with Trump for a while now, and Trump was talking about “We’re going to be back by Easter,” but then the reality and the science overwhelmed the ideology and the pursuit of profit and he said no by Easter, admitting we’re going to lose hundreds of thousands of people here, even if we do the best possible.” All we can do is mitigate, not stop the virus at this point. In other words slow down the process. But Trump will change his mind again about opening the economy. He constantly flip flops.

I don’t think there’ll be any real solution to this health crisis, and thus to the disruption of the economy, until they get a vaccine or some sort of treatment that clearly cures people functionally so that they could go back to work. Until you see the medical scientific solution, the pressure on the economy is going to continue. Maybe not as severe as the initial effects that we’re seeing now, in especially Europe and the U.S., but it will continue even after that. And the economy will not really fully recover, I believe, until you really have the medical solution.

I strongly disagree with all those Pollyannas who say that it’s going to be V-shaped recovery. There’s not going to be V-shaped recovery by any means. Why? Because there’s been great psychological wounds inflicted on both the psychology and expectations of consumers and businesses. That’s not going to go away very quickly. You can provide income protection to some extent; that’s going on now. But the $2.2 trillion U.S. ‘CARES’ bill just passed by Congress is just a mitigation, as even they’re now admitting, just putting a floor under the economic collapse to some extent for a couple of months at most.

But they’re going to need an even bigger stimulus bill by May/June if they want to get through the rest of the summer. Whether that happens is going to be determined by a political fight in the U.S. because, again, business interests, capitalists, do not want to drag out the economic crisis as much as we’ll probably have to in order to save lives. So there’ll be a big fight over that next stimulus bill coming in May or June.

I’ve written on my blog several articles in February-March that said, look, if there is truly a war with the virus going on – and there is– then we’re going to have to go to a war budget in the U.S. similar to what it did in 1942. If you look at 1940-41, the U.S. Government spending before World War II was about 10% of total GDP. In one year, 1942, that rose to 40% by the end of that year. And at one point in ’44, government spending was 70%.

That was a war mobilization in ’42, and I’m arguing that we have to go to 40% of again. If the government spending before this crisis in 2019 was roughly $4.5 trillion and that was 21% of GDP, we’re going to have to add another $4 trillion in direct government spending – not in business loan bailouts of bankers or investors. That’s done by the central bank, the Federal Reserve and not part of direct government spending. And not in the form of more corporate tax cuts, either, because that’s also not going to have much effect stimulating the economy in present conditions of severe contraction. It has to be direct government spending to households and small businesses.

We have some of that direct spending started but it’s not sufficient. The CARES ACT’s $500 billion to workers in the form of extended employment benefits and an initial round of household cash injection and checks, plus $367 billion to small businesses in grants, and loans that will probably convert to cash anyway. But all that’s just a 6- to 8-week solution. We’re going to have to have an even more massive stimulus, direct stimulus by the government, equal to 40% of GDP. And that has to come soon this year. Whether that happens is a political question. We’ll see.

But that’s what I believe has to happen. We have to go on a true war mobilization footing with government spending taking the lead because the psychology of investors and businesses has been so hammered – and consumers too – that even under the best of circumstances – let’s assume the very unlikely scenario that by June this health crisis element is over–the economy will still be wounded and businesses will not invest. They will be very, very cautious. They will not bring everybody back to work. Banks will not lend their own money very readily either.

Look, after the last crisis in 2008-09, we had a decline in bank lending and real investment for years after that, continually. So the banks will not lend except to the very safest, biggest customers. You’re not going to get investment snapping back. And in fact, investment wasn’t doing so good in the U.S. before the virus hit anyway. For 9 months in the last year, 2019, we had a contraction in real capital spending going on. We had a 6 month manufacturing recession. We had consumers that were showing signs that they were tapped out on credit and debt. And we had a trade war that was holding back growth as well. The real economy was therefore quite weak in 2019, not robust and strong, as Trump likes to say.

And all that was happening on the eve of this. It was not a strong economy, and this crisis has simply precipitated and accelerated the collapse. It was already slowly slowing down. And in Europe, the same scenario. Ditto Japan in late 2019. But now the virus effect has exacerbated and accelerated it all. It’s telescoped it, and now we’re in a deep, deep downturn.

The deep and rapid contraction of the real economy is going to affect the psychology of investors and businesses and the spending by consumers and households. Some of the money by the stimulus bills to date will be hoarded, because both businesses or consumers don’t know if this thing’s coming back, how long it’s going to go on. Households will buy necessities, but that’s it. They’re not going to go out and buy new homes, cars and all the rest at levels they had before. They’re going to sit on much of the bailout money; they’re going to hoard it. They’ll use some of it to pay down some of the debt they’ve accumulated to date, and businesses will spend it on stocks & bond investments, but they’ll mostly hoard it. Same for many households that will still have jobs,

As economists like to say, the multiplier effect from the CARES Act bill is going to be very, very low here for government spending. Businesses, what are they going to do? They’re going to hoard it. Banks are going to hoard it. They’re going to keep it for future debt payments, maybe, because they’ve also borrowing big time, drawing down their available bank loan credit lines and issuing record corporate bond debt. Businesses were drawing down their credit lines by hundreds of billions in February and March, as this thing began to unfold. And issuing hundreds of billions of dollars in new corporate bonds.

Record levels of corporate debt occurred in February because corporations and businesses are gathering in all the cash they can, in this dash for cash. In economist terms, it’s the return of what’s called liquidity preference by businesses, investors and households. It’s also what’s called a liquidity trap. Giving businesses more money doesn’t result in more investment, hiring, and growth in a severe and deep economic contraction. We’re in a liquidity trap with a vengeance. Monetary solutions don’t work in the current scenario. If anyone doubted John Maynard Keynes’ explanation of why business investment did not, would not, could not lead a recovery from the ’30s Depression despite near zero interest rates and free money, this is it a repeat event today revealing the same. This is a massive liquidity preference, liquidity trap going on.

Until the psychology changes, businesses are not going to open up their wallets and invest and expand production or hire everyone back tomorrow. They’re not going to expand because people aren’t going to be buying things at prior levels as well. That’s another reason. In certain industries like the oil industry, you have a total true collapse of capital expenditures going on. That’s not going to come out of it. The same is true with large sections of retail, of leisure, hospitality, travel and mass entertainment industries. They’re just not going to come ‘back to normal’, even under the best of assumptions. Not in the short term and likely not in the longer as well. The economy is now severely wounded, and ending the virus effect—even if quickly—is not going to change the economic crisis fundamentals very much. The contraction now has an economic dynamic of its own.

You’ve got to remember that every time there’s a deep recession, business looks for ways to cut costs. They focus on ways to become more efficient in using their employment. They replace jobs more with new technology and automation. That’s what they’re going to do coming out of this, too. They’re not going to hire these people back in droves, I don’t believe. As long as this virus isn’t resolved with the vaccine, the uncertainty is going to hang over everybody, business and consumer alike, and the hangover is going to keep the recovery very, very slow. And businesses will look for new ways to cut jobs, not rehire, or rehire those laid off as part time or temp workers.

Now, the big wild card with this very slow recovery, if it comes, when it comes, the big wild card is the credit system, the banking system, and by that I mean the shadow banking system as well as the commercial banking system. They’re about the same size. But the shadow banking system is far more unstable and fragile. If there’s a credit crunch, at least I’d say in financial system terms, there will be defaults and bankruptcies that will cause a major crisis in the credit system. Credit will freeze up. When that happens what you’ve got is the overlay of a financial crash on top of this already real economy collapsing.

You see, in 2008, it was different. It was the financial side that crashed that dragged down the real economy, and it was only halted when the Federal Reserve dumped $5 trillion into the banks and then engineered low interest rates for 6 years after that. The Fed at the time said, “We’re going to take the money back when we get recovery. We’ll sell off our $4.5T balance sheet.” I said at the time in my 2017 book, ‘Central Bankers at the End of Their Ropes’, it would not happen. Central bankers were at the end of their rope and would never retract the excess liquidity injected to save the banking system.

And I predicted all of this in my 2016 book, Systemic Fragility in the Global Economy as well. In fact, my central bankers book is subtitled Monetary Policy in the Coming Depression. We are certainly, certainly in a great recession here right now. The question today is will the nonfinancial corporate sector default on the massive debt they accumulate the past ten years that is now coming due? And will deflation in financial markets spill over to exacerbate deflation as well in real goods and services? The longer that we have this contraction in the real economy, the more fragile the financial system will become and the more susceptible it will be to a crash itself. When that might happen, I don’t know for certain, but the odds are increasing it could within the next six to twelve months.

But right now we have the Federal Reserve bailing out the banks even more than in 2008-09, spending even more, injecting even more liquidity to bail out the banks even before they fail this time. In 2008, they were failing and we spent $4-5 trillion to bail them out after the fact, and of course central banks globally did the same. Globally, it was a $20 trillion bailout by liquidity injection.

The problem with injecting so much liquidity is that you might save the banking system from collapsing, but you inject so much liquidity in the global economy, after it’s all over it ends up in fueling financial speculation and growing financial bubbles and fragility even further again. This is one of the great contradictions of capitalism right now. They generate banking crises caused by too much excess liquidity over decades, too much investment going into financial markets. It causes these bubbles and crashes, and then they have to bail it out with – guess what? More liquidity. So the solution to the problem becomes the problem once again.

That will be the inevitable consequence once again of the Federal Reserve now injecting trillions of dollars into the banking system. Already it has promised $6 trillion. Even before the crash came, in early 2019 the Fed had abandoned raising interest rates and started cutting rates again, providing more cheap money. And then it started its QE once again, although it didn’t call it that, last September by pumping $500 billion into repo market to keep that market from going under. And then when this virus thing started, the Fed announced still another $2.2 trillion—i.e. $1.5 for repos and $700 billion once again for buying mortgages and mortgage bonds and treasuries, call it QE5, whatever.

So going into this virus crisis in February 2020 the Fed had spent $2.7 trillion over the prior 6 months, and now it’s another $4 trillion at least promised by the Fed in March, and it may be open-ended. And right now the Fed is not only pre-bailing out the banks and the shadow banks, it’s setting up once again special lending facilities to deal with the worst fractures in the financial system that are appearing, for example right now in the municipal bond market. We also are seeing problems in the money market funds and commercial property and commercial paper markets, in the repo markets, and now they’re pre-bailing out the consumer credit. Credit cards, auto finance firms, and whatever.

The Fed is becoming a garbage can for corporate debt everywhere. It’s original mandate from its formation in 1913 up to 2008 was to bail out only the commercial banking system. In 2008-09 that was expanded to bailing out the shadow banking system as well—i.e. insurance companies, hedge funds, finance companies, and all the rest of the high risk taking and speculating financial system that had grown as large as the commercial banks. But now it’s every private financial institution and sector that holds debt. And nonfinancial corporations at all levels as well. They’re prepared to bail the whole thing out. And the Fed’s doing it even before the banks and non-banks default or go bankrupt. It’s a general pre-bailing out of the entire capitalist system. Read the Fed’s original mandate. It says nothing of that.

Well, they may bail it out in the short run, though even that’s not guaranteed – we’ll see whether we have a credit crisis nevertheless within the next 12 months or so– but even if they do bail it out in the short run, what the Fed’s doing today is such a massive injection of liquidity that for the next decade we will have nothing but financial instability occurring on a repetitive basis.

Essentially, you could say this: fiscal and monetary tools that mainstream economics says are used to stabilize the economy no longer function that way. These are tools being used to subsidize capital incomes across the board. That subsidization’s been going on for two decades now. So the capitalist state is so integrated now with maintaining values and maintaining capitalist incomes that it’s a total different animal in the 21st century. It’s become one with capital. More integrated with capital than ever before. It’s another indicator of the system’s crisis. Policy can no longer serve its primary function of stabilizing the system; it’s now a handmaiden for ensuring capital incomes first.

If you look just at tax cuts in this country since 2001, George W. Bush gave $4 trillion to corporations and investors, with some tax crumbs thrown to consumers. About 80% of the $4T went to businesses & investors; about 20% to consumers. Then we get Obama, and Obama gives $288 billion in tax cuts to business in his 2009 bailout. Then he extends Bush’s tax cuts for another two years to 2010 and passes another $800 billion in business tax cuts in 2010 on top of that. And then he takes $1.5 trillion out of government spending on social programs to pay for it in 2011, and then in 2013 he makes Bush’s tax cuts permanent at the cost of another $5 trillion.

So we had over $10 trillion in tax cuts mostly going to investors and businesses under Bush and Obama, and then we get Trump, who has already passed $5 trillion more in tax cuts, most of it, again, for businesses, multinational businesses, corporations, and all the rest. $4.5 trillion in January 2018 over the next decade and another $429B in 2019 in tax loopholes. It’s massive tax cuts since 2000. $15 trillion and rising. And on top of that, we fight these wars in the Middle East that cost $7 trillion. That brings us to the Cares Act passed this March 2020, which according to reports amounts to more than another $650 billion in tax cuts.

Well, no wonder. Add it up. $15 trillion in tax cuts, $7 trillion in wars, that’s $22 trillion. That’s the U.S. national debt last year, 2019. Of course, that national debt now is going to go to $27-28 trillion by 2022. Meanwhile, the financial side of the capitalist state is getting very unstable, and the system itself is getting very unstable.

Systems and empires crash most often because of financial instability internally. That’s what causes them to go under when they cannot continue economic growth and continue the standard of living for the people inside it. You can go back to ancient Rome. Let me go off on a historical tangent here. Why did Rome collapse? Because it lost its agricultural base. It lost the economic surplus that it used to finance its armies with when the barbarian so-called invaders took over Spain, Sicily and North Africa, where its agriculture surplus was located, its agricultural economy. It lost it. That was the fifth century. It had already lost its eastern agricultural base and surplus when Egypt went to the Eastern Roman Empire early in the 4th century.

So Rome could not afford to field an army large enough to protect its borders and it crashed. The same thing happens to all empires. Look at the British Empire. It loses its colonies after World War II and it becomes just a shadow, a shell of its former self, dependent on the rest of Europe and the United States allowing it to become a financial center. But of course, with Brexit on the horizon, Britain will no longer be that financial center. Britain is going to be an economy about the size of Northern Italy within the next decade. It’ll be totally irrelevant.

The same thing is happening within the United States now. The same thing. We have this fiscal crisis, we have a monetary crisis, and both monetary policy and fiscal policy are just conduits for the subsidization of capital incomes. It’s undercutting the standard of living for the rest of the country. At some point, people were fooled thinking that Trump was going to do something about it – and of course, the Democrats ran a stupid campaign by incompetent candidates and they lost to Trump, and now they’re trying to get back in the game. But they’re having a hard time, mostly due to incompetent leadership and continued dumb strategies.

But it’s still a 50-50 chance whether Trump might not win again because of Democratic incompetence, electoral incompetence. In fact, Trump has taken control of the Republican Party. He has control of the “red states” and therefore control of the Electoral College and the Senate, and the Supreme Court now. Don’t forget, in 2000 the Supreme Court gave the presidency to George W. Bush by stopping the vote in Florida. Something like that could happen again in another close election.

So all these institutions of government are working together to support capital in this country, and the most extreme and rapacious forms of finance capital in particular. Former bankers from Goldman Sachs investment bank are running the economic policies of the US since Trump came into office. They’re everywhere in high positions in his administration. Don’t count out the possibility that Trump may even, if this thing continues, call a national emergency and suspend the November election if this virus thing gets worse. That’s quite possible. Then we’re in a de facto political civil war in the United States, and much more disruption, and therefore much more uncertainty in the economy.

Now, that’s an extreme possibility, I admit, and I don’t want to be alarmist, but you’ve got to look forward and ask yourself what’s the worst case scenario? What’s the best case scenario? What’s the likely scenario, what’s in between the extremes? The most likely scenario, to get back to the original question, is that we’re going to have, at best, a very, very slow, rocky recovery here for the rest of this year and a very slow recovery at best for years to come.

It’s going to change the consciousness of people in this country and it’s going to change the politics in this country like we’ve never seen before. It could go further right and it can go in the direction of progressive politics. But that’s something no one can predict yet.

(Note: This interview was conducted in mid-April 2020 by Konrad Stachnio of Poland, for the publication of a collection of essays by writers in Europe and the USA on the emerging virus-driven global economic contraction.)

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