Business & Investment

Biden faces a new Great Depression

Dear reader,

Economic growth or economic decline is the result of more factors than any administration or any policy set. Of course, certain policies, such as tax reforms and regulatory initiatives, can help or hurt the economy depending on how they are designed, but they generally do not change macro momentum. ..

The tax hike may be a headwind for growth, but it doesn’t stop the strong economy. Similarly, tax cuts and extended unemployment benefits may boost the downturn, but they alone cannot end the recession.

Growth and depression are caused by demographics, globalization, war, inflation, deflation and, of course, larger events such as pandemics. Significant changes in fiscal and monetary policy are the only policies that may or may not move the needle.

The recession that began in February 2020 probably ended in July. There is no official declaration to that effect from the National Bureau of Economic Research (NBER). This is a private but widely recognized business cycle mediator.

Still, given the 33.1% growth forecast for Q3 GDP, it’s almost certain that the recession is over. The depression may be over, but the new depression is not over.

Annual growth in the first quarter of 2020 was -5%. Second quarter production was -31.4%. Third quarter growth was 33.1%.

Official figures for fourth-quarter growth aren’t available until late January, but the best estimate at the moment is about 7% growth. Both the second-quarter decline and the third-quarter recovery were the highest annual declines and growth records in US history.

This is the problem. Growth in the third quarter was impressive, but as a result of the decline in the second quarter, it was functioning on a much lower basis. That 31.1% profit should be applied to a base that was only about 65% of the 2019 production level due to the decline in the first and second quarters.

Its third-quarter profit returns production to about 87% of that level, and with fourth-quarter profit of 5%, annual GDP will be up to 93% of 2019 levels.

Nevertheless, GDP for the full year of 2020 will decrease by an estimated 7%. This is the worst year-round GDP decline since 1946, when demobilization after World War II reduced growth by 11.6%.

During the worst year of the Great Depression (1932), growth fell by 12.9%. 2020 represents a historic and traumatic decline in the kind of growth found only in the context of depression and war.

It’s the new Great Depression.

2021 economic outlook

So what’s the outlook for 2021? There will be a new recession in the first quarter of 2021. In fact, the economy may now be heading for another technological recession. This is the first double-bottomed recession since 1980-81 (July 1981), when the second recession began. Almost exactly one year after the end of the last recession (July 1980).

The reason is the imposition of new blockade requirements by the governors of most major states.

Investors may be encouraged by the highest ever stock market prices, but stock market indexes are market capitalized or formatted, and a few tech or digital economy companies (Amazon, Apple, Netflix, Microsoft, Facebook, Alphabet [Google], And some others).

These companies are the least affected by the pandemic and do not represent the entire US economy. Over 45% of GDP and 50% of all jobs are generated by SMEs. These businesses include restaurants, bars, salons, gyms, dry cleaners, bodegas, boutiques and small manufacturers.

This is part of the economy affected by the blockade. They have been destroyed. Many closures are no longer temporary, but permanently as businesses fail, equipment is dumped at fire-sale prices, unemployment does not recover, leases are broken, and empty storefronts are a sign of the times. became.

It can be found everywhere from Fifth Avenue in New York City to the nearby small towns.

Vaccines are being given, but not fast enough to stop the new recession (and concerns about the effectiveness of vaccines given viral mutations and questions about how long the antibody response lasts. there is).

The decline in unemployment reported in recent months is not the cause of the cheers that Wall Street analysts think it is. These rates do not include individuals who are unemployed but have dropped out of the workforce and are not technically counted as unemployed.

This phenomenon is manifested in the labor force participation rate, which has fallen sharply, approaching the lowest level since the 1970s when women began to work in large numbers.

Whether or not they are technically counted as unemployed, the productivity of unemployed healthy people is zero. This is another impediment to growth and another reason to disbelieve Wall Street cheerleaders. Biden’s policy does not change this result, but it will make it slightly worse.

Biden supports the blockade, despite scientific evidence that it does not work to stop the spread of the virus. (Hand wash, social distance, masks work, but blockades don’t.) Biden’s immediate border reopening plan will put downward pressure on wages. His green regulatory plans will raise the cost of consumers and the cost of work in the energy sector. His tax increase plan will be another impediment to growth.

The Biden project does not cause a recession. It’s already here. His plans will make things worse and will probably extend the new recession into the second quarter.

Monetary policy is not stimulating, as new money is sent to banks and banks simply deposit it with the Fed as a surplus reserve to receive interest. If the money is not lent by the bank and not used by the consumer, there is no sale or “speed” of the money.

This means that deflation will be a bigger problem than inflation, at least next year. Deflation increases the real value of debt, which is another impediment to growth. The Fed’s policies are powerless. Jay Powell and his colleagues are out of the game and can be safely ignored.

Fiscal policy is not stimulating, as the US debt-to-GDP ratio is currently over 130% and is rising rapidly. Extensive research shows that when the debt-to-GDP ratio exceeds 90%, the new debt multiplier is less than one. This means that you are in a debt trap (in addition to the liquidity trap caused by the Fed).

You can’t get out of the liquidity trap. You can’t get out of the debt trap. Given the current situation of slow speeds, high savings rates, high debt, high unemployment and new blockades, neither fiscal policy nor monetary policy creates stimulus.

The Fed and Congress may try to stimulate the economy, but they will fail.

The investor path is clear. As the new recession becomes apparent, the gap between market perceptions and economic reality will soon close, and equity exposure needs to be reduced. Cash allocations need to be increased to reduce the volatility of the entire portfolio and give investors flexibility and options once some of their political and economic uncertainties begin to disappear.

Allocations of gold, silver and mining stocks must be at least 10% of the investor portfolio as both an inflation hedge and a hedge against diminished confidence in central bank currencies.

all the best,

Jim Rickers signature

Jim Rickers,
Strategist, Daily Reckoning Australia

PS: Australia’s Massive COVID Depression — Learn which investments to accumulate and which to avoid to give you the best chance of maintaining wealth during a recession. Click here for more information.

Biden faces a new Great Depression Biden faces a new Great Depression

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