Tag Archives: Uncertainty

The second shoe

In Western Canada and the Maritimes, COVID-19 is pretty much done. Still lots of it in Montreal and Toronto. There has been no silver bullet cure found and a vaccine, if it can be found at all, looks to be some distance off.

Meanwhile, our American friends have just had a couple of weeks of protests and riots ostensibly about the police murder of a black man, more generally about the frustration of the American left. The very real chance that Donald Trump will win re-election in the face of overwhelming media and elite opposition is creating massive shock. That, in turn, engergizes a small, but very vocal, minority to take to the streets in protest. The target is “systemic racism” and they just know The Donald is at the root of that system. Like COVID-19, the protests and the riots will pass.

The US stock market which used to be a barometer for the relative strength of the economy has taken a vacation from this role in response to the literal trillions of fresh printed dollars flooding the market. Ever upward regardless of such unwoke concerns as price/earnings and actual profitability. Never mind the millions of unemployed and the tens of thousands of businesses felled by COVID. It is raining dollar bills. (The situation is much the same in Canada with government money papering over the collapse of the oil and gas industry, mass unemployment and business failure, plus unprecedented levels of government and personal debt.)

Cementing my status as a grumpy old, white, man of heterosexual inclination and, thus, as unwoke as you can possibly get, I don’t think all this is even a little bit sustainable. At some point the reality of the massive demand destruction created by the COVID shutdown is going to bump into the massive personal and governmental debt and, to make things interesting, the structural unemployment the shutdown has created.

And that is if things go well.

It is just possible that the economy can be restarted, employment recreated, debt paid down and demand goosed; but the system as it stands right now is very, very fragile. It will not take much to turn a manageable recession into a serious depression.

One of the stranger things about modern economics is how much depends on confidence. If Mr. Jones thinks he will have a job next week he makes different choices than if he doesn’t. Repeat several million times an hour and you have an economy.

The reason why this is strange is that Mr. Jones makes his choices in conditions of uncertainty. In a normal, well functioning, economy that uncertainty is constrained in the sense that the past tends to determine the future. If you have had a job on the 1st of the month, chances were very good you would have one at the end of the month.

For many people the real effect of COVID has been to radically increase the level of uncertainty in their day to day lives. Take a look at this chart:

That is the US personal savings rate. When people are uncertain they don’t spend and therefore the savings rate goes up. If people don’t spend 30% of their income there are going to be significant economic consequences.

Of course, the personal savings rate is about people who actually have incomes and assets of some sort. What happens when you have to make choices with no income because your job has been cancelled due to COVID?

There is much debate about whether or not there will be a “spike” in COVID cases because of the lousy social distancing at the protests. And there is quite serious concern that a second wave of the virus in September is possible, even likely. What is not being discussed is the very real economic and social effects of a sudden rise in uncertainty.

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