The COVID recession resulted in the most significant “pull-forward” of income growth in modern history.
An unprecedented amount of debt was used to plug a record output gap.
This recession is different because income growth increased as opposed to declined. The similarity comes from the use of debt capital to blunt the negative impact of deflation.
The outcome of the recession will ultimately be worse as the level of public and private indebtedness has breached all critical thresholds and will now have a non-linear impact on economic growth.
Overusing one factor of the production function, specifically debt capital, has diminishing marginal returns and will result in the weakest expansionary income growth in the years to come.
A long history of recessions, dating back to the founding of the republic, has allowed us to create a template for a typical downturn in the economy. The COVID recession, mostly thanks to unprecedented government action, has distinct differences from the historical recessionary outline.
While differences appear large on the surface, a more in-depth analysis reveals a consistent fact-pattern and one that clearly emphasizes why this recession will be more damaging. We know that the “shock” to the economy was among the worst ever experienced, but here I am referring to the recovery that will undoubtedly take place when discussing why this recession will be “worse.”
Typically, during recessions, income falls for the average population.
The chart below shows seven recessions before the COVID recession with the annualized rate of real disposable income growth per capita during each recession. Prior to the COVID recession, the average recession brought income growth of –0.54%. In other words, incomes declined during the average recession.
In 2020, due to one-time stimulus checks and massively boosted unemployment benefits, so far, we have seen 32% annualized growth in income during the recession.
Real Disposable Personal Income Growth: Per Capita (Annualized Growth):
Source: Bloomberg, FRED, BEA, EPB Macro Research
This recession is clearly different because income growth went up as opposed to going down, a significant deviation from the standard recessionary outline.
As noted, income growth soared due to government transfer payments, namely one-time stimulus checks and enhanced unemployment. Total government transfer payments reached a record 30% of total income during the crisis and has since cooled to about a quarter of total personal income.
Government Transfer Payments As A % of Total Personal Income:
At this point, we are all aware that this massive rise in income through transfer payments was facilitated by an enormous increase in public sector debt. Many have pointed out that this is akin to a “free lunch” as long as the Federal Reserve buys the debt issued to the public. This is a highly flawed analysis that disregards many core pillars of macroeconomics and a careful study of the existing problems associated with extreme levels of overindebtedness.
Using assumptions which are likely too low, total nonfinancial debt as a % of GDP will surge to 310%, breaching the cumulative threshold outlined in the BIS paper, “The Real Effects of Debt,” the level at which debt starts to have a nonlinear negative impact on economic growth.
It is important to note that the paper specifically excluded any mention of massive inflation as a result of overindebtedness and instead emphasized the drag on growth.
In fact, there have been dozens of papers written about the impacts of extreme levels of debt; virtually none cite high inflation as the result unless the central bank’s liabilities become legal tender, something discussed at the conclusion of this note.
Total Nonfinancial Debt As A % of GDP:
Source: Z.1 Financial Accounts, BEA, Bloomberg, EPB Macro Research
Furthermore, assuming that the Central Bank can buy the debt of the government, thereby allowing fiscal policy to generate inflation, disregards the well documented diminishing marginal returns proposition.
The production function says economic output is determined by how technology interacts with the factors of production: land, labor, and capital.
Overusing one factor of production has substantial evidence of diminishing marginal gains.
With total nonfinancial debt to GDP soaring to 310%, the US has eclipsed all peaks in total debt dating back to the 1800s.
Clearly, we are overusing debt capital, and more specifically, government debt capital.
Government debt as a % of GDP has risen to levels that are significantly above the threshold for diminishing marginal returns yet we continue to believe that more is more, dismissing the evidence that more government debt, regardless of the use and the balance sheet on which it resides, will have a nonlinear negative impact on economic growth.
Government Debt As A % of GDP:
Source: Z.1 Financial Accounts, BEA, Bloomberg, EPB Macro Research
Debt is simply a pull-forward of future consumption or rather an exchange of current consumption at the expense of future consumption. We are in the process of the greatest pull-forward of demand in history, and we continue to believe that because we are using “more” debt, or that because it is directed to a particular group of people rather than another group, that we can bypass the well-documented evidence of diminishing marginal returns.
To see the evidence of diminishing marginal returns on full display, we can track the rate of real personal disposable income growth per capita, during only expansionary periods, throughout a period of time in which debt capital has been highly overused.
From the 1960s through the early 2000s, real personal disposable income growth per capita increased at a 3.0% annualized rate during expansionary periods. After the turn of the century, we lost 36% of our trend income growth, falling to just 1.9%. Many factors contributed to this decline, but diminishing marginal returns and an overuse of debt capital are among the main culprits.
Real Disposable Personal Income Growth: Per Capita (Annualized Growth):
Source: Bloomberg, FRED, BEA, EPB Macro Research
Now, we have elevated debt as a percentage of the economy to levels we have not seen before in the United States. This development has made many uncomfortable and caused analysts to throw out various forecasts regarding inflation and a collapse of the currency. We have evidence from abroad, however, of total nonfinancial debt at levels above 300%. The results affirm the principle of diminishing marginal returns as excessive debt overhangs lead to disinflation, lower velocity, and weaker economic growth, regardless of the use.
Using debt capital to boost income growth, even if the debt is swapped for overnight reserves by the Central Bank will fail to generate a sustained rise in velocity over many years to come as the private sector will be crowded out and get away with paying lower income growth as it is subsidized by the government.
Furthermore, relying on government-based income will also then put the burden of “income growth” on the government. If the government starts to make $1,000 monthly payments a regular occurrence, in order to achieve 2% income growth at the end of ten years, these payments will have to exceed $1,200 per month.
Unfortunately, economics is complex, and the existence of a Central Bank has never guaranteed a free lunch. The trend level of income growth during expansionary periods has steadily declined as the economy has become grossly over-indebted.
Now that we have pulled forward income growth into the recessionary period to plug a record output gap, the economy will struggle to gain its footing independent of government support.
A lack of investment in structures and equipment ensure that the velocity of money will remain weak as a negative net national savings rate coupled with a lack of investment will begin to erode our existing capital equipment.
Private Nonresidential Fixed Investment: Structures & Equipment As A % of GDP:
For many years, the solution to economic troubles has been bigger government stimulus packages. $1 trillion has become $2 trillion, and the last $2 trillion package lasted less than half a year. The evidence of diminishing marginal returns is again on full display as each stimulus effort is even more fleeting, requiring more extensive programs with greater regularity.
As Dr. Lacy Hunt said in his recent podcast with Grant Williams, “economics is not accounting. We have to grapple with nonlinearities.”
Income growth has increased during this recession, a distinct difference from the normal recessionary template. The use of debt capital, specifically government debt capital, to blunt the impact of deflation is a page out of the same playbook the economy has been using for several decades.
The resulting degradation of income growth during the next expansionary period will be worse than prior episodes as we have pushed the level of indebtedness passed all critical and well-studied thresholds.
We should continue to prepare for anemic real income growth and the knock-on effects that dynamic will bring to asset prices.
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Shares Of Jimmy Lai’s Newspaper Soar As Hong Kong Vows To “Fight On” Against CCP CrackdownTyler DurdenTue, 08/11/2020 — 18:25
Hong Kongers are literally using the financial markets, considered the beating heart of the global capitalist system, to fight the nominally “Communist” rulers in Beijing. One day after Hong Kong police arrested media Tycoon Jimmy Lai, who holds British citizenship as well, the stock of Next Digital, Lai’s media company which owns Apple Daily, HK’s most popular daily newspaper, and a frequent thorn in the side of the CCP.
After arresting Lai in April over allegations he fueled last year’s pro-democracy unrest, police arrested him again yesterday in the first major arrest tied to the new national security law. The arrest of Lai, his sons and other pro-democracy figures, including youth activist Agnes Chow, who was released from jail on Tuesday. The arrests prompted Secretary of State Pompeo and top UK diplomats to denounce the latest “disturbing” strike against the freedoms ensconced in the “Basic Law”.
But now that flooding into the streets in protests carries too much risk for the average Hong Konger (who is now facing COVID and laws conflating dissent with terrorism), many have found an interesting and innovative way to support the pro-democracy movement: buying shares in Next Digital, the parent company of “Apple Daily”.
After shedding 20% of its value yesterday, Next Digital has surged on a flood of mom and pop orders.
In just one day, the stock rose 4x from peak to trough…
Hitting its highest level since 2013.”
Shares closed on Tuesday at HK$1.10, up from its close of HK$0.255 just 24 hours before. The paper printed and sold more than half a million copies of yesterday’s edition, 5x the normal number.
On Tuesday, the newspaper’s front page showed an image of Mr Lai in handcuffs with the headline: “Apple Daily must fight on.” It comes as the paper published extraordinary scenes, streamed live on Monday, of police leading a handcuffed Jimmy Lai through his newsroom as nearly 200 officers raided the building.
Many cited the escalating crackdown on dissent as “the day Hong Kong’s press freedoms died”. US Secretary of State Mike Pompeo complained China had “eviscerated Hong Kong’s freedoms”.
In a clever display of support, Hong Kongers started lining up to buy Tuesday’s print edition at around 0230 local time.
As copies quickly sold out, some bought multiple issues to hand out to passersby.
“(I bought these) to hand them out to others, I’m afraid a lot of people can‘t get their copies,” said one anonymous woman who spoke with a BBC reporter. She had bought 16 copies. Online subscriptions have soared by 20,000 just this week alone.
Pro-democracy activists are calling for supporters to buy the stock.
In a statement, the paper has promised to “fight on”, and said the search warrant executed on its offices (not to mention Lai’s arrest) will have no impact on the paper’s operations.
In 2011, Alex Morse looked like a progressive star.At age 22, he’d become the first openly gay mayor of Holyoke, Massachusetts, was the youngest person ever to hold the office, and soon after became the first Bay State mayor to endorse a recreational marijuana ballot initiative.
Bright, quick, and with a sense of humor, he appeared headed places.
His announcement last year that he was running for congress against Richard Neal, the House Ways and Means committee chair and a master collector of corporate cash, made him a focal point of the movement to remake the Democratic Party in a less donor-fattened image.
Last week, Morse’s career took a dark turn. The College Democrats of Massachusetts sent him a letter telling him he was no longer welcome at any of their events. The group later released a letter accusing him of a variety of things, most particularly “having sexual contact with college students, including at UMass Amherst, where he teaches, and the greater Five College Consortium.” The College Dems claimed he met college students on apps like Tinder and Grindr; Morse taught a political science course at UMass-Amherst.
Morse acknowledged having “consensual adult relationships, including some with college students” but insisted he had “never used his power as Mayor or UMass lecturer for romantic or sexual gain,” adding that he “never violated UMass policy,” and “any claim to the contrary is false.”
UMass policy bans consensual sexual contact between faculty and “any students or postdoctoral researchers they teach, advise or supervise.” Although the College Democrats said Morse “abused his power for sexual relationships,” no one seems to be accusing him of sleeping with one of his own students. The issue here appears to lay entirely in the group’s conception of “power,” which reads like a parody of post-millenial paranoia.
The College Democrats explained that a major part of Morse’s offense was that he sought the contact information of students at their events:
Mayor Morse came to College Democrats of Massachusetts events and got to know our membership, and then sought out students that he met at our events privately on social media, in a manner widely understood by our generation to indicate intimacy.
If you’re wondering if it’s possible that the College Democrats just defined communicating on social media as a kind of sexual act, you’re not wrong. It got worse. In their letter to Morse, the group explained that when Morse wrote to those adult students – who, of course, gave Morse their contact info voluntarily – they lacked the free will to ignore his communications:
We have heardcountlessstories of Morse adding students to his ‘Close Friends Story’ and Direct Messaging members of College Democrats on Instagram in a way that makes these students feel pressured to respond due to his status…
American college students, it seems, are so intimidated by someone with a political job title that they lack the agency to ignore an Instagram shout-out. The College Democrats elaborated (emphasis mine):
Mayor Morse is a widely-admired and well-connected gatekeeper to progressive politics in Massachusetts and nationally, which makes the task of refusing his advances fraught for college students who wish to enter progressive politics themselves… the Mayor’s various positions of power create a significant and undeniable power imbalance between himself and the college students he sought out… where such a lopsided power dynamic exists, consent becomes complicated.
This is not a sexual harassment issue in the classic sense of someone who actually has power over someone else, for instance in the workplace or in a classroom. The concept here is that students who might “wish to enter progressive politics” will feel uncomfortable refusing, or even just not answering, so mighty a personage as the Mayor of Holyoke, Massachusetts, for fear of what that mightdo to their job prospects someday, in a field they have not even chosen yet.
South Africans woke up on Thursday morning to a message from US President Donald Trump about ‘land expropriation’ and the ‘large scale killings of farmers’ and they’re not impressed.
Trump has asked his secretary of state, Mike Pompeo to “closely study the South African land and farm seizures” he confirmed in a tweet to his more than 53.9-million followers on the social networking site.
Trump appeared to be reacting to this report on Fox News on land seizures in SA. On the Tucker Carlson, Tonight shows the host said President Cyril Ramaphosa has “begun seizing land from his own citizens without compensation because they’re the wrong skin color.”
It sounds like the (so-called) American Indian story all over again, but this time it’s with a twist. What is it that differs this from what happens in America other than they got put on reservations and then run off of that. Oh, that’s right I forgot there was no one there when (so-called) whites got to south Africa LMAO Sometime history repeats in strange ways.
How is it that Tucker Carlson can forget how this country came about. Listen to what they said “they took the land during apathy and that was bad” But it was (I can only assume) OK because they were African?
Again as with all race matters, it is really one of class and money these are no little family farms they are talking about they are corporations. Yes African states fail and the way State fails is with a lot of help, however, this is a class problem again “these are not family farms that are being talked about these are corporations”
And another point. What constitution and government did they agree on before? That was in the constitution (The Same land reform, they agreed to) in order to get them out of apathy did you really think that lack in the constitution was going to last?
Tucker Carlson said it’s like, find a buddy and rob somebody!
Shades of American history…1776 Starting with the Chickamauga Wars and the Second Cherokee War, to 1795 – Northwest Indian War!
How quickly we forget!
But let’s go on they also talk about Zimbabwe and how the country fell and how they experienced hyperinflation (the mark of the beast) that is used for every country that is on the shit list of the bankers. Bankers can make any country fall if they have to use the dollar. Which is why the world has awoken to the fact and are moving away from it.
Julius Malema No-Nonsense Response to Trump’s Twitter Threats
Julius Malema | Full Address and Q&A | Oxford Union
To the powers that (should not) be: you can do it the easy way or
Something to think about
When talking about the blowback of the Haitian revolution, no one ever talks about the Louisiana purchase which happened because of the revolution. The question that should come to mind is who did the French buy it (the land) from to be able to sell it to the other foreign people who claim today “No More Immigrates”?
Some Historical Events of The Europeans Takeover Of Africa