Oscar Wilde famously wrote that a second marriage was a vivid example of hope triumphing over experience.
One has to wonder whether the same might not be said of President Trump. He is now confidently proclaiming that once the coronavirus pandemic passes, we will have a V-shaped U.S. economic recovery that will quickly return the U.S. economy to its former state of robust health. In so doing, he seems to have forgotten how long it took the U.S. and global economies to recover from the 2008-2009 Great Recession after the U.S. housing and credit market bubble had burst.
Unfortunately, there is every reason to expect that the 2020 U.S. recession will be considerably deeper and the spike in unemployment very much more marked than was the 2008-2009 experience.
To be sure, the September 2008 Lehman bankruptcy did cause the dramatic bursting of a U.S. housing and credit market bubble that sent the U.S. and global economies into their deepest economic recession in the post-war period. However, unlike the present case with the coronavirus pandemic, it did not cause major parts of the global economy to go into simultaneous cardiac arrest as large parts of their populations were locked down. Nor did it totally upend international travel and cause major dislocations in global supply chains.
The truth of the matter is that large parts of the global economy have been shut down for an indefinite time period. First it was China that prevented literally tens of millions of its workers from returning to the workplace after the Chinese New Year. Now it is major economies like those of Italy, South Korea, Spain, California, New York and London, that are locking down their populations and mandating the shuttering of sizable parts of their economies.
It should be little wonder then that a consensus is emerging that we are bound to have a very much deeper U.S. and world economic recession than we did in 2008-2009. For example, Morgan Stanley is now warning that the U.S. could have a 30 percent annualized rate of GDP decline in the second quarter of this year and a rise in unemployment that will make that in 2008-2009 pale by comparison.
Despite an unprecedentedly large-scale fiscal and monetary policy stimulus, the U.S. recovery from the 2008-2009 recession was the slowest in the post-war period. Meanwhile it took seven years before U.S. unemployment returned to its pre-2008 economic crisis low.
With hindsight, it would seem that among the main factors explaining the disappointing economic recovery over the past decade was the major destruction of housing and equity market wealth occasioned by the earlier recession. It also did not help matters that households and companies were burdened by an excessive amount of debt that they had difficulty in servicing after the recession struck. Nor did it help that a European sovereign debt crisis centered on Greece added to an atmosphere of world economic uncertainty.
While one certainly must expect that the U.S. and global economies will experience a large bounce once the coronavirus epidemic passes as people return to work, one must also expect those economies will still have to cope with the serious financial market damage that the epidemic will have left in its wake. These will include the triggering of a major credit crunch and the bursting of the “everything” global asset-price bubble that had been caused by years of ultra-easy monetary policy.
It will also more than likely include a full-blown Italian sovereign debt crisis. It will do so as that country will experience the greatest of difficulty in servicing its public debt mountain in the midst of its unprecedented economic collapse.
All of this makes it highly improbable that the U.S. and global economies will retain their pre-coronavirus peak anytime soon. This would seem to be particularly the case considering the record speed with which 35 percent has already been wiped out in U.S. and global equity wealth well as well as the virulence of the global credit crunch that is now underway. It would also seem to be the case considering the likelihood of a sovereign debt crisis in Italy, a country whose economy is around ten times the size of Greece’s. If the Greek debt crisis shook the world economy before, how much more so would an Italian debt crisis?
It is understandable that President Trump would want to restore economic confidence by promising a bright economic future. But one has to hope that in formulating the appropriate policy response to the very difficult economic times we are now facing, his administration does not take his rhetoric at face value.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.
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