Global Economic Crisis

The U.S. Bureau of Economic Analysis released its report on GDP growth for Q 1 of 2020. The numbers were dismal, negative 4.8 percent. Though this was the worst decline experienced by the American economy since 2008, at the height of the Global Financial crisis, it was merely a harbinger of much worse to come. It must be recognized that the impact of the demand destruction inflicted by the Covid-19 pandemic only began to emerge in the last two weeks of Q1.

A more telling pointer of whist to expect in Q2 was the latest jobless claims report issued by the U.S. Labor Department. According  to the report, an additional  3.8 million American workers filed unemployment claims. Cumulatively, this means that during the past 6-weeks more than  30 million U.S. workers have filed jobless claims. In other words, over a period of only six weeks, the U.S. unemployment rate has skyrocketed from 3.5 percent to more than 18 percent. This is an unprecedented rate of accelerated employment contraction. Not even during the Great Depression has the American economy witnessed such appalling statistics.

The collapse of the job market in the United States brings with it a radical contraction in aggregate demand. This would point to the Q2 report showing that, at a minimum, the nation’s GDP will  shrink by more than 20 percent, and possibly as high as 40 percent.

The collapse of the world’s largest economy at unprecedented velocity is only a reflection of a global economic implosion. The Global Economic Crisis will linger after the health crisis  created by the coronavirus has receded. This is indeed the Great Depression of the 21st century.

The U.S. Labor Department released this morning its weekly report on jobless claims. The data shows last week’s record-setting 3.3 million claims has doubled this week to more than 6.6. million. This number exceeds not only the global financial crisis of 2007-09, but even the Great Depression of the 1930s, in the rapidity of job destruction.

The coronavirus pandemic has now unleashed a severe global economic crisis of catastrophic proportions. Unfortunately, this is only the beginning. With a vaccine at least a year, and more likely 18 months , away from development and production, the entire planet is the grips of not only a massive health crisis, but a virtual meltdown of economic activity.

As the pace of jobs destruction accelerates, demand is also being annihilated, compounding the depth and pace of economic contraction. Undoubtedly, this will also generate a severe financial shock globally, as equities collapse, bond spreads widen and sovereign and corporate debt insolvency rampages with destructive ferocity.

According to the latest data from the U.S. Labor Department, initial unemployment benefit claims reached 479,000 in the last week of July. This reflects an unanticipated increase of 4.1 %, the highest level of initial jobless claims since last April.

The latest jobless claims report from the world’s largest economy make clear that the global economic crisis not only remains a potent reality; the jobs crisis now afflicting most advanced economies make a consumer-led economic recovery impossible. With governments across the globe beginning to transition from deficit-funded stimulus programs to austerity, it is equally clear that sovereigns overloaded with public debt will not be able to compensate for the fall-off in private sector demand much longer.

The latest data on U.S. jobless claims is just another indicator that a double-dip recession is becoming inevitable.

Just in the past week, economic media pundits as diverse as Nobel laureate Paul Krugman, who writes for The New York Times, and Ambrose Evans-Pritchard, the international business editor for the British newspaper, the Telegraph, have warned that the United States is already in the initial phases of an economic depression. Their chilly characterization of the U.S. economy after more than a year of the Obama stimulus, preceded by TARP, is sterile is its uninhibited gloominess.

In the case of Paul Krugman, his focus is on the disastrous unemployment rate in America, and his conviction that fiscal crisis and deficits be damned, the U.S. must borrow and spend whatever it takes to drive down the unemployment rate, or face an even more grave economic emergency. As I have stated before, while I concur with Krugman’s description of the American economy, I don’t think his prescription is supportable, based on the mathematical realities and the fact that excessive private debt sparked the global financial and economic crisis.

Ambrose Evans-Pritchard’s most recent column had the melancholy headline, “With the U.S. trapped in depression, this really is starting to feel like 1932.” He lays out the case for why the U.S. is in the throes of a depression; dismal home and retail sales, collapsing state budgets and the resulting fiscal cuts abetting even more bad economic indicators. In his eyes, the only hope are the central banks engaging in another round of quantitative easing (being dubbed by some as QE 2) and debt monetization, the inevitable inflation actually being preferable to a deflationary spiral.

What is clear from reading these two esteemed economic observers is that very intelligent economists are losing hope over the state of the U.S. economy (which also means the global economy) and in their despair are grasping at extraordinary policy measures that are likely to further exacerbate all the macro-economic indicators they are rightfully perturbed by. The concluding comments in Evans-Pritchard’s column sum up the dire gloom that permeates his appreciation of the situation:

“Perhaps naively, I still think central banks have the tools to head off disaster. The question is whether they will do so fast enough, or even whether they wish to resist the chorus of 1930s liquidation taking charge of the debate. Last week the Bank for International Settlements called for combined fiscal and monetary tightening, lending its great authority to the forces of debt-deflation and mass unemployment. If even the BIS has lost the plot, God help us.”