In a typical business cycle, as money and credit expand in the economy, a surge in inflation eventually followed, prompting the Fed to raise interest rates in an effort to cool down the economy and control inflation. This typically led to a recession.
This recession, or possibly depression, is government-induced as non-essential businesses remain closed in much of the country; travel and events have been canceled while millions of employees are either working from home or potentially without jobs.
The issue with economic or market models is they rely on linear data. In terms of this virus, we simply don’t have enough inputs to model it correctly.
How long the economy remains shut down and people remain quarantined will determine the severity of the mini-depression now underway and how long it will take to recover thereafter. The economic projections vary all over the place. Jamie Dimon, CEO of JPMorgan is calling it “a bad recession.” Former Fed Chair Janet Yellen told CNBC that the real unemployment rate could be far higher with the economy possibly declining by 30% in the second quarter. As a point of reference, during the Great Depression, unemployment rose to 24.9%, the economy contracted by 25%, and prices fell by 30%. All of this took place between 1929 and 1933. Yellen is talking about the economy contracting by 30% in a single quarter. Fed Governor Bullard has suggested that the unemployment rate could hit 30% the longer the economy is shut down.
The truth of the matter is that nobody knows as we have not found ourselves in this situation for more than a hundred years since the Spanish Flu pandemic of 1918. The problem lies in the pandemic itself, how quickly it plateaus and burns itself out, or, worse, returns. There is also the unknown of government policy and its response to the pandemic. That said, we are shortly reaching the point where the cure is worse than the disease. Imagine the media headline: The operation was successful but the patient died.
The issue with economic or market models is they rely on linear data. In terms of this virus, we simply don’t have enough inputs to model it correctly. Trends in place are expected to remain in place. If yesterday was bad, tomorrow is sure to be just as bad or if yesterday is a good day, tomorrow is sure to be a good one as well. Sentiment fluctuates with trends in place and remains so until something changes.
Chosen excerpts by Job Market Monitor. Read the whole story @ Recession, Depression Or Something Else? | Seeking Alpha
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