Note
from Tom: I haven’t been putting my posts about the pandemic on Tom Alrich’s
Blog recently, because I thought there were more important things to talk about
on the NERC CIP/Executive Order front. However, I – and the chairman of the
Federal Reserve - feel the economy is now at a very critical point, where
decisions made in Washington in the next 2-3 weeks could determine whether the
US ends up in a years long depression or starts to turn around this year. This
(along with Part II, which will hopefully come tomorrow) is my modest
contribution to that discussion.
My former economics professor Milton
Friedman’s greatest work is an 800-page tome called “A
Monetary History of the United States”, which he wrote with Anna Jacobson
Schwartz. The book makes the argument that the primary cause of economic
fluctuations, even the Great Depression, has been fluctuations in the supply of
money; moreover, this has almost always (especially since the formation of the
Federal Reserve in the early 1900s) been under the control of government
bodies.
The most important chapter of that
book (which was later published as a standalone book) is called “The Great Contraction”.
In that chapter, Friedman makes the case that it was a failure of nerve by the
Federal Reserve – and especially an internal shift in power from the New York
Federal Reserve Bank to the Federal Reserve Board in Washington DC – that
allowed what should have been an ordinary recession in 1929 (exacerbated, but
not caused, by the stock market crash in that year) to become the Great
Depression.
The thesis of the entire book is that,
in order to ensure stable growth, the government should keep the money supply
steady in good times and bad - not exactly steady, but increasing at the
long-term growth rate of the economy (usually 2-3%). This might not seem like a
lot of growth since the growth rate has often been higher than that. But it’s
also often been a lot lower (i.e. negative), as is the case in spades this
year. If we could have stable 3-5% growth we’d be much better off in the long
run, and our children and grandchildren would be even better off.
What exactly was the failure of nerve
by the Fed, according to Friedman and Schwartz? It was that they not only
didn’t maintain 3-5% growth in the money supply during the period 1929 to 1933
(when banks failed and unemployment rose to about 33%); they actually let it
fall by about one third – by far the largest drop (by a factor of three or so)
in the money supply in US history. This happened for two reasons, although
they’re pretty much the same:
1.
They
didn’t open the discount window and let banks borrow all the money they needed
to keep afloat, instead letting them crash, while saying this was a result of
poor banking practices.
2.
They
didn’t encourage the Federal government itself to run a deficit, so that they
could fight the recession using the tools we think of as commonplace today:
unemployment insurance, cash payments to individuals, etc. Instead, president
Hoover and his administration reacted the way an individual household does when
there are economic troubles – they cut back their spending to try to match
their declining revenues. Of course, that caused revenues to decline further,
which led Hoover to cut back spending even more, etc…obviously a completely
self-defeating course.
Of course, it’s hard to blame any particular
individuals for their reactions, since the required measures would have been (mostly)
unprecedented – but the fact remains that it’s because these people didn’t do these things that a
garden-variety recession turned into the Great Depression.
Which brings me to today. The federal
government has already spent (or committed to spending, anyway) over $3
trillion fighting the recession caused by the novel coronavirus. Now there are
many – including the White House and many Congressional Republicans (and some
Democrats, truth be told) – who say this is enough for now. Let’s wait and see
if things turn around. Well, we don’t have to wait – we have plenty of evidence to show
there’s a serious crisis, which isn’t going to fix itself anytime soon:
- Jerome Powell,
Chairman of the Federal Reserve Board, said
on Wednesday that the US is “experiencing an economic hit ‘without modern
precedent,’ one that could permanently damage the economy if Congress and
the White House did not provide sufficient financial support to prevent a
wave of bankruptcies and prolonged joblessness.”
- Kevin
Hassett, the chairman of Trump’s Council of Economic Advisers, said two
weeks ago that the unemployment rate would reach 20% in June (it’s 14.7%
now). This is pretty much baked into the cake already, since new
unemployment claims indicate that if anything that’s a low estimate. Of course,
either way this will be the highest level of unemployment since the Great
Depression.
- At least
15% of American children are going hungry regularly, which is perhaps why
you see mile-long lines at food banks.
- States and
municipalities – who can’t run deficits very long without terrible
consequences – are now looking at significant layoffs of teachers,
firefighters, police…even health care workers. This at a time when we need
more of these, not fewer.
- Trump of
course wants to open the economy completely back up, but a big majority of
Americans says it’s way too soon to do that. They need to feel safe that
they won’t catch Covid-19 when they go back to work. Until they see
numbers that make them feel safe, they’re not going to go back – unless they’re forced to by the end
of unemployment benefits.
- The other
main reason people don’t want to go back to work is that schools are
closed, and of course there’s almost no safe and affordable day care
available. Yet they don’t want to gamble with the lives of their children
by sending them back to school, when there’s a small but real chance that
they’ll catch Covid-19 at school and die.
And remember, these are the early warning indicators of what could
turn out to be a depression on the scale of the 1930s. Then the indicators that
were ignored were bank failures, which aren’t happening now, mainly because of
deposit insurance. But just because the indicators are different, they’re here
nonetheless – and they’re flashing bright red.
The
numbers
I’m not
doing my usual table with projections of deaths today, since new deaths yesterday
were almost exactly what they were the previous day (1,606 vs. 1,595), meaning
the projected numbers hardly changed at all. The actual numbers below are
updated, of course. I do want to point out that the US has now surpassed 90,000
in total Covid-19 deaths.
I. Total
deaths
Total US deaths as of yesterday: 90,113
Increase in deaths since previous day: 1,606 (vs. 1,595 yesterday)
Percent increase in deaths since previous day: 2% (vs. 2%
yesterday)
Yesterday’s 7-day rate of increase in total deaths: 13% (This number
is used to project deaths in the table above)
II. Total
reported cases
I no longer
pay any attention to the reported case number. It is a huge underestimate of actual
cases, which is at least 5-10 times what’s reported. This is because of the
huge shortage of testing capacity. For reported cases to be anywhere near
actual cases, we would need to be doing millions of tests a day. I believe the
US has done fewer than 7 million tests since the start of the pandemic.
Total US reported cases: 1,4507,798
Increase in reported cases since previous day: 21,886
Percent increase in reported cases since yesterday: 1%
Percent increase in reported cases since 7 days previous: 12%
III. Deaths
as a percentage of closed cases so far in the US:
Total
Recoveries in US as of yesterday: 339,232
Total
Deaths as of yesterday: 90,113
Deaths so
far as percentage of closed cases (=deaths + recoveries): 21% (vs. 21%
yesterday) Let’s be clear. This means that, of all the
coronavirus cases that have been closed so far in the US, 21% of them have
resulted in death. Compare this with the comparable number from South Korea,
which is below 3%. China’s is 6%. The reason this number is so high is that
total reported recoveries are so low. I’ve been assuming since March 26, when
the recoveries number was first published, that it would rise, so that this
percentage (which was 41% on March 26), would be far lower than it is now. But
it still has to drop a long way, in order for the US to have anything less than
millions of death over the course of the pandemic – since we seem to have given
up on controlling total cases in any meaningful way.
I would love to hear any comments or
questions you have on this post. Drop me an email at tom@tomalrich.com
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