For many months now, economists and financial analysts have been debating what the shape and composition of an economic recovery will look in the U.S. as the country battles the Corona virus pandemic.
Will it be a V, a U, W, an L or a square root? Will it also be a K, in terms of composition, with those doing well, be they individuals or companies, continuing to thrive, while those doing poorly, fare even worse? The most common assumptions, a "W" and a "K" were based on two, potentially faulty, assumptions:
1) Continued fiscal support from the federal government
2) Effective therapeutics and vaccines for the Corona virus
At the moment, we have neither.
The lack of a federal response, on both fronts, may raise the specter of the dreaded "L-shaped" recovery, where we go down and stay down for a protracted period of time.
While it's true that the economy has bounced back since the greater than 31.4% annualized contraction in 2nd quarter GDP, by as much as 35%, the rebound leaves economic growth, and GDP levels, below where they were before the pandemic hit.
Further, now that the Senate has adjourned there is no chance of a quick compromise on relief and stimulus.
Depending on the outcome of next week's presidential and congressional elections, it is decidedly possible that there may no deal reached in the "lame duck" session of Congress either.
That means no help until late January, or early February, by which time tens of thousands of additional furloughs and layoffs will have occurred; consumers will have drawn down their savings to get through the holidays while additional regional lockdowns will be the final nail in the coffin for small businesses and maybe Main Street writ large.
Depression scenario
It is something of a doomsday scenario, for sure.
But given the absence of federal policies on virus containment (admittedly abandoned entirely by the Trump Administration) and mitigation, the lack of a breakthrough on therapeutics and vaccines, we have the makings of an economic meltdown in the U.S.
To add insult to injury, it appears Europe is faring no better. National lockdowns on the Continent will deepen a potential double-dip recession, both abroad and at home.
It will be impossible for global central banks to provide much more meaningful stimulus to soften the blow, since interest rates are not restraining growth anywhere and, in fact, falling ever lower.
Indeed, global sovereign debt carrying negative yields is approaching last year's record of $17 trillion, while longer-term U.S. debt has seen a drop in yields in recent days amid concerns the pandemic will slow growth decidedly in the 4th quarter.
While it still isn't my base case for the economy going forward, the risks of that dreaded "L" are rising.
Coupled with the "K-shaped" composition of the "recovery" and there is a depression-like risk in our future.
No support for the worst off among us, no ability to retrain or obtain newly acquired skills, since new jobs will be hard to come by.
A lack of income support will put the brakes on consumption which remains 70% of domestic GDP while a continued contraction in hospitality, leisure and travel, especially during the winter, will leave many both figuratively, and potentially literally, out in the cold.
The Nero-like fiddling (Nero actually played the Lyre) of our elected officials smacks of late-empire behavior. One can only hope this intransigence and incompetence does not deal our economy a fatal blow.
Time is short. Swift and decisive action is needed. Whether we get it is an open question. If we don't, it may be a political and economic illness from which our economy may never recover.
Never is a long time, but it would not be the first time in history that a great nation is felled by an external force for which there is no adequate internal response.
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