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The New Normal: Austerity For All

The lock downs, which have swept the globe, are unprecedented. The U.S. economy is expected to wither by at least a quarter––as much as during the Great Depression. While the reduction after 1929 took place over a four-year period, the recent decline will take place over a few months.

Unemployment could reach 30%. ‘This is a planned, organized partial shutdown of the U.S. economy in the second quarter,” said Federal Reserve Bank of St. Louis President James Bullard. “The overall goal is to keep everyone, households and businesses, whole… It is a huge shock and we are trying to cope with it and keep it under control.”

Unemployment will be worse than the Great Depression and three times than during the 2007-’09 recession.

Bullard anticipates a 50% plunge in gross domestic product. At the end of March, U.S. unemployment reached 13 percent––the highest since World War II–– from record lows at the month’s start. 16.8 million have filed for unemployment benefits. U.S. unemployment increases currently at approximately 0.5 percent per day. Unemployment rate could reach 30 percent by the summer.

Retail, real estate, education, entertainment, restaurants were deemed non-essential––leaving 80 percent of Americans out of work. “In sectors like retail, which has recently come under fierce pressure from online competition, the temporary lockdown may prove to be terminal,” writes for Foreign Policy. “In many cases, the stores that shut down in early March will not reopen. The jobs will be permanently lost. Millions of Americans and their families are facing catastrophe.”

The north of Italy, hit the hardest by the coronavirus lockdowns, comprises 50 percent of Italian GDP. Due to its dependence on exports, experts predict Germany’s GDP will fall by more than the United States. The Organization for Economic Cooperation and Development forecasts global austerity.

China’s official figures show its unemployment at 6.2 percent, which is the highest number since record keeping began in the 1990s. Reports posit that as many as 205 million migrant workers were furloughed––one quarter of the Chinese workforce.

India’s workforce numbers 471 million, of which only 19 percent are covered by social security, two-thirds have no formal employment contract, and at least 100 million are migrant workers. 

Emerging market economies, for the first time since the period after World War II, will contract, while the U.S.’ stimulus package is the largest in U.S. peacetime history and Germany has declared an emergency, lifting its limits on public debt. U.S. News reports Europe will likely shrink by 9.8%––the largest decline since records began in 1970.

By late March, the Fed was purchasing assets worth $90 billion per day–more than Ben Bernanke’s Fed purchased during most months. Each second of every day, the Fed swapped a million dollar’s worth of Treasuries and mortgage-backed securities for cash. 

As the latest unemployment numbers were announced on April 9, the Fed announced it was launching an additional $2.3 trillion in asset purchases. Seventy-three percent of American households endured a loss of income in March, while one-third did not pay rent as of April 5. Consumer debt delinquencies will increase. 

Europe’s petrol consumption has decreased by 88 percent. Automobile market is devastated, with manufacturers across Europe and Asia sitting on unsold vehicles. 

China’s Association of Automobile Manufacturers said its year-on-year sales plunged by 48.4% in March. In the U.S., some states have banned the sales of cars altogether. 

“The longer we sustain the lockdown, the deeper the scarring to the economy and the slower the recovery,” writes Adam Tooze for Foreign Policy.

Public debt, on the balance sheets of central banks, is increasing at the largest ever clip during peacetime. Those central banks are keeping interest rates low, but will be repaid by tax increases, austerity or inflation, public defaults of debt at central banks––or all of the above.  Some reports posit U.S. debt will exceed 100% of GDP by the end of 2020. 

Central banks will buy debt issued by governments. On April 9, the Bank of England announced it would be printing money.

“The Bank of England will temporarily extend use of the government’s longstanding ways and means facility to help government cashflows and provide a temporary short-term source of additional funding,” said the prime minister’s official spokesman.

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