This week’s popular narrative has been overwhelmingly bleak. The once-optimistic outlook for a swift economic recovery has faded faster than a fleeting thought. Yet, amidst this prevailing cynicism, one prominent economist has emerged with a glimmer of hope for rejuvenated prosperity just around the corner.
On Wednesday, Nobel laureate Paul Krugman took a brief pause from his analysis of liquidity traps to speak with Noah Smith at Bloomberg. He expressed his belief that the economic downturn of 1979-82 implies a rapid rebound once the pandemic is controlled, stating, “I don’t see the case for a multiyear depression.”
While such a rapid recovery would alleviate much of the current financial distress, many are concerned about the long-term impacts of government lockdowns. The extensive damage inflicted on the economy could have enduring implications.
The escalating trajectory of government spending and debt is undeniable. The budget deficit has surged by nearly $3 trillion over the past four months alone, and the national debt, now exceeding $25.6 trillion, surpasses the size of the economy.
Moreover, this deficit spending is being supported by Federal Reserve credits generated from nothing. This kind of monetary policy may have severe, lasting repercussions.
Currently, both the economy and the financial system face significant turmoil. Contrary to Krugman’s assertions, we are not merely experiencing a cyclical downturn; we are witnessing a profound societal collapse, one that seems beyond the authorities’ control.
Since the days of Nero, who famously debased coins while Rome burned, the leadership has been marked by a disgraceful array of policies: mass surveillance, continuous wars, market interventions, and increased government control. Yet, these well-worn solutions have merely compounded existing problems.
Proposed Solutions
The authorities may be unable to halt the ongoing depression, yet their attempts are expected. Irrespective of their good intentions, their endeavors only threaten to exacerbate the situation.
Despite the challenges, there is potential for economic recovery, although it may take a decade or more. The severity and longevity of the downturn will largely depend on the extent of governmental mismanagement, which has been quite significant so far.
While lockdown measures might have flattened the infection curve, they did little to address the underlying issues. The virus remains pervasive, infections continue to rise, and the economy has suffered devastating blows.
Each proposed solution has given rise to new challenges. Economists at the University of Chicago estimate that over two-thirds of workers on unemployment insurance are earning more from benefits than they did in their jobs, with some even receiving two to three times their previous income.
The $600 weekly payments from the CARES Act have provided crucial support for many. However, they also create a disincentive to work, inadvertently delaying genuine economic recovery.
The government’s attempt to address the fallout from its lockdown measures has inadvertently become part of the problem. Yet, new proposals are on the table to further complicate matters.
For example, Senator Rob Portman has put forth a plan for a $450 weekly “return-to-work bonus,” aimed at enticing people back into the workforce. Larry Kudlow, an economic advisor, has indicated the administration is “looking at very carefully” such suggestions.
What other misguided initiatives are being considered by the White House and central planners? A number of troubling alternatives come to mind.
A Complete Societal Breakdown
Unlike the Great Depression, characterized by widespread bank failures, today’s scenario is marked by extensive money printing by the Federal Reserve. The Fed’s balance sheet has ballooned from $4 trillion at the beginning of the year to over $7 trillion, with projections suggesting it could reach $10 trillion by year-end.
Such monetary policies lead to a myriad of economic distortions. As the value of money diminishes, prices may fluctuate unpredictably, influenced by the prevailing psychology of the populace.
Will financial assets see inflation similar to the aftermath of the 2008-09 bailouts? Or could the influx of cash into the economy lead to consumer price inflation? Is an economic boom on the horizon, or are we headed for a stagnation characterized by rising inflation?
Given that this turmoil is unfolding in an election year, the stakes are even higher. As political campaigns ramp up, proposed economic solutions will range from the extreme to the ludicrous. Discussions of fundamental principles like freedom, integrity in currency, and minimalist governance will likely be absent from mainstream discourse—unless you click here.
While it may be intriguing to observe, the ramifications of these developments could be profoundly damaging. Here’s a glimpse of what lies ahead:
As two factions clash over dwindling resources, we will witness suppressed tensions boil over. One side seeks to redistribute wealth from the affluent to the economically disadvantaged; another pushes to repair the nation’s crumbling infrastructure with funds sourced from unknown origins.
After months of lockdown, the population is restless and unwilling to accept further inaction. As summer approaches and economic pressures mount, unrest is likely to escalate. Recent riots in Minnesota have already sparked tensions in Los Angeles, but that’s just the beginning.
This is a true societal breakdown. Issues of racial injustice may dominate today’s discourse, but countless other grievances await eruption. By the time we reach August, particularly when unemployment benefits taper off, expect chaos to spill into mainstream society.
As we face these daunting challenges, it’s essential to remain vigilant about the trajectory of our economy and society.
Sincerely,
MN Gordon
for Economic Prism
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