Economic realities of the pandemic

“We’re not here to indulge in fantasy but in political and economic reality. America has become a secondrate power. Its trade deficit and its fiscal deficit are at nightmare proportions… The new law of evolution in corporate America seems to be survival of the un-fittest. Greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA.”

— Gordon Gekko in 1987’s “Wall Street”

The coronavirus pandemic has had unprecedented ramifications on the American economy. Since the U.S. is the nation hardest hit by COVID-19, it’s worth looking at how the following “big ticket” items will affect future economic growth:

Debt, Deficit, Inflation: Gekko’s “greed is good” speech is perhaps one of the most misunderstood concepts in popular culture. Pundits mercilessly vilify it as the root cause of Wall Street greed, but in doing so, they fail to understand the true point. Sure, Gekko was a “bad guy,” but that doesn’t make what he said wrong. In fact, his words were incredibly prescient, being infinitely more applicable today than they were 37 years ago.

Consider:

— Today’s trade and fiscal deficits make the “nightmare proportions” of those in 1987 look like a walk in the park.

Last year, the U.S. trade deficit (the amount by which imports exceed exports) was a staggering $616 billion — and that’s the lowest in six years because of President Trump’s get-tough trade policies with China. The budget deficit (government expenditures versus revenue) was $1.02 trillion. That’s not a misprint. Our government spent over a trillion more dollars than it received in just a single year.

And then we have the unfathomable $23 trillion national debt, which is money America owes to its creditors. But it gets more alarming. Those numbers are from 2019, and thus do not reflect the government’s unprecedented spending in response to coronavirus. Multiple stimulus packages have totaled almost $3 trillion, and substantially more aid is expected.

Numbers don’t lie, and math isn’t partisan. Fact of the matter is that the government’s policy of creating money out of thin air is nothing new, as we saw in the 2009 stimulus (“only” $787 billion), and the long-running “quantitative easing,” which artificially propped up the stock market. Now, with the ante being upped like never before, interest rates will most assuredly rise (though not right away), and inflation will spike. And it’s not hard to understand why: Injecting trillions of additional dollars devalues the currency because it dilutes the money supply.

— Interest Rates: Because the Federal Reserve used everything in its arsenal to combat C19’s effect on the economy, interest rates are near historic lows, where they will remain for the foreseeable future. However

— and this is a huge however — at some point they will rise by a substantial margin, for two primary reasons: First, as stated above, lenders will raise rates to offset inflation. Second, buyers of U.S. debt will likely demand higher rates of return because of concern that America might not fulfil its obligations. That’s not to say the government will default, but its monstrous liabilities are generating doubt over its ability to pay on time, and per the original terms.

— Stock Market: The stock market may not be at its height, but its irrationality sure is. Overall, the market is only down 15 percent from its alltime high, a stellar example of Wall Street’s complete disconnect from Main Street.

Are we really to believe that the world is only 15 percent upside-down? With record unemployment, battered companies, small businesses that may never reopen, inadequate testing, and being at least twelve months away from a vaccine, it defies logic to think that the economy will experience a sharp upswing after the crash.

Who is going to be the first to board a cruise ship? To fly on a packed airplane? To attend a conference with thousands of people? Who will rush to Disney World, movie theaters, gyms and restaurants? How long can movie theaters and airlines stay in business with empty seats? Ditto for restaurants and hotels operating at 30 or 40 percent capacity.

Tread carefully, since Main Street — not Wall Street — always dictates the health of the economy. And until a vaccine is discovered, many businesses will continue to be on a ventilator.