Economy Awaits the Fed’s Rescue Amidst Coronavirus Panic

 

The good news is that Elizabeth Warren has dropped out of the presidential race. And Mike Bloomberg. And Amy Klobuchar. That guy with the name we could never pronounce.

The bad news is that Bernie Sanders and Joe Biden are still in the race on the Democratic side…and Donald Trump runs unopposed for the Republicans. The best you can say about any of them is that their names are easy to spell.

Meanwhile, the Dow dropped another 969 points yesterday. Stocks fell in Europe this morning. Based on early trading, it’s going to be another rough day in the U.S., too.

Coronavirus downdraft

Everybody wants more: more income, more money, more sales, more GDP, more jobs, and more sex.

But a pandemic brings less. People stay home. They stop earning…and spending. GDP goes down. Debtors have a hard time paying their bills.

Schools are closing. Parents must now stay home, too. No more business trips.

Yesterday, on the phone with a professional investor, he explained why an important international conference had just been cancelled.

‘They’re afraid people won’t come.’

And he might not have gone either.

‘I’m not worried about getting sick. I’m just worried about getting home.’

The travel industry is caught in the coronavirus downdraft. Flybe, a European regional carrier, was the first airline to crash and burn.

The New York Times reports:

Empty jumbo jets arriving at deserted airports. Masked passengers disinfecting their own seats. Stone-faced airline executives huddling with President Trump.

With the coronavirus outbreak continuing to spread around the globe, the aviation industry is being jolted.

Airline stocks dropped sharply on Thursday as investors reckoned with the prospect of canceled flights, lost sales and substantial reductions in service for months to come. Several carriers — including United Airlines, JetBlue and Lufthansa — announced new route closings in recent days. An industry trade group said the coronavirus could wipe out between $63 billion and $113 billion in worldwide airline revenues this year.

‘There are dramatically fewer people flying this week than there were last week,’ said Nicholas E. Calio, chief executive of Airlines for America, a trade organization. ‘Flights are being taken down because people aren’t getting on airplanes.’

System shock

In a normal world, less is what you get from time to time. Things slow down. Corrections happen. There are ‘shocks to the system.’ Unexpected reverses.

Fires clear out the dry debris on the forest floor. Strong winds knock down the rotten trees.

Recessions rid the economy of money-losing companies. Crashes wipe out reckless speculators, moving precious capital from weak hands to stronger ones.

And arguments over breakfast remind you to watch your step.

Setbacks are just part of life.

The coronavirus poses no existential threat to the human race. And it appears that children are spared, so the future is safe. Healthy people, too, are much more likely to survive than die.

Instead, the malady seems to take out the decrepit trees…the old, the weak, and those with ‘compromised immune systems.’

Here at the Diary, we always look at the bright side. So, we note that this is not necessarily a bad thing (except for those who are taken out).

It will reduce the burden on Social Security and Medicare. It will make it easier to get a doctor’s appointment, and free up some parking places for the all-you-can-eat early-bird specials.

The real problem is that the coronavirus exposes the weaknesses and lies in the whole system…especially the fragilities caused by fake money…

 

Thank the feds

In effect, the feds have compromised the immune system of the entire economy.

What do you need in a setback? Savings. But the Federal Reserve’s ultra-low interest rates penalized savings for the last 10 years. Naturally, savings fell to their lowest levels in history.

Instead of saving money, people were encouraged to ‘invest’ it. This, in turn, pushed up prices for investment assets to their highest levels in history. What is it that you don’t want to own in a setback? Overpriced speculative assets, of course.

And in backstopping the U.S. markets…and the U.S. economy…the Fed gave people the impression that setbacks were a thing of the past. Whatever happened, it would be there…just in time. ‘More’ would be a permanent feature of life.

Each time the stock market tried to correct, for example, in came the firefighters at the Fed with giant hoses full of ‘liquidity.’

And each time the economy tried to take a breather, same thing. Relief came just in time from the feds.

‘What, me worry?’ became an investment strategy, where the most sans souci investors…buying the most reckless investments…made the most money.

Waiting for the federal cavalry

Instead of doing the hard work of developing new products and services, CEOs saw that they could boost their stock prices simply by borrowing heavily at very low rates and using the money to buy back their own shares. Now, they have a mountain of debt and a falling stock price.

Instead of doing the work of finding the companies that were actually making money, investors found they could simply buy an ETF.

Or, if they were feeling their oats, they could just buy a big company that began with an A — Apple, Alphabet, Amazon — and they would be at the front of the list of investment performance.

And instead of doing the hard work of getting a good job, young people — fresh out of college with $120,000 of student debt and a degree in communication — found that they could make ends meet in the gig economy …sitting in Starbucks with their laptop computers, and dreaming of a new killer app that they could IPO the following year.

Well, now the guy at the next table is coughing. The woman at the counter sneezes. And the gigs are suddenly less attractive.

But what is he to do? He can’t take sick leave. He has no savings. And he has to make the next lease payment on his Subaru.

Corporate CEOs…households…investors — all have been compromised. And all now count on the federal cavalry to arrive, just in time.

Stretched out and wheezing from the coronavirus

But wait…The Fed compromised its own immune system, too. It spent its rate cuts protecting speculators from their own mistakes. Now, it has almost no rates left to cut.

As for the federal government…When times were flush, it should have run surpluses (savings) so it would have some room to maneuver when the setbacks came. Instead, it increased spending and ran $1 trillion deficits.

And the Trump team, too. It promised to Make America Great Again. But it squandered its opportunity (if it ever had one). Instead of balancing the budget and draining the Swamp, it increased spending at twice the Obama rate…and made the deepest part of the Deep State swamp — the Pentagon — deeper than ever.

And so now what? The voters face a miserable choice, with worn-out husks on both sides of the aisle. Neither side has any plan or idea beyond those that compromised their immune systems in the first place.

Households, corporations, and government are stretched out, living hand-to-mouth, with few reserves to see them through a real crisis.

And the economy has been so weirded-out by fake money…now, it trembles and quakes…rattles and wheezes like a frail 90-year-old…at the approach of a microscopic bug.

Will help arrive just in time? We don’t know. But we bet a lot of people wish they had a little more cushion to fall back on, just in case.

More to come…

 

Regards,

Bill Bonner

 

Daily Wealth

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Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance.


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