The welcome assurance of a vaccine won’t immunize the US economy against a recession.
As time passes, the ability of the economy to clear out some accumulating burdens becomes ever more problematic.
The economy will be left within a post-pandemic world that will likely see stubborn asset deflation, which will be very hard to avoid in the coming recovery.
Daniel Alpert is an adjunct professor at Cornell Law School.
This is an opinion column. The thoughts expressed are those of the author.
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This column is not another typical warning about the length of time it will take to vaccinate enough people in order to return to some form of business as usual. Given the encouraging news on the development of highly effective vaccines, it is very likely — in a triumph of science and willpower — that the massive logistical feat will be accomplished in the first half of next year. Market enthusiasm echoes my own optimism regarding the potential end of the COVID-19 pandemic.
There is also reason for confidence that we have learned to treat the disease more effectively so as to limit mortality from its now substantially elevated rate of contagion.
November saw equity markets rally by over 10.75%, likely reflecting investors’ enthusiasm for the vaccine news and approval for the impending end of the Trump era.
Yet neither of these very welcome outcomes will immunize market economies against the renewed recession likely to arrive during the first quarter of 2021, before we arrive in the promised land of whatever future normalcy will look like after the virus is snuffed out .
The looming problem
As we head into December we face a series of looming economic challenges that urgently require action before the inauguration of Joe Biden and Kamala Harris. While there is little hope that the outgoing administration will address them, solutions must be teed up for advancement the moment the new president takes office. A failure to do so will lead the US economy into an unnecessarily severe double dip recession in the first quarter of 2021 and worsen the post-vaccine recovery.
These pending problems stem from the same cause – the extended nature of the economic collapse. As much as 16 months will have elapsed from the initial virus-related economic shutdown, through what is now a second wave of infection-reduced activity, to the point at which recovery can finally commence.
We are experiencing persistent unemployment and business failures of all sizes – all readily visible to the public, policy makers and the media. But a pandemic-related time bomb is ticking away almost imperceptibly.
Households and businesses are continuing to accrue unpaid rents, debt service and other obligations as a result of an unprecedented pauses in debt collection — both from existing state and federal moratoria and private lender forbearance. At the same time state and local governments are continuing to endure massive operating deficits.
As time passes, the ability of the economy to clear out these accumulating burdens becomes ever more problematic, eventually risking a full-on systemic financial crisis if not addressed.
How to head off this coming crisis
To prevent the growing burdens from crushing our economy the federal government must implement a series of revised pandemic relief policies:
Bridge households through to normal times and reduce the level of unpayable burdens through extension and re-expansion of supplemental unemployment insurance benefits, as well as instituting new programs enabling households to stretch out obligations that have accrued, and will continue to compound, during the crisis.Ensure that small and medium-sized businesses can extend unpaid obligations so that they can survive to reemploy the millions they have laid off, and have now resumed laying off as the weather gets cold (think restaurants) and the virus spikes (affecting many other sectors).Provide long term relief to states and cities so that they are not forced to continue and deepen their layoffs to date.Promoting efficient and rapid reorganization of larger enterprises in bankruptcy – which will itself generate mountains of rejected (terminated) commercial leases and debt write-offs that will, as with the three issues above, require action if a systemic financial crisis is to be avoided.
We have a difficult task ahead if we are to avoid a double-dip recession.
Political risks abound as fights over industry”bail-outs” will grow. But bail-ins, as I wrote here last month, represent a realistic policy alternative that is sensitive to the notion of fairness to those taxpayers who do not directly benefit. In a bail-in, the government buys up and extends obligations of both private and public debt holders in order to provide necessary relief without giving anyone an entirely free ride.
The alternative is to have mountains of unpaid obligations ricochet across the economy for years. Household and commercial tenants not able to pay their landlords; landlords and homeowners not able to pay their mortgages; businesses and consumers not able to pay debt service or refinance debt that comes due; lenders not being able to pay bondholders; and bondholders (insurance companies, pension funds and endowments) not being able to pay their beneficiaries. For such is what chronic systemic crises are made of.
Finally, the conditions into which the economy re-emerges will not be those of business as usual prior to the crisis. We already experienced a “new-normal” following the Great Recession. Now we will have a New-New-Normal. And it is unlikely to be an improvement.
I don’t need to engage in crystal ball forecasts about changes in human socialization that will result from feelings of vulnerability to disease. While we will all wash our hands a lot more frequently (my mother finally got her wish) and wear masks out of courtesy when we have a cold, vaccines will see us re-emerge from this protracted, collective hermitage.
But it does not take a crystal ball to accurately forecast two things that will pose obstacles to even the anemic level of recovery we saw after 2012.
Certain sectors of the economy, such as retail, air transportation, hospitality, restaurants and other leisure activities, and commercial real estate – which collectively employed over 25% to 30% of all US private sector workers before the pandemic – are going to experience enormous pressure due to changes in consumer and business behavior unrelated to either disease or a period of economic recession.
Zoom and its competitors are not going to be placed back on the storage shelf for use in a future crisis. Brick-and-mortar shopping will see an acceleration of its pre-pandemic decline. And we will clearly not need as much office, hotel, airplane and shopping center space as we once thought we did and values of the assets used in those sectors are highly vulnerable
Asset deflation in those sectors will be in stark contrast to the recovery in the same sectors, experienced from 2012 to 2016 following the Great Recession. Much of that recovery was driven by an enormous decline in the interest rates on 10 year US treasury debt from about 5.0% before the recession to a low of around 1.5% in 2012 – a total of 3.5%, enabling assets to be held by investors at lower cost and therefore providing a huge tailwind for prices paid for assets.
In contrast, with government note and bond rates at or near zero, long-term rates have fallen by only about 0.75% from pre-pandemic levels. Putting aside the vastly reduced demand discussed above, we just won’t see the rebound in speculation we saw last decade and it is highly likely that we will see the asset deflation that monetary policy wizards were able to avoid the last time around.
What does that mean? Well, additional defaults on debt that can’t be paid or that comes due – and a higher severity of loss to lenders.
All of which can lead to a very serious second financial crisis of this young century.
So we need to act to avoid that – and need to act fast.
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