In context of the evolving global Coronavirus Pandemic and crashed stock markets coming into early-March 2020, the U.S. government ordered the shutdown of most domestic economic and societal activity. Such upended living and business conditions that had evolved and existed together for many decades and created circumstances that could make returning to pre-Pandemic conditions extraordinarily difficult and protracted at best.
That environment also triggered panicked, systemic bailouts, including “unlimited” money creation by the Federal Reserve and panicked, unfettered government spending by the White House and Congress, who already had pushed the Federal Budget Deficit and Debt of recent years well beyond any practical bounds of sustainability. Money Supply tends to drive inflation, while excessive debt expansion raises national solvency issues, which also can trigger money growth, inflation and relative sovereign currency weakness. The combination of unprecedented money creation, deficit spending and economic implosion produces the potential for a Hyperinflationary Depression, a circumstance where affected investors could seek safe-haven in the holding of physical precious metals, gold and silver.
ECONOMY WAS TURNING LOWER EVEN BEFORE THE PANDEMIC COLLAPSE
Activity in pre-Pandemic, Fourth-Quarter 2019 U.S. Industrial Production and inflation-adjusted real Retail Sales contracted quarter-to-quarter, and both series were on early track for second consecutive quarterly contractions in First-Quarter 2020. That was before Pandemic-driven, collapsing production, sales and other activity in March pulled the initial reporting of First-Quarter 2020 Gross Domestic Product (GDP) into its deepest annualised quarterly contraction since the Great Recession, initially estimated at down 4.8% (-4.8%). With April 2020 Industrial Production and Real Retail Sales monthly declines the deepest in their respective 101- and 75-year histories, Consensus forecasts are for a Second-Quarter 2020 GDP annualised drop of about 30% (-30%). With new claims for unemployment insurance confirming a continuing economic decline in the month of May, my ShadowsStats.com forecast is for something close to a 50% (-50%) annualised second-quarter decline. Either number would be the deepest quarterly GDP contraction in U.S. history, not only indicating a headline recession, but a depression, with a quarterly contraction deeper than 10% (-10%).
Current economic activity has plunged due to the Pandemic shutdown, not due to normal economic pressures, although, again, that fell on top of what already had been weakening business growth, impaired by excessive Fed tightening in 2019. Economic recovery now awaits a lifting of current Pandemic constraints, with effective testing and treatments needed in hand, and ideally a vaccine, which could restore some confidence in the system. A meaningful “reopening” of the economy likely will be slower than planned.
ECONOMIC BOTTOMING COULD BE IN PLACE IN THE NEXT QUARTER OR TWO, BUT FULL RECOVERY WILL NOT BE RAPID
The Pandemic-driven economic shutdown and the related disruptions to people’s lives already have been severe enough to alter consumers’ outlook and optimism negatively for a number of years to come, as did the 9-11 Terrorist Attacks in 2001. Around for more than half a century, the dominant surveys of U.S. consumer attitudes, the Conference Board’s Consumer Confidence Index® and the University of Michigan’s Index of Consumer Sentiment, both hit their historic peaks in 2000, before 9-11. Although the series were relatively strong in February 2020, neither series had recovered its pre 9-11 peak activity, going into the March 2020 Pandemic-driven collapse. Those February pre-Pandemic peak levels are not likely to be seen again for some time.
In like manner, once the U.S. GDP hits bottom in the current Second-Quarter 2020 or next quarter, any activity off bottom going forward will tend show some quarterly economic gain. Still, where full economic “recovery” is defined as economic activity regaining and then rising above its prior, pre-recession or pre-depression peak activity, that likely will be some years off. Pre-Great Recession peak activity in real GDP was in Fourth-Quarter 2007, which was recovered only in Second-Quarter 2011. Even so, major U.S. industries such as manufacturing and construction never have regained their pre-Great Recession peak levels. Recovery from the current Pandemic-driven economic plunge will be measured against the Fourth-Quarter 2019 near-term GDP peak. Yet, the current economic decline is so severe that Third- or Fourth-Quarter 2020 GDP could fall back to below pre-Great Recession peak activity levels, wiping out the entire post-Great Recession economic expansion. Accordingly, the full range of Pandemic disruptions has been massive and could be slow to disappear.
Economic “stimulus” in the form of government spending or Federal Reserve accommodation helps systemic liquidity, but not so much current economic growth, which has been savaged so severely by the Pandemic-driven shutdown. Although the pre-Pandemic slowing in consumer demand had been driven by the Federal Reserve’s tightening of consumer liquidity, the Pandemic has overwritten such issues. The Pandemic now is the primary and fundamental driver of the current collapse in business activity. Assuming some Pandemic relief by year-end, the plunge into Third-Quarter 2020 GDP activity could be the bottom here, with activity moving off bottom in Fourth-Quarter 2020.
UNSUSTAINABLE 2020 FEDERAL DEBT-TO-GDP RATIO WILL TOP THE WORLD WAR II RECORD HIGH
Based on U.S. Treasury debt projections for fiscal year-end 2020 (September 30th), and my ShadowStats.com estimate of full fiscal-year 2020 nominal GDP, 2020 Federal Debt as a percent of GDP will hit an unprecedented and increasingly unstable and unsustainable 138%, up from 107% in 2019 and topping the prior World War II historic high of 119% in 1946. These numbers do not reflect the $3 trillion stimulus package just passed by the Democrat-controlled U.S. House of Representatives, which would take that measure to a further unprecedented 153%. Despite current opposition to that stimulus in the Republican-controlled Senate, significant additional federal stimulus is a virtual certainty in the months ahead and likely in at least the next year or two ahead.
FOMC HAS EXPLODED MONEY SUPPLY GROWTH EXPONENTIALLYTO THE HIGHEST LEVEL IN HISTORY
The Federal Reserve responded to the financial panic by cutting interest rates to zero, and moving to create unlimited systemic liquidity and money supply. Annual growth in the latest U.S. Money Supply measures is accelerating rapidly, with M1 up 33%, M2 up 23% and the ShadowStats Ongoing M3 at 25%, versus respective annual growth rates of 6.3%, 6.8% and 8.5% in January. The growth has begun to take on an exponential pattern, consistent with higher inflation ahead, albeit still shy of triggering a hyperinflation. Continued rapid acceleration of the money growth should accelerate inflationary pressures markedly.
TOO MUCH MONEY CHASING TOO FEW GOODS CAN CREATE AN INFLATION PROBLEM
Again, U.S. economic activity is collapsing at an unprecedented pace, driven by the Pandemic disruption, not by lack of demand. This circumstance easily could see mounting product shortages, with increasing cash in circulation going against too few goods, pushing prices higher. An early example already has surfaced in the last month or two, with domestic meat shortages and rapidly escalating price increases for meat products.
A SURGING GOLD PRICE WILL TEND TO SIGNAL AN ACCELERATING INFLATION PROBLEM
Gold is a store of wealth, and holding physical gold will tend to maintain the purchasing power of one’s assets and income. Historically, gold often has been the currency, and it has maintained its purchasing power over millennia. The same amount of gold that bought a loaf of bread in Ancient Rome would buy a loaf of bread today. For the same amount of gold today as in 1925 New York City, you could buy a third-row center seat for a top Broadway show. As discussed in the previous issue of Executive Global’s Winter 2020 article Gold Glitters as the Federal Reserve Loses Control, the price of gold tends to follow underlying actual inflation and often anticipates it. EG