Recession or Depression? QE Infinity & the Opening of Fiscal Floodgates

Demography Unplugged with Neil Howe

In this latest issue of my weekly podcast, I discuss whether this recession could become an extended depression. Public figures and economists are projecting single or double quarter collapses in U.S. GDP never before experienced since the birth of quarterly data in 1947. Most major economies in the world are going into shutdown mode in response to the COVID-19 threat, and that's like turning off a giant master switch in the global economy that no one has ever seen turned off before.

3M Treasury bills have been driven all the way to the mat. As of market close yesterday, the 3M was yielding 0.02%. So the nominal short-term yield is now essentially zero. As for the 10Y, the Fed has been trying to pull its yield down as well--but this is a more difficult task, even after hundreds of billions of dollars in long-term purchases.

A recession is always triggered by some particular event. But that doesn't mean it's unpredictable. Our late-cycle economy was slowing down in any case. Some one thing or another would have triggered a recession by the beginning of this fall.

On Thursday look for the total initial jobless claims filed in the week for March 15 through 21. The number is expected to be a blockbuster--some are predicting 1 million, others 2 million. Keep in mind that the previous weekly high for initial claims--set in March of 2009--was only 665,000. My staff and I have looked at the available state numbers, and we think the total could be even higher… maybe as high as 4 million initial claims filed in one week.

There is a viable endgame--which I call "smart suppression." It requires, first a serious lock-down that lasts long enough to suppress new infections and deaths. And then it requires widespread testing--both with the PCR throat test and with a serum antibody test--along with a system for monitoring and tracking positives, for following up with their contacts, and for keeping the highest risk people isolated. It would be a big operation. But it would save our economy.

What about fiscal policy? Now that the Fed has fired its bazookas, Congress is loading its howitzers. The administration's fiscal stimulus plan started out at $1 trillion. Then, after negotiations with Dems and further signs of economic stress, that size has ramped up to closer to $2 trillion. $1 trillion is nearly 5% of GDP. We're already running a 5% of GDP deficit. Consider too that tax revenue will fall by several % of GDP. So if we spend an extra $1 trillion this CY we will be running a deficit of 12 or 13 or 14% of GDP. In just one year this would generate the largest deficit since World War II.
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