Has COVID-19 killed recessions?

Has COVID-19 killed recessions? It’s a fascinating question. Let’s hope not because they are vital to advancing living standards as they sweep out the capital misallocation of the cycle and help drive productivity growth. Deutsche Bank muses:

So aggressive has been the policy response that the US Covid recession is likely to be the shortest on record in spite of a savage global pandemic. If you can restore growth so quickly in a period when lockdowns are prevalent, then surely a normal recession will now hold no fear and be quickly reversed.

To be fair this trend has been in place on a smaller scale for the last forty years. All four of the cycles since the early 1980s make the top six longest in the thirty-four recorded since 1854 and as today’s CoTD shows these four super cycles have coincided with a unique move to structural deficit financing. Indeed the graph shows other long cycles all coincided with large deficits largely around wars and the New Deal in the 1930s. If it was this easy to avoid recessions why wasn’t it done all the time?

The simplistic answer is that such a policy would have been impossible when money was tied to gold and was only facilitated when the US periodically broke currency ties to gold and then permanently once the Bretton Woods system broke down in 1971. However, for a decade this was highly inflationary and disruptive economically. A miracle then occurred from the early 1980s as we saw a secular four decade structural shift lower in inflation.

We think China’s re-entry into the global economic system in the late 1970s and the natural demographics of the developed world and China ensured that the supply of global labour (much of it very cheap) surged from this point. We think this helped ensure that the usual pressure on wages and prices as activity rose through the subsequent cycles was more subdued than it would normally be and fiscal and monetary policy could be kept looser and ward off economic headwinds much more easily. The cost of this was huge debt accumulation and latterly huge central bank balance sheets and perhaps a structural loss of productivity.

So what’s stopping this becoming the normal policy response and thus ending all but short technical recessions going forward? The answer is likely nothing until either inflation or political constraints arrive.

Without either, policymakers will now likely pursue MMT/helicopter money type policies when the need arises. However, the structural cycle poses risks to this. As the labour supply has now peaked in the key global economies/regions and as globalisation is challenged we might hit inflation pressures earlier in subsequent cycles which will provide the biggest challenge to this no recession theory.

Policymakers could soon face more dilemmas than that seen over the last forty years if we are correct but if we are not, the business cycle could be a thing of the past.

So long as the new virus reality is managed effectively, I don’t see why the business cycle should end. It is likely that MMT will advance as western politicians seek to mollify the losers of globalisation. But that is not the end of the business cycle so much as a new demand driver within it.

In theory, at least, that extra demand should drive the output gaps that have dogged many developed economies to close versus the last cycle.

If so, it will eventually result in higher wages and inflation and, once central banks are forced to shift away from their newfound easiness, it will also bring volatility back to the business cycle.

Don’t get me wrong. I don’t see this coming in the short or medium term as other forces quiet global inflation. In particular, I am referencing the return of Chinese restructuring which will impart serious global disinflation again before long. But over the longer term, if the MMT will is there, it will happen.

If so, COVID-19 will mark not the end of the recession phenomenon but its rebirth as global interest rates grind slowly higher and asset prices, god help ’em, become speed humps for real economy advancement.

David Llewellyn-Smith
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Comments

  1. master of toilet paper

    economies dont make any sense anymore, trying to understand them through any sort of perceived rational framework is like trying to understand the fluctuations of the quantum foam by consulting a mitre 10 purchase receipt

    • Recessions “are vital to advancing living standards as they sweep out the capital misallocation of the cycle and help drive productivity growth.”

      OK, I agree.

      But how can that possibly work when the cost of capital is, virtually, zero?

    • Jumping jack flash

      Oh, but they make perfect sense when you consider the New Economy’s paradigm of infinite debt growth.
      It explains everything they have done so far and possibly can predict what they will do to keep the debt growing, once you understand the basic principle and laws of debt.

  2. Feels like we’re in the “new paradigm” phase. Every time it’s different, and yet every time it’s the same.

    • What is fair value in a zero interest world?

      If mortgage rates went sufficiently below zero so that someone could “buy” a house and pay it off it’s principle in 30 years time without actually having spent a single cent of their own money, then what would be the fair value of that house?

      • Goldstandard1MEMBER

        All good points…. which is why this situation can’t and WON’T continue. Something breaks soon.

        • I suspect that figure is the point where politicians and bureaucrats begin to fear civil unrest. But other than that there is no mathematical lower bound.

          IMO once we move to digital currency we will see legislated wage inflation.

          • At that point anyone can service infinite debt so the system breaks, assuming 30 year loan terms.
            Not sure digital currency makes any difference to anything as our currency is already primarily digital, especially post covid and current governments are clearly pro wage suppression.

          • When everyone is being paid digitally on a ledger that is visible to regulators. Govt will be able to mandate let’s say a 2% pay rise on this date, manufacturers and retailers can adjust their prices on that date. It is not really possible with what is largely a cash economy.

          • ps: your -3% is estimated based on a 30 year mortgage? could we see the banks gaming the system with 100-year mortgage at -1%?

          • You could definitely see the system gamed like that, but I’m not sure banks are allowed a greater than 30 year mortgage at this point or I’d expect 35 and 40 year ones would already have been seen.

            Although having thought about it a bit more thoroughly, a negative interest loan with compounding interest will never actually pay itself off completely, even if it has only $1 outstanding, the interest paid back will be 3 cents at -3%. The outstanding balance will approach but never reach $0.

          • Jumping jack flash

            Debt repays debt. Its a fantastic system because debt is treated the same as real money.

            If houses churn fast enough it would be ok. If you were only allowed to keep a house for 10 years before paying some enormous land tax, say, then that would probably motivate people to sell at least every 10 years, which would mean a larger pile of debt would be magicked up to repay the existing debt plus interest.

            That colossal pile of debt would have to go somewhere. It could all go back into another house, but the smart ones would spend most of the debt pile and just keep the minimum amount to use to obtain their next house up the ladder.

  3. I’m feeling we will have a 2 year house price surge followed by a hard landing if (when) China decides to keep punishing us and finds access to resources elsewhere.

    • Jumping jack flash

      May not even last 2 years. It all depends on the debt growth and whether our esteemed leaders with planet-sized brains decide to bow to the lobbies and resume wage theft prematurely.

  4. Poochie the Rockin DogMEMBER

    Lol assets will continue to rise until society collapses, if assets don’t rise that means the elites get angry & the job of government is to keep the elites happy. All regular plebs can do is buy stocks & try to FIRE

  5. If risk isn’t priced correctly then it will build up and something ill break. Sure, the socialist central planners think they have it all figured out. But they’ll end up causing the same chaos that they always do. Because markets need to understand prices properly in order to work effectively. Can’t remember the last time I heard a central banker say that though. According to them, prices need to constantly inflate.

    • Jumping jack flash

      100%

      Risk is simply ignored if it doesnt fit with their plan.
      The only risk that is considered is LVR which is very, very convenient when debt itself increases value by simply existing and being attached to assets.

  6. Jumping jack flash

    COVID didn’t end recessions.
    Bush ended recessions. He rejected the idea that there could be a recession. Howard jumped on board too after getting into power arguably because of a recession (possibly Bush as well!)

    Greenspan flooded everything with cheap (at that time) debt to spend rather than to expand productive capacity, and changed economics and history forever.

    COVID is a handy excuse to spend trillions on setting the global economy back on the right track of debt expansion after it came perilously close to revealing its true state (collapsing, slowly but surely) in 2019.

    • After endless years of moaning about spending, our conservative government did seem to seize the opportunity to open the spigots with alacrity. No compunction about directing the largesse at the big end of town either.

      • Jumping jack flash

        They need everything inflation. They will get it.

        They made a gigantic mistake in 2007 because, i assume, nobody really knew what to expect once they started down the path of infinite debt. Raising interest rates just as everything was starting to work properly was insane.

        The next decade and a half was spent trying to get back to how things were. A largely laclustre effort, because they didn’t want to spook the horses.

        They wont make the same mistake twice. But then again they arent too bright either.