As comforting as it is to know the worst of coronavirus may soon be behind us, I'm left with an unsettled feeling.
It's not just the strange "new normal" we'll be in for awhile; the casual wearing of face masks, the long and confusing checkout lines at the grocery store, the apprehension at those around us. What will it be like at church when they finally reopen for Masses, and too late for Easter? Are we sitting next to each other this fall at sporting events? Does Paris really need to ban jogging outdoors?
It's the economics that are on my mind, too. Much as I tired of the "recession-is-coming" Chicken Little crowd the last couple years, the inversion of the yield curve a year ago did signal a slowdown--even a recession--was coming. It may well have taken a couple more years if not for coronavirus. But it was in the cards.
I'm not saying markets knew Covid-19 was coming. What I wonder is (a) whether this nasty self-imposed recession "counts" as the downturn, (b) whether we have restarted the business cycle, since it didn't really end on its own, and (c) if that means the end of the business cycle still looms in the somewhat near future.
On top of that, what happens now that we're saddled with the huge bills necessary to keep the coronavirus recession from morphing into a depression? The deficit could be running 15-20% of GDP this year. The Fed's balance sheet has grown by more in the past couple weeks than in all of its early efforts to fight the '08-09 crisis.
I've been thinking about what the economist David Rosenberg warned the other day: "We're gonna come out of this with more inflation than anybody would have thought." I replied, "People aren't going to believe that." To which he responded, "Outright debt monetization, I will tell you, that to say that this will not be inflation down the road is to say that you're betting against history." (And Rosenberg has not been an inflation hawk.)
We don't have to monetize (i.e. have the Fed purchase) the debt, of course, but the only other real option to pay for it is raising taxes tremendously, which will undermine the recovery and GDP growth. I just don't see a lot of great "ways out" here. With any luck, this will be a relatively rapid recovery with low interest rates that allows us to gradually work down the deficit. That's probably the base case right now, in fact, but this is a terribly delicate dance.
I think history will look favorably on America's financial response to coronavirus. I think we might even be surprised by how quickly the economy rebounds from it. I'm just nervous about what happens next.
See you tomorrow at 1 p.m!