No Solid Footing Beneath America’s Economy
There’s never a good time for a Pandemic — but for the US Economy, it couldn’t have been worse
A popular wealth advisor was answering questions from fans and investors. Oddly, some responses began with a pause — and that hesitation spoke volumes.
I’m broke, yet listening intently. I don’t have cash for any type of investment right now. That’s not why I’m listening.
Their typical, casual confidence in replying with suggestions — often to buy or invest in whatever ultimately benefits their own portfolio — is being forgone.
“What’s good to invest in right now?” the email asks.
. . .
The question is met with an eery pause; and this isn’t the first delayed response I’ve heard in recent weeks from such individuals. These displays of hesitance seem borne of genuine concern. After all, when people who stand to benefit from selling to you are instead offering their best guess on how not to lose your money, the delusion should be over.
Not only was the economy in a similar state in both 2007 and 2019, but many indicators are far worse today — even after the bailouts we just had.
There are significant, even systemic problems with our economy right now, which began well before yesterday, and will linger beyond tomorrow. Maybe we should have all been paying attention.
The Big Picture
The US Economy has been on very shaky ground for the last few years, and it was getting worse. We already know wages have been flat since Nixon when compared to production, and in contrast to the cost of living and inflation.
Ultimately there was a sort of mass hysteria, psychologically, about the economy by those in denial. If you had a reasonable wage and followed the mainstream media, you’d be partially forgiven for thinking everything was A-OK. On the outside however, were those who had repeatedly been pushed under further and further by layoffs, bankruptcies, and quite frankly by falling out of the diminishing middle class.
Quite simply, average people were broke. To keep up, we frequently had to resort to using credit to maintain anything close to a middle-class existence. Borrowing was eventually available from the banks several years after the bailouts, but consumer debt was making new records with all-time highs.
Debt bubbles are the common denominator preceding all financial crises, including the 1929 Great Depression, the 2008 Great Recession, and the others in-between. That is where we found ourselves yet again at the end of 2019. Consumer debt was far from being the only gigantic debt bubble we were facing prior to this Coronavirus Pandemic.
Below I’ll go into the nitty-gritty of how our economy has systematically come apart since 2008, starting with a bit of levity:
Fed QE money + Bailouts + T-bills = Super-high balance sheet
Broke consumers + Increased cost of living = Too much consumer debt
Low business sales/profits + Fed QE Money + Low interest rates — Business tax cuts = (Stock buybacks + dividends)/No money for a rainy day.
Buybacks + Dividends = Stock market bull run, but also more corporate debt.
Government promises + Ultra-high college tuition = Record student loan debt
Broke students with new degrees — decent jobs = Defaults on student debt
China trade sanctions = Last ditch effort, probably
American Dream = LOL
We count plenty of things toward GDP today that are actually devoid of adding real value to the system. Paper-pushing, intermediaries, and financial transactions — these add up to a big part of the US Economy, but are actually either neutral, or are actually a drag on the economy. We’re just good at massaging numbers — we change calculations on indicators when it suits us.
It took us far too long to unravel the causes of the 2008 financial crisis; we cannot allow that to happen this time by simply calling 2020 the ‘Corona Pandemic Crash’ — it would be misplaced blame.
Bailouts and QE, 2008–2017
2008 was a bleak time for many; lost jobs, homes, and often hope. What Wall Street endured was brutal as well; Lehman Brothers and Bear Stearns went under. The market giveth and the market taketh away. The whole financial system teetered, but the Fed donned it’s Superman cape and swooped down, scooping up billions in bad debts from the vast multitude of Mortgage-Backed Securities (MBS’s), in addition to purchasing lots of T-Bills (Treasuries) to add to its exponentially growing balance sheet.
This Quantitative Easing (QE) lasted several years, during which the average Joe enjoyed no noticeable improvement in the economy. Before QE, the Federal Reserve balance sheet was around $900 Billion. By 2014, it had ballooned to $4.5 Trillion. The mere announcement in of the plan in 2014 to slow expansion and start ‘cleaning up the balance sheet’ by Oct 2017 was not easily swallowed by the markets, or by the banks, despite this news being given years in advance. Why?
Because all of that additional liquidity (QE) was being treated as the ‘new normal’. Banks now just expected that much money to work with.
Then why didn’t we have lots of inflation?
It’s important to undertsand that inflation doesn’t get spread around evenly. Governments, bankers and corporations are masters of what we call ‘privatizing the gains and socializing the losses’. There may be no other statement that so eloquently summarizes just how the economy is ‘rigged’, and where inequality stems from.
Inflation doesn’t just affect things we buy at the grocery store, it affects asset prices too. The cost of bread goes up and so does the value of your home. While price increases on general consumer goods seemed modest considering the sheer volume of money thrown at the problem, it is simply not accurate to say that ‘QE didn’t cause inflation’.
Did your home price start to recover? Stocks doing well? 401K looked a little healthier before the Pandemic? These things are all assets, and the same mechanism that makes your grocery bill higher also makes your house gain value. The stock market as well, was inflated, and well overdue for a correction — c’mon, you’ve had a bull market for 10 years!
The river of QE money that so easily flowed into the banks after 2008 found itself in stagnant waters, as banks were reluctant to lend. The idea behind all that cash was to help restart the economy, lend to businesses, etc., but it was easy for banks to be stingy — because they were offered an incentive of .75% interest paid on excess reserves kept at the Fed — in addition to 1.4% interest being paid to the banks for their usual, required reserves. This was made possible by the Emergency Economic Stabilization Act of 2008 — otherwise, banks were not allowed to receive interest payments simply by leaving money parked at the Fed.
To picture this, imagine the Fed is like a regular bank. The big banks (Bank of America, JP Morgan Chase, etc.) have savings accounts at the Fed. In 2008, the Fed offered something like a ‘credit line’ to the banks. They said:
“Hey, Banks…why don’t you transfer the balances from all those pesky mortgages and loans that are going bad over to us?” and they did, to ‘stabilize’. Then, the Fed said: “We’re also gonna give you access to a big ‘ol credit line, so you can make more loans and stuff”. “Great! That will give us liquidity” said the big banks. “And to sweeten the deal, we’ll actually PAY you interest on the credit that you aren’t using.”
“Hot Damn!” said the big banks.
From 2008–2013, the banks had only distributed about 19% of the QE money into the real economy, and they clung to the rest. These were the excess reserves generating complaints about the banks ‘hoarding’, and how although liquidity became accessible, economic growth languished, leaving something to be desired.
Funny enough, the banks’ unwillingness to loan more likely did help us a bit (despite their best efforts). Passing that many new dollars through to the ‘real economy’ too quickly could’ve easily caused much more inflation. Despite some price increases, it could have been a lot worse.
Business Sucks, Sales Suck, You got laid off…
In the years following this tepid “recovery”, apart from a handful of bright moments in corporate America, things were not going well on the consumer spending side. Disappointing quarterly earnings reports became more frequent, as did large layoffs.
Several times since 2016, many low earnings reports had come in, and in 2019 it was getting especially rough. Apple, Google, and other big names expected to carry the economy posted losses. As I mentioned, consumers were tapped out and already in debt.
Citigroup, General Motors, Bank of America and HP had some of the largest layoffs in 20 years. Circuit City and Comp USA — the main competitors of Best Buy, are gone. Yeah, you might get a little nostalgic and sad in a moment.
Toys ‘R’ Us, KB Toys, and many others either closed many store locations or even closed their doors for good during this period:
Borders and Waldenbooks, Kmart, La-Z-Boy, Linens-N-Things, Macys, Office Depot, Saks 5th Ave, Sears, Zales, Sharper Image, Gap, Foot Locker, Ethan Allen, Dillards, The Disney Store, 84 Lumber, Sports Authority, Wet Seal, Radio Shack, Virgin US, Bon-Ton, Dress Barn, and many more.
Remember those places?
…but the Stock Market was doing great
There were a handful of factors propping up stocks in the longest bull market in history:
Corporate stock buybacks hit a record high $1.1T in 2018, in part due to tax cuts. This is not supposed to be a main driver of growth, but companies with the largest buybacks were the ones outperforming the market since 2009 (when the bull run started), and this behavior only increased during the consumer slowdown. Airlines are under scrutiny right now for spending 96% of their cash on buybacks, then expecting a bailout. In fact, corporate cash spending across multiple industries was used toward buybacks and dividends at about 95%. Apple, Oracle, Wells Fargo, Microsoft, Merck, JP Morgan Chase, Bank of America and others had huge share buybacks.
Often, shares were bought back with borrowed money — all that delicious QE money at such tasty low interest rates, how could they say no?
Trump’s 2017 Corporate Tax Cut from 35% to 21%, along with a bit of good ol’ deregulation was just what businesses needed to tweak their earnings.
In a nutshell, businesses were running out of steam. They’d collectively used about 95% of their money on buybacks and dividends, with the help of the tax cuts. This was being done in part to offset poor sales, because the average consumer was broke and already in debt. The share buybacks declined by the end of 2018, so businesses had nothing left to hide behind.
Debt is a four-letter word — the “Everything Bubble”
Debt is by far the largest factor heading into any financial crisis, and boy did we have it through 2019. I wonder if Guinness keeps records on that?
Student Loan debt rose tremendously after 2008’s recovery, and hasn’t slowed down one bit. The cost of a college education had exploded (one of the sneaky effects of the inflation experts say didn’t happen). Student Loan debt actually surpassed credit card debt — and considering how ‘new’ this type of debt is, that is tragically hilarious. There was virtually NO student debt at all in 1980, and it didn’t really take off until the 90’s. Hard to believe, huh?
Household/Consumer Debt — This drove the only sense of recovery that regular people saw since 2008. Mortgage payments, car payments, and student loans combined. You probably have a home, or car, or you’re a student, so I’m guessing no explanation is needed. It’s ridiculously high and it leapfrogged 2008’s Household Debt figure already back in 2017.
Corporate Debt/Corporate Bond Market reached $10 Trillion by the end of 2019. The entire global economy is about $21 Trillion. The amount had doubled since the 2008 crisis, in part due to low interest rates set by the Fed. This easily-borrowed bond money enabled corporations to buy back large swathes of their shares — causing those stock prices to increase, and taking care of shareholders with dividends. Using borrowed money for share buybacks instead of actual growth through R&D and production is foolish — it’s hollow growth, plain and simple.
BBB Ratings — Of this enormous figure, over 50% of these bonds are rated “BBB”, which is as low as it gets for investment-grade debt. This is a much higher percentage than in 2001 (17%). The danger now is the likelihood that rating agencies could drop many bonds to “BB” or below — junk bond range — suddenly rendering them ineligible to be held by pension funds and other retirement accounts.
September 2019 — Liquidity hits the fan
Prior to the recent announcement in early March by the Federal Reserve to offer much needed liquidity to the banks — $1.5 Trillion worth — those banks were already getting some help over the prior six months. Not in the trillions in one shot, but it’s been in the billions…every night.
This money was for facilitating the overnight lending market (the ‘REPO’ market’), in which banks use “Repurchase Agreements” to square up, and have money ‘in the register’ when they open for business. The typical rate banks charge one another for such short-term loans was under 2% — yet on Sept 17 suddenly shot up to 10%!
To me, this said quite simply that banks didn’t trust one another — which couldn’t possibly be a good thing. This sudden rake hike was a giant red flag that a crisis was about to unfold.
If the Fed hadn’t helped immediately — and quite a bit — some banks simply would not have had the cash to open come daylight, and the giant financial machine would’ve seized up, well before the Pandemic began in Wuhan.
September 2019 wasn’t the first sign of trouble, either — but when the Pandemic had barely made it to US shores in early March 2020, it was surprising for the Fed to quickly offer up an amount greater than the entire 2008 bailouts at a moment’s notice. If it wasn’t the virus, what happened?
The Pandemic it seems, was an amazingly convenient time for banks to ask publicly for the huge preliminary bailout they were being sheepish about. In reality, the banks were going to need much more help than they were already getting anyway. Any number of ‘pins’ could’ve popped this bubble.
Boomers retiring in droves
The baby boom generation are currently beginning to retire at incredible rates — tens of thousands per day — between approximately 2020 and 2025. This obviously puts incredible strain on the system. In addition to the fact that many of these boomers will no longer be contributing to their 401(k)s and other retirement vehicles, instead, they will be drawing payments from them. The current crisis in 2020 is certainly not welcome news for new retirees.
Don’t hold your breath
The markets reaction to some Fed announcements was not a good indicator. And the fact that the billions of QE already pumped in, combined with the fact that we effectively began QE again seven months ago now, all this effort including MMT and giving people $1,200 and other benefits end all this effort and it’s barely keeping the economy afloat let alone recovering.
It’s not as if the Fed and government can actually replace people’s income, which is effectively what it would take. References to a “V-shaped recovery” are a bit laughable. (Just picture a chart with the line going down, and back up). Even a U-shaped recovery is starting to seem implausible. Those Keynesian models are in doubt even by today’s Econ-101 students.
Perhaps tomorrow’s economists will do slightly better than your local meteorologist. We can hope, at least.
None of the actual problems that brought us to the 2008 Recession, and now the 2020 (soon to be) Depression have been addressed. The biggest problem pre-2008 was debt, in conjunction with a continued ricochet effect from the 1997 Asian Crisis and the 2001 Dotcom Bust. Heading into 2020? You guessed it! Even more debt of all kinds — the “Everything Bubble” — and leftover crap from 2008’s bad mortgage debt to boot. Say a prayer for Deutsche Bank on that note.
Whatever crash was coming was going to be bad, and the Coronavirus really just kicked it off in spectacular fashion. We have no real reason to believe that the efforts made by the Fed, no matter how quickly they acted, and the MMT “Helicopter money” will even begin to address the underlying problems of an entire economy propped up by hollow growth.
My friends, I wish I could say the worst was over by now (late April 2020), but however it appears to be playing out, we have reasons to doubt there is any solid footing beneath America. I believe the only real way we could begin to recover, is with debt forgiveness, and for now, to allow collapse.
What greed giveth, fear taketh away. Stay safe, and stay tuned.
(More articles on the Financial System coming soon)