We’re in a crucible

In addition to periodic recessions, the economy tends to have long waves of expansion and contraction. For example, the Great Depression of 1929–1942 was followed by decades of general economic health and expansion until the late 1960s; we suffered from stagflation for about fifteen years, 1967–1982; then robust growth resumed through about 2007. It seemed as if a contractionary period would begin after the Great Recession, but in the wake of the extreme measures of monetary and fiscal stimulation implemented after 2009 some gauges of economic health improved. For example, the unemployment rate dropped from 10% to under 4%.

It used to be a pattern that when unemployment fell, workers and salaried employees tended to have more bargaining power and thus more ability to obtain higher wages — resulting in a narrowing of the national income differential between the rich and the rest. But that hasn’t happened recently. Much of the employment generated after the Great Recession was low-wage or part-time or precarious “gig work.” Meanwhile, stock prices more than tripled. The already-wealthy own the lion’s share of corporate stock, so inequality worsened.

Intent upon avoiding extended periods of contraction, the government and the Federal Reserve have been resorting to increasingly extreme stimulatory measures. In a sense, they haven’t let capitalism play out its normal boom-and-bust long-waves cycle. So now we’ve arrived at situation characterized by:

* Unprecedentedly low interest rates:
The basic federal funds interest rate was historically in a range of 3% to 7%. It’s now barely above zero.

* Unprecedentedly low bond yields:
The yield on the benchmark 10-year treasury bond was historically in a range of 4% to 10%. It’s now below 1%.

* Unprecedentedly low stock dividend yields:
The full-market average of dividend yields historically has ranged between 3% and 6%. During the period 1870–1990 there had been only five years where it fell (slightly) below 3%. But it has been well below that for most of the last thirty years, and below 2% for much of the most recent period.

* Unprecedentedly high Federal Reserve asset purchases:
Historically, in a severe recession, when the Federal Reserve felt it necessary to go above and beyond the usual stimulation “tools” (lowering interest rates and increasing money supply) it occasionally would resort to buying bonds. The added demand for bonds would cause prices to rise. Support for the bond market was an additional method of supporting the economy as a whole. Such bond purchases would increase the asset levels on the Fed’s balance sheet. The total value of those assets had never exceeded $1 trillion prior to the Great Recession. Between 2009 and 2014 it rose to over $4 trillion. Now it’s approaching $7 trillion.

* Unprecedentedly high levels of debt:
Adjusted for inflation, Gross Domestic Product was about $4 trillion in 1970. The total of public and private debt in that year was $2 trillion, half of GDP. By 2018 the GDP had gone up by a factor of five to $20 trillion. But the total of public and private debt had soared to over $60 trillion, more than three times GDP. Debt increased by a factor of 30 over that span of time! Sound extreme? Well, the deficit spending during 2020 will cause that soar.

* Unprecedentedly (unbelievably!) high federal budget deficits:
Ross Perot made an impact in the presidential election of 1992 by pointing out that the federal budget deficit had increased from $41 billion in 1979 to $269 billion in 1991. After that, for a while, spending was reigned in and the government ran surpluses during the period 1998 to 2001. The Iraq War pushed the deficit all the way back up to $248 billion in 2006. It was alarming when emergency spending to lift the economy out of the Great Recession produced a deficit of over $1 trillion. It’s now on its way to $4 trillion.

* Unprecedentedly high levels of inequality:
The national share of after-tax income of the top one percent rose from about 10% in 1960 to almost 20% when the stock market peaked in February. The top five individual fortunes now equal the wealth of the bottom half of the entire population.

* * * *

John Maynard Keynes said that during recessions it was acceptable for governments to run deficits and for central banks to take extreme stimulative measures. But once the economy goes back into expansion those measures should be reversed in order to get things back to normal. After economic health seemed to be returning five or six years out from the Great Recession there were efforts to: reign in deficits; raise interest rates, bond yields, and stock dividend levels; reduce the Fed’s balance sheet; and decrease debt levels. A small amount of progress was made in those directions through 2019. Then the Pandemic Recession hit in 2020.

Having never much normalized after the Great Recession, the current crisis puts us into an unprecedented economic crucible. If the stimulatory measures of 2009–2014 were extreme, what we’re witnessing now must be labeled ultra-ultra-extreme. Money and credit are spewing out all over the place — to individuals, to businesses, to state governments — while jobs are disappearing and markets are gyrating. The stock market went down 35% in four weeks (from late February to late March) and then rose back up over 30% during the ensuing four weeks (from late March to late April). Swings of that magnitude over periods of just weeks have been . . . unprecedented!

And now we’re faced with a cauldron, an incendiary brew of hyper-stimulation within the context of enormous levels of debt. Many small businesses, a certain number of large corporations, and even some state governments may be forced to declare bankruptcy. The situation is so extreme, the debt and deficits have developed over such a long period of time (over the last forty years), that it wouldn’t be surprising to see the crucible we entered in 2020 extend ten or fifteen years going forward.

Gyrating asset prices, low yields, a tinder-box of inequality . . . can capitalism as we know it survive?