Deflation stalks the US

  

As you can see below, total deaths increased by 2,800 yesterday, which pushed up all the projected deaths numbers. The ultimate result is that we’ll have 1.5 million deaths of Covid-19 from March through June, vs. a little more than the 1 million projected yesterday. Of course, this will continue to go up and down, but anyone who claims that either deaths or cases have in any way “turned the corner” is simply engaging in wishful thinking. There’s no evidence at all that any part of the country has turned the corner, other than Washington State, California and perhaps New York City.

For someone who experienced the 1970’s, when the price of oil seemed to be the most important number in the world and it just continued to go up and up, it was quite astounding to see that May futures prices in the US were -37% a barrel on Sunday (they’ve since recovered to barely positive territory, I believe). Remember, prices were around $60 at the beginning of this year; now there literally seems to be no bottom.

Of course, a negative price like this (where the seller is literally paying the buyer to take the stuff off his hands) is driven by the fact that a futures contract is expiring, and the seller is facing having to take physical delivery of the commodity. Negative prices have also occurred fairly regularly lately in the natural gas market in Texas, where overproduction has resulted in some generators being paid to take the stuff off the hands of the producers. And as many people in the electric power industry know, negative power prices late at night are quite common.

It’s safe to say there aren’t many other areas where we’ll see negative prices. For manufactured goods, if prices get too low, the factories will just shut down – they won’t keep producing at anywhere near negative prices. And even for perishable food like milk and vegetables, the commodity can literally be dumped somewhere (perhaps at a small fixed cost), rather than have to resort to negative prices – and this has been happening in the US lately, especially with milk.

But does that mean there isn’t actual deflation now? Absolutely not. The fact that there is about zero demand for air travel now, yet airlines aren’t paying people to fly with them, doesn’t mean there isn’t actual deflation in the industry. If the airlines wanted to keep the planes full – i.e. if air travel were a perishable commodity like electricity – they would have to literally pay people to fly. So it’s safe to assume that we’re in a period of deflation, not inflation. And given the rapid collapse of the economy, I’d say the actual inflation rate is something like negative 10 or 15%, not negative 1 or 2%.

In the 70’s, when inflation grew rapidly, and peaked at an annual rate of increase of 18% in 1980, it of course seemed that inflation would be the concern from then on. But the rate of inflation moderated after that, and the 2008 recession brought the inflation rate to zero, where it stayed for seven years. It’s barely budged upward since then, despite explicit actions by the Fed to get it higher.

The problem with deflation – and this was the big driver of the Great Depression – is that, if people think the price for a durable good will be lower in six months, they’ll be much more inclined to wait to buy it, than if they think it will be higher in six months. And if, six months later, the see the price is still declining, they may decide to keep waiting. This makes it literally impossible to restart the economy, absent some government stimulus action.

The reason that the stock market crash of 1929 turned into the Great Depression a couple of years later was that the government took exactly the wrong lesson from the crash. They assumed that a national government – with the power to issue money at will – was like a household, which needs to conserve its resources when the going gets tough. Franklin Roosevelt didn’t have any analytical framework to back him up, but he understood intuitively that the actions the Hoover administration was taking were making the problem much worse. He came into office in 1933 determined to “try something” – and the first thing he did was impose a ten-day bank shutdown while he restructured the banking system.

Even then, all of Roosevelt’s programs didn’t get the economy back to rapid growth by themselves (in fact, there was another sharp recession in 1937). The person who finally ensured rapid growth was Adolf Hitler. Roosevelt could see war coming (even when the population was still very wary of getting involved), and started ramping up production. Then after Pearl Harbor there was no hesitation, and the US moved to wartime production at a fantastic rate.

But the US could have come back to rapid growth much more quickly, as my former economics professor Milton Friedman (with his wife Anna Schwartz) wrote in his great book “A Monetary History of the United States” – and as he repeatedly mentioned in his classes. This is because Roosevelt remained tied to the idea that it was only by getting production going again that the economy would begin to recover. Since interest rates were already near zero, there seemed to be no room for monetary policy to act.

But Friedman points out that in fact real interest rates were very high. Given that the inflation rate was negative 9.3% in 1932, the real interest rate – which is the nominal rate minus the inflation rate - was over ten percent. By focusing all of its relief efforts on getting real goods into the hands of people (which of course have real production costs), the Federal government was overlooking what it also should have been doing – printing lots of money and getting that in people’s and business’ hands immediately. The recovery would have come much more quickly if the government had literally handed out money to people on street corners and paid businesses to keep their employees on their payrolls.

Does this sound like today? That’s because it is. Except now we don’t have the option of increasing (or even maintaining) production in the near term. Reopening factories will literally kill workers. Instead, we need to “print” tons and tons of money and distribute it to businesses and individuals, to keep them alive until the epidemic has been brought under control in the US. Of course, we need to do that fairly, but we need to do more of it now, not less.

If the government wants to borrow money instead of creating it by fiat, fine. Because the dollar is the world’s reserve currency, and is increasingly seen as the real safe haven today (in fact, more than gold), investors worldwide will literally pay us for the privilege of lending us money (which is why implicit rates on US short term notes are negative). In the end, it doesn’t matter much whether the US pays for these handouts by borrowing or by simply “printing” money.

We need to get the money out there before we kill more businesses than we already have, and before we start literally killing people by forcing them to go back to work due solely to economic necessity. Besides stopping the virus itself, nothing is more important. There might or might not be some serious economic consequences down the road. But at least the road won’t literally end this year for a large portion of our fellow citizens. Currently, the latter outcome looks more and more likely.

The numbers

These numbers are updated every day, based on reported US Covid-19 deaths the day before (taken from the Worldometers.info site, where I’ve been getting my numbers all along). No other variables go into these numbers – they are all projections based on yesterday’s 3-day rate of increase in total Covid-19 deaths, which was 14%.

Week ending	Deaths reported during week/month	Avg. deaths per day during week/month	Pct. Change from previous week/month
March 7	18	3
March 14	38	5	111%
March 21	244	35	542%
March 28	1,928	275	690%
Month of March	4,058	131
April 4	6,225	889	223%
April 11	12,126	1,732	95%
April 18	18,434	2,633	52%
April 25	15,780	2,254	-14%
Month of April	67,125	2,237	1654%
May 2	22,783	3,255	44%
May 9	34,174	4,882	50%
May 16	45,199	6,457	32%
May 23	65,259	9,323	44%
May 30	97,885	13,984	50%
Month of May	261,636	8,440	390%
June 6	129,466	18,495	32%
June 13	186,926	26,704	44%
June 20	280,380	40,054	50%
June 27	370,839	52,977	32%
Month of June	1,163,782	38,793	445%
Total March - June	1,496,600

Red = projected numbers

I. Total deaths

Total US deaths as of yesterday: 45,343

Increase in deaths since previous day: 2,825 (vs. 1,953 yesterday)

Percent increase in deaths since previous day: 7% (vs. 5% yesterday)

Yesterday’s 3-day rate of increase in total deaths: 16% (used to project deaths in table above – was 14% yesterday)

II. Total reported cases

Total US confirmed cases: 819,175

Increase in cases since previous day: 26,237

Percent increase in cases since yesterday: 3%

Percent increase in cases since 3 days previous: 11%

I stopped using reported cases as the basis for any forecasts last week, because the forecasts were becoming ridiculously low. And the reason for this is clear – not only is the number of new tests not increasing (as the administration repeatedly asserts is the case), it’s currently stuck at around 150,000 tests/day, probably because of huge shortages in the supplies needed to conduct the tests.  Testers report that, no matter what group they test, they get a 20% infection rate, meaning that the only constraint on reported cases is the availability of tests. For every 1,000 tests that can be conducted per day, about 200 more cases will be identified. The equivalent rate in South Korea is 2%, which is a vivid illustration of having the virus under control (as the South Koreans have from the beginning, despite the fact that they couldn’t restrict travel with China, and never tried to do that) with never having had control in the first place, as in the US. We’re learning a lot of lessons in this outbreak! I sure hope that a few of us are still around to apply those lessons the next time.

III. Reported case mortality rate so far in the pandemic in the US:

Total Recoveries in US as of yesterday: 82,973

Total Deaths as of yesterday: 42,518

Deaths so far as percentage of closed cases (=deaths + recoveries): 35% (vs. 37% yesterday) Let’s be clear. This means that, of all the coronavirus cases that have been closed so far in the US, 35% of them have resulted in death. Of course, this number will come down as time goes on and more cases are closed in which the victim recovered. But this number has gone down and up since Worldometers started publishing the recovery rate on March 26 (when it was 41%), and on about half the days, it’s gone up; there is still no sign of a downward trend, and other countries like Italy and France show comparable percentages.