June 25, 2020
Here's an unprecedented milestone: Total public debt has now reached (or is going to reach this year) more than 100% of gross world product.
- There's a lot of debate about whether that really matters in countries like the U.S. or Japan that control their own currency.
- More on that in item 4, part of a jam-packed newsletter which covers economics, immigration, art, and more. All in 1,954 words, a 7-minute read.
1 big thing: The shape of the recovery
It's not a U, it's not an L, and it's definitely not an I. America's economic recovery from the coronavirus shutdown has already started. In economists' shorthand, that means it's a V (a sharp rebound), a W (a nasty double-dip), or, most likely, something in between.
Why it matters: The shape of the recovery will directly affect the future of millions of unemployed Americans. It will also determine whether small business owners, in particular, will be able to restart their entrepreneurial careers after being forced to shut down during the pandemic.
Context: One big fear in March and April was that America would see no real economic recovery so long as the pandemic remained out of control. In May, however, we saw more than 40,000 deaths from COVID-19 — and we had the largest monthly employment gain in American history, with 2.5 million new jobs being created.
- Be smart: The consensus among economists is now that we'll see a "reverse radical" recovery. Think of a backwards square-root sign, where there's a sharp drop, a relatively small bounce back, and then a long period of subpar growth.
The best-case scenario is a V. White House economic adviser Larry Kudlow, for one, is sure the economic recovery will last: "I think we're off to the races in what will be a very strong V-shaped recovery," he said this week.
- The case for a V is based on the idea that even if the number of new coronavirus cases is rising alarmingly, the number of new coronavirus deaths is falling steadily. Given that deaths lag cases, however, it's not clear how long that trend can persist.
The worst-case scenario would be a "W." Federal Reserve vice chair Randal Quarles is telling banks to prepare for "a W-shaped double dip recession with a short-lived recovery followed by a severe drop in activity later this year due to a second wave of containment measures."
- While virus-related lockdowns remain the biggest risk, economists also worry about the fact that May's surprisingly good economic data were driven in large part by hundreds of billions of dollars of temporary government stimulus.
- The $1,200 checks, along with an extra $600 per week for anybody claiming unemployment assistance, actually caused personal incomes to rise in April.
- If and when the free money runs out, the mini-boom could be over. At that point we could fall back into a "W-shaped" recovery — or even a double-dip recession.
By the numbers: According to BofA Securities' global fund manager survey, 64% of investors expect a U-shaped or W-shaped recovery. Just 18% expect something V-shaped.
Reality check: Many major industries, from live entertainment to air travel and even in-person shopping, remain in a dire economic condition. They still have no real ability to know when or how they might return to a pre-pandemic state of health.
- International trade is looking very weak. Borders went up quickly once the virus hit, and will go down much more slowly.
- State and local governments also seem certain to lay off millions more workers in the coming months, given the unprecedented magnitude of their budget crunch.
The bottom line: "We don't have a word for being in a depressed economy that's growing," says Heidi Shierholz, senior economist at the Economic Policy Institute.
- Even a fast recovery will take place amid double-digit unemployment rates and the shuttering of millions of small businesses. That's nothing to celebrate.
Bonus: World trade volume craters
The volume of world trade plunged a staggering 12.1% in April, according to new data from the Dutch Bureau for Economic Policy Analysis. On an annualized basis, it has now fallen by more than $2 trillion in just 1 month, with no V-shaped rebound in sight.
2. No more crossing borders for work
Another area where there's no sign of any recovery is in the movement of workers across borders, especially when it comes to movement in and out of the U.S.
Why it matters: Multinational U.S. corporations are built on international travel. Apple spends $150 million a year on air travel, for instance, and pre-coronavirus was buying 50 business class seats per day just from San Francisco to Shanghai. That level of investment in cross-border ties helped to create a company that's now worth $1.6 trillion.
Driving the news: U.S. borders remain shut to travelers from China and Europe. There are only eight flights per week between the U.S. and China; the United Airlines SFO-SHA route where Apple used to spend $35 million a year currently has no flights at all. The EU is almost certain to ban U.S. travelers when it reopens on July 1. And Donald Trump has banned thousands of nonimmigrant workers from entering the country this year.
By the numbers: Trump has prevented the issuance of about 29,000 H1-B visas, 23,000 H2-B visas, 72,000 J-1 visas, and even 6,000 L-1 visas, which are just ways for executives at multinational companies to move from a foreign office to a U.S. location. That's according to estimates from the Migration Policy Institute; the numbers cover only the period from July to December 2020.
- Also affected: Some 37,000 individuals who would normally receive H-4, J-2, or L-2 dependent visas.
- The racial angle: Most of the would-be immigrants who will now remain outside the U.S. are Mexican, Indian, and Chinese. Visas that normally go to wealthier and whiter foreigners, such as E-1, TN, O-1, or I visas, are unaffected.
My thought bubble: If multinational companies can't bring talent to work for them on U.S. soil, that's only going to accelerate their move to remote work and foreign hubs. Zoom works just fine across international borders, and countries like Canada are jumping at this opportunity to attract global expertise.
The bottom line: The nascent economic recovery has been entirely domestic so far. For as long as Donald Trump remains president, it's likely to stay that way.
3. The reassuring corporate bond market
The V-shaped recovery is starkest in the stock market, where the Nasdaq has overtaken its pre-virus highs and where the S&P 500 is back to its frothy levels of last November.
- The health of the stock market provides reassurance that our current crisis will pass without the major loss of wealth that we saw in 2008-09.
Why it matters: There is still a lot of fear that a "tidal wave of bankruptcies" is about to swamp the economy, sending it back into another downward spiral. But for all that U.S. corporations are operating with unprecedented amounts of debt, the financial markets remain sanguine.
By the numbers: While high-profile "mega-bankruptcies" such as Hertz and J. Crew make headlines, the total number of bankruptcies involving more than $100 million in debt is likely to be substantially lower this year than we saw during the last recession. That's according to NYU business school professor Edward Altman, who sees 192 such filings in 2020, compared with 242 in 2009.
- Flashback: One of the great surprises of 2009 was how few companies ended up filing for bankruptcy. The same might well end up being true in 2020.
- Insolvent companies do not always file for bankruptcy protection. Often, their creditors allow them to roll over their debts, betting that they'll make a better recovery that way compared with their likely outcome in bankruptcy court.
Corporate credit spreads — the market's gauge of the riskiness of corporate debt — are elevated right now, but nowhere near their levels during the last recession. They're even lower than the spike we saw in 2016.
The bottom line: The good news in the current crisis is that it isn't a credit crunch. If you're holding corporate debt, you can be at least a little bit reassured that a lot of equity needs to be wiped out before you lose a penny.
4. Monetizing the deficit
The best way to avoid a W-shaped double-dip recession is to ensure that fiscal stimulus continues past July. Many members of Congress, however, worry about the effect of multi-trillion-dollar deficits on the national debt.
- The solution, per Stony Brook economics professor Stephanie Kelton: Run deficits without issuing any debt at all. Kelton suggests we should just monetize the deficit instead — fund it by printing dollars rather than issuing Treasury bonds.
Between the lines: Economically speaking, there's not a lot of difference between paying for the deficit with money or paying for it with bonds carrying a near-zero interest rate. As former IMF chief economist Olivier Blanchard writes, "it just replaces a zero interest rate asset, called debt, by another one, called money."
- Printing money does not cause inflation — quite the opposite. If you issue debt instead of money, then any interest on the debt is excess money entering the financial system. Take away the interest, and you take away inflationary pressure.
The big picture: There's still enormous demand for risk-free assets, and Treasury bonds serve a very important role in the financial system. No one's suggesting that we stop issuing them entirely. But insofar as rhetoric around the national debt is acting as a brake on necessary economic stimulus, it might make sense to have deficits without debt.
My thought bubble: There's a paradox here. The people who want to print money to avoid adding to the national debt are also the people who say that the size of the national debt doesn't matter. The hope is that monetization would placate the deficit hawks, but that seems unlikely.
Go deeper: Kelton was a guest on my podcast last week, and went into detail on how Modern Monetary Theory views sovereign finance.
5. Art gets political
Crises always hit the poor worse than the rich. The art world, however, might be an exception. Museums and galleries are struggling, but street-level artists are more visible then ever.
Why it matters: Street art has been recognized as an important part of art history for decades, and it has always been political-with-a-small-p. The current protests, however, have elevated the art form to a fully-fledged political force.
How it works: Black Lives Matter protests were initially accompanied by looting, which caused businesses to board up their windows with plywood. That in turn was the catalyst for an explosion of political street art.
- It didn't take long for the new artistic movement to be legitimized and/or co-opted by politicians and corporations painting slogans on their streets and storefronts. Expect an official Black Lives Matter mural outside Trump Tower any day now, to match the one near the White House.
- New York magazine realized that the best way to demonstrate the unpopularity of Mayor Bill de Blasio was simply to wheatpaste his picture onto the streets of the city, and let New Yorkers express themselves naturally.
- The Robert E. Lee statue in Richmond, Virginia, will soon come down — covered in paint and anti-racist graffiti.
The bottom line: Most high-profile art in recent years has been elitist, sealed within a bubble of wealth and privilege. Those days are over. The defining art of 2020 is distributed, anonymous, and much more powerful.
6. Coming up: May's income figures
Personal income figures for May are out on Friday, Axios' Courtenay Brown writes.
Flashback: Household incomes saw the biggest monthly surge ever (10.5%) in April, against the backdrop of record job losses. Economists didn't see it coming.
- The data showed the CARES Act stimulus payments worked. The nearly 90% jump in government transfer payments in April offset the losses in every other income category.
Extra unemployment benefits haven't expired yet. But there were no new stimulus checks last month to help buoy income.
- Economists expect incomes to fall 7%.
- Consumer spending — which is released alongside income figures — is estimated to have rebounded 10% after falling 13.6% in April.
7. Building of the week: Met Breuer, New York
The Met Breuer is such a striking piece of architecture that it's named after its designer, the great Hungarian Bauhaus architect Marcel Breuer.
- The building was constructed for the Whitney Museum of American Art in 1966. When the Whitney moved downtown in 2014, its former home was taken over by the Metropolitan Museum.
- Don't call it brutalist: For all that it has stark and clean lines, the exterior is granite, not concrete.
The Met Breuer's final exhibition, a retrospective of Gerhard Richter, was open for just nine days.
- The next museum to call the building home will be the Frick, which will move there while undergoing renovations. It remains to be seen how the likes of Bellini, Goya, Holbein, Ingres, and Velázquez will respond to Breuer's high modern ceilings.