According to Jim Rickards, recessions are cyclical. The recession that started at the bust of the outbreak most likely ended, and we are now living another level of economic slump that came as a consequence of the effects of the recession. Considering the GDP estimates for a third-quarter growth of 33.1%, the least we can say is that we’re out of the first round of economic recession. But that doesn’t mean we’re headed to a recovery. In fact, in Rickards’ view, we’re moving towards an economic depression.
As the official numbers for fourth-quarter growth won’t be known until the end of this month, estimates for growth are in the range of 7%. Both the second-quarter meltdown and the third-quarter rebound were the highest annualized figures for decline and growth ever recorded in U.S. history. But as Rickards explains, that’s exactly the problem.
That is to say, the third-quarter growth could potentially have put output up again to approximately 87% of the previous level, and a estimated fourth-quarter growth of 5% would set the annual GDP at 93% of the 2019 level. In any case, that still configures a decline of 7% in GDP for the full year 2020, the worst full-year decline in GDP since 1946 when growth collapsed by 11.6% after WW2.
The worst full-year of the Great Depression was in 1932, when growth fell 12.9%. This indicates that the historic and dramatic collapse in growth of 2020 is at levels only seen against the backdrop of economic depressions and wartimes. That is precisely why Rickards argues that we’re entering a New Great Depression.
The strategist foresees that a new recession will be unfolded in the first quarter of 2021. At this moment, the economy is already on the path for another technical recession, which signals that we’re on the verge of a double-dip recession. While last year’s recession was sparked by the health crisis, this year’s recession is being caused by the introduction of new strict lockdowns and stay-at-home orders in most major states of the nation.
More than 45% of GDP and 50% of all jobs are generated by small and medium-sized businesses. This is the segment of the economy that has been struggling the most because of lockdowns. A considerable part of the closings aren’t temporary anymore but have become permanent as bankruptcy rates are soaring, equipments are being sold at fire-sale prices, job losses are not regained, leases are broken and empty storefronts become a sign of the times.
The latest labor market report found that for the first time since April, over 140,000 jobs were cut last month, a clear sign that the economy is stumbling amid so many restrictions and so many rounds of shutdowns.
Consumer spending has flatlined over the past few months, giving almost no incentive for companies to hire. The economy still has 9.9 million fewer jobs than it did before the health crisis sunk us into a deep recession almost a year ago. This staggering drop in the labor force participation rate is nearing the lowest rate ever recorded, at this point, the level of long-term unemployment is so high that it is only comparable in modern history to the ranks seen during the Great Recession.
Moreover, Rickards maintains that Biden’s policies are likely to aggravate this situation even further. However, in his view, the Biden plan will not cause the recession; it’s already here, but the strategist suggests that his plans will make things even worse and possibly prolong the new recession into the second quarter as well.
Consequently, in the short-term, deflation will be a much bigger issue than inflation. And deflation has a direct impact on growth since it increases the real value of debt. So, eventually, neither fiscal nor monetary policy will be able to generate stimulus to boost the economy. We will be facing low velocity of money, with high savings rates, high debt, high unemployment, and amid new lockdowns.
The Fed and Congress can try, but they will never manage to stimulate the economy out of the recession. Instead, they will put us on a path for an economic free-fall of unprecedented proportions while dramatically expanding our national debt and letting us inevitably fall into a New Great Depression.
Epic Economist website: https://www.epiceconomist.com