posted November 30, 2020
Does the 21st Century’s First Great Worldwide Depression Lie Ahead?

Economists generally distinguish between what they call ‘normal’ recessions and ‘great recessions’—as well as between both normal, great and what’s called an economic depression. All three forms of capitalist economic contractions share certain characteristics in common, but are distinguished by certain fundamental differences as well.

By all accounts, after four months of economic collapse—March 2020 through June 2020—the US economy is clearly now mired in another Great Recession once again. And it appears the current 2020 Great Recession 2.0 is far worse than the 2008-09 prior Great Recession event. Moreover, the odds are greater today than in 2008 that the current 2.0 contraction may evolve into the first Great Depression of the 21st century.

Great recessions are worse than ‘normal’ recessions in the depth and duration of their economic decline. They are also anterooms to Great Depressions. They may be prevented from evolving into bona fide depressions; or they may fail to be contained, deteriorate further, and eventually transform into a Great Depression. They are thus highly unstable events.

So how does today’s Great Recession 2.0 compare on the spectrum of US capitalist crises and collapse over the past century? And will it be prevented from further deteriorating? By all indications thus far, the chances of the latter are growing. What happens in the second half of 2020 will determine its trajectory—and whether it is successfully contained or morphs into the first Great Depression of the 21st century!

A Spectrum of Capitalist Crises

The Great Depression of the 1930s decade began as a Great Recession in 1929-30 that collapsed further into a Great Depression after 1930. In contrast, the Great Recession of 2008-09 was successfully contained and prevented from evolving into a Great Depression—albeit at great longer term cost to the stability of the capitalist system itself over the subsequent decade. So what can be said of the current crisis? How is it similar or different from 2008-09? And what is the likelihood of a repeat of the 1930s?

It remains yet to be seen, after only four months from March through June 2020, what the future trajectory of today’s Great Recession of 2020 may be: containment or further deterioration. The odds favor the latter, however, for seven reasons:

• Today’s 2020 collapse comes on the heels of a weak US and global economy in 2019, in contrast to the much stronger US and global real economy in 2007.
• The current collapse has occurred much faster; it has also already contracted five times deeper compared to 2008-09. In just four months, March to June, the US economy has contracted somewhere around 25%-30% in US GDP terms. In 2008-09 the decline was no more than 6%.
• Today’s US collapse occurs with more than 90% of other world economies similarly in deep recession—compared to 60% in 2008-09. This time there won’t be any China and emerging markets economic boom, as occurred in 2009-10, to put a floor under the collapse of the US, Europe, and Japan by stimulating global trade.
• Governments’ policy responses to stimulate their economies will prove even less effective this time around compared to 2008-09 due to a decade of accelerating income inequality, low productivity and business real investment, widespread wage and incomes stagnation of working classes, collapse of social safety nets, record budget deficits and tens of trillions of dollars of debt run-up by business, households, and governments alike.
• The COVID-19 overlay is continuing to depress the economy still further, with no sign thus far of its moderating; in fact, today at mid-year signs are growing of an even worse second wave of mass infections and hospitalizations with all the negative consequences for the US economy and recovery.
• The growing political instability—especially in the USA—has a great potential to negatively impact both consumer and business expectations that would further dampen household spending and business real investing. Political instability and uncertainty becomes itself a negative economic force.
• Finally, there’s the very large wild card looming on the horizon in the somewhat longer term. Should recovery lag or falter, a combination of the preceding six factors may cause the volume and rate of defaults and bankruptcies (business, consumer & even state-local governments) in the US economy to overwhelm the US banking system once again, leading to a financial crash. This in turn will exacerbate still further the decline in the real, non-financial side of the US economy, possibly descending into the first Great Depression of the 21st century.

These seven great forces are emerging from deep within the current economic crisis and have yet to play themselves out. But any one of them, and certainly any combination, are capable of pushing the already fragile US real economy into an even deeper contraction in the coming months.

The 1930s: A Great Recession Morphs into a Great Depression

Historically, it is not well understood by economists that 1929-30 began as a Great Recession and only after 18 months began to morph into an actual Great Depression.

A stock market crash in October 1929 precipitated and accelerated a sharper decline in manufacturing and construction that had already slowly begun to develop even before October. The faster decline of manufacturing and construction that followed after the October 1929 stock market crash had not yet spilled over to the rest of the US economy. Unemployment rose to around 10% in 1930. But banks were not to begin collapsing for another 15 months, more than a year later, in December 1930. It was only when a series of increasingly severe banking crashes began to occur—in December 1930, in 1931, 1932, and March 1933—that the US economy, ‘ratchet-like’, fell off a series of cliffs, plunging ever deeper into the Great Depression, only hitting a trough in summer 1933.

Thereafter the road to recovery took seven years of stop-go, partial recoveries then relapses. In 1933-34 the banks were bailed out, and a pro-business policy called the National Recovery Act was introduced to benefit businesses but not wages and employment. The non-bank real economy rebounded (not recovered) modestly but failed to attain a sustained recovery. In 1935 the Roosevelt New Deal fiscal spending programs succeeded in partially stimulating the economy and generated some sustained recovery. However, the New Deal was prematurely repealed in part by a Republican dominated Congress and conservative US Supreme Court in 1937-38. The result was a relapse into depression once again. Restoration of the New Deal programs in 1938 restored the track to sustained recovery, although slowly. In 1940-41 an acceleration of US war preparation spending provided a much needed second push for recovery, which was fully attained by 1942, as the US government share of total GDP spending rose to 40% of GDP from less than 20%, even during the peak years of the New Deal.

2008-09: A Great Recession Is Successfully Contained

Unlike the 1929-30 period, the 2008-09 events illustrate how a Great Recession was contained, averting a slide into a bona fide Great Depression.

In both periods, a crash in the financial sector provided the catalyst. While in 1929 a financial crash precipitated a decline in the real, non-financial economy, in 2008 the financial markets responsible were the housing markets and what were called the derivatives markets (i.e. credit default swaps or CDSs). Together these interacted and resulted in a collapse first of several investment banks, then of the quasi-government financial institutions associated with the housing market, Fannie Mae and Freddie Mac. The financial crash quickly accelerated to impact mortgage companies and banks which had over extended in providing mortgages. The financial crisis culminated in September 2008 with the collapse of the investment bank, Lehman Brothers, that had over-invested in subprime mortgages and the giant insurance company, AIG, that had over-written CDS insurance contracts on Lehman Brothers that it couldn’t pay for. A general banking crisis and freeze of lending by the banks to all companies, non-financial as well as financial, followed. The banking crash thus brought down the ‘real’ economy. Mass layoffs followed, peaking at 600,000+ per month through late 2008 and into early 2009.

The banks and financial system were quickly bailed out and stabilized. In mid-2009 the US central bank, the Federal Reserve, quickly provided trillions of dollars in emergency funds to the banking system and lowered interest rates to near zero—unlike in 1930-32 when the Federal Reserve failed to bail out the banks and eventually allowed 17,000 US banks to fail.

The Federal Reserve would continue to provide free money to the banks to the tune of $5.5 trillion over the next seven years, 2009-16, and to hold rates at near zero. B7 2010, banks had been bailed out but they continued to be subsidized for years thereafter by the Federal Reserve by keeping rates near zero and providing banks with further trillions of dollars of virtually free money. The trillions of dollars of free money found its way from the US banks to non-bank businesses and investors and to US multinational corporations expanding offshore.

The Fed’s allocation of more than $5 trillion in virtually free money to banks and investors was processed by an annual distribution of money to US corporations over the next seven years at the rate of $800 billion a year, which these utilized in the form of stock buybacks, dividend payouts, and other corporate to shareholder distributions. This historic massive distribution of more than $5 trillion by the U.S. central bank, the Fed, contributed significantly to the accelerating wealth concentration among corporations and wealthiest 1% households in the USA from 2010 to 2016.

With most of the Bank bailout money now going to fuel corporate mergers & acquisitions, offshore investing by US multinational corporations, and creating asset price bubbles in stocks and other financial assets, the real non-financial economy was starved of money capital for investing in the US real economy and fared less well in the following years. The financial sector of the US economy in effect ‘crowded out’ job-creating real investment in the real economy, .

In contrast to the more than $5 trillion pumped into the US banking system and private investors by the Federal Reserve from 2009 through 2015, the non-financial real economy was provided with only a $787 billion fiscal stimulus in January 2009 by Obama’s economic recovery program.

This proved insufficient as a stimulus, not only due to its insufficient magnitude but because of its composition as well—with only about $600 billion in business tax cuts and subsidies going to state & local governments. Both business and state governments in turn then largely hoarded the stimulus at first and then spent it very slowly, if at all. This failed fiscal stimulus accounted for much of the weak and protracted recovery of the real economy after 2009—in contrast to the massive, immediate and continued bail out of the banks and investors by the Federal Reserve over the same post-2009 period.

Unlike the quick recovery of banks and investors, the real economy struggled to obtain a sustained recovery. Economic growth in GDP on average annually was only 60% of a normal post-recession recovery. It took six years just to recover jobs lost since 2008, which didn’t occur until late 2015. Real wages stagnated at best for most of the US work force over the same period. A typical legacy of great recessions is always a weak real economy recovery, very slow job restoration, and wage stagnation. The 2008-09 was thus no different.
The trajectory of the post-2008 collapse was a short, shallow recovery followed by similar relatively short periods of anemic growth. The US economy stalled, almost falling into subsequent recessions, on two occasions in the winters of 2012 and 2015. Europe and Japan fared worse. Europe stumbled into a second, double dip recession in 2011-13 and Japan slipped in and out of short recessions on three separate occasions after 2009.

Near economic stagnation, and short economic relapses, for an extended period for another 5-6 years was thus the defining characteristic of the period of from June 2009 through 2015—i.e. the first Great Recession in the 21st century. A second banking crash did not follow the real economy’s decline of 2008-09. The Great Recession of 2008-09 was thus prevented from transforming into a bona fide Great Depression, such as occurred in 1931.

The weak recovery of the real economy, 2010-16, was achieved at the great cost of a weak jobs recovery, stagnant wages for most, low real business investment and productivity, and growing income inequality in favor of the financial-banking sector and wealthiest 1% investor households—all of which would eventually come at a price when the 2020 crisis erupted.

2020 Phase 1: The Second Great Recession

The current 2020 crash of the real economy in the USA dwarfs the 2008-09 first Great Recession. Since late February 2020, the US economy has contracted more than four times faster than it did in 2008-09. In the latter case the contraction took 19 months for US GDP to decline by 6%. In 2020 US GDP faced a similar decline in just the first quarter, January-March 2020. Official forecasts for the second quarter 2020, April thru June 2020, are for the US economy to contract by another astounding 30%-40%: The Federal Reserve bank’s districts of Atlanta and New York provide GDP prediction services for the economy.

The combined economic decline for the entire first six months of 2020 will likely range from 20% to 25% of US GDP. That’s a loss of about $5 trillion in GDP terms— in just four months, compared to 19 months in 2007-09; and four to five times deeper than that which occurred in 2008-09.

Another pair of key sources indicating the severe dimensions of the current second quarter collapse are the Purchasing Managers Indexes (PMIs) for manufacturing and for services. An index number of 50 indicates stagnation: no growth in manufacturing and/or services but no contraction either. A number above 50 indicates growth of the economy in these sectors; below 50 indicates a contraction or recession in activity. PMIs for both manufacturing and services plummeted in March and April to record lows in the 30s range, and, while rising as in the April-June second quarter, both PMIs are still below 50, indicating a continued contraction of both manufacturing and services.

It is thus a myth that the US economy is growing once again in June. It is just not falling as fast as it had in March-May.
Another way to envision the special severity of the current 2020 Great Recession is that more than 90% of countries globally are accompanying the USA in the decline—compared to 60% in 2008-09, making the current contraction even more global in character than was 2008-09—occurring not only faster but also steeper.

According to June 2020 latest forecasts of the global economy by the World Bank (WB) and the International Monetary Fund (IMF), the volume of world trade is projected to decline by double digit percentages throughout 2020. The World Bank predicts a -13.4% fall in 2020; the IMF, 12%. Both sources see a -5% fall in global GDP—something that has never occurred before in modern record keeping. Both the IMF and World Bank forecast the USA, Europe, and advanced economies will contract by 8%-10% for the entire year, 2020—about double that of the 2008-09 Great Recession!

However, that optimistic forecast of 8%-10% for the US and other advanced economies assumes a successful fiscal-policy implementation in the second half of 2020 as well as the absence of a second COVID-19 surge in the coming months—neither of which appear likely to happen.

The World Bank’s -5% and -8% best case forecasts include the assumption there is no second COVID-19 wave and no premature reopening of the US and other economies. If either happens, “then we will begin talking about depression-level growth and policy responses”. Of course both had already begun to occur by late June 2020. The World Bank added that its best case -5% contraction (and -8% for USA) is further dependent on sufficiently strong government fiscal stimulus as well as on no resumption of the global trade war.
It further warns that should these assumptions prove real, then that “will almost certainly be followed by a solvency (financial) crisis, particularly among small firms in the retail, leisure and hospitality sectors.”

US Federal Reserve chair Jerome Powell has more or less echoed the World Bank’s conditional optimistic forecast, noting that much depends on the US economy reopening without a second COVID-19 wave. While Trump and company continue to spin the V-shaped recovery scenario, Fed chairman Powell and other Federal Reserve governors have been consistently warning that is not on the horizon. Appearing before Congress in mid-May 2020 Powell made it plain that the United States faces a long overall recovery…likely not before the end of 2021. European Central Bank chair Christine Lagarde has echoed Powell’s warning, pointing out “we’re not going to return to the ex-ante status quo” and that global trade will be “significantly reduced.”

Another big factor among the noted ‘seven’ forces that could potentially drive the US economy deeper into recession is the adequacy of a US government fiscal stimulus response to the current crisis.

First, Congress passed two small fiscal spending bills of $100 billion and $75 billion, targeting reimbursements to hospitals; neither were designed as general economic stimulus bills. Then in March 2020, the US Congress passed the dubiously-termed CARES ACT, amounting to about $2.2 trillion. It included three business lending programs: for small, medium and large businesses, totaling $1.45 trillion, to which a further $310 trillion was quickly added to what was called the Payroll Protection Program (PPP), for small business loans.

To this approximately $1.8 trillion in business loans, convertible to cash grants if the business borrower used 70% to maintain the wages of its employees—was added another $500 billion in direct subsidies to workers in the form of expanded unemployment benefits and one-time supplemental income checks of $1,200 per adult and $600 per dependent for no more than two dependents.

In addition to the loans/grants and unemployment/supplement checks were $650 billion in tax cuts in the CARES ACT. This is seldom referenced in the media, and are virtually all business- and investor-targeted, leaving less than 3% of the total to be provided to households earning less than $100,000 a year in annual income. Featured tax cuts include a payroll retention tax credit, temporary business payroll tax deferment, net operating loss corporate tax averaging, faster depreciation write-offs, and a larger business loss allowance.

Summed up, the CARES ACT and its predecessors provided a fiscal stimulus—at least on paper—of $1.8T in business loans/grants, $500 billion to workers and families, $650 billion in business tax cuts, and about two hundred billion in direct subsidies to hospitals and health care deliverers. Or about $3.2 trillion total.

If it is assumed all the $3.2 trillion actually entered the US economy as a stimulus by the end of June, then the stimulus as a percent of US GDP amounts to about 11% of GDP. But it didn’t. As of end of June 2020, only about half that has actually been spent. So the stimulus is only 5.5% of GDP. In other words, about the same 5.5% as in 2009, for an economy in 2020 that has contracted five times faster and five times deeper! And if 5.5% was insufficient to stimulate the real economy in 2009 (in contrast to the Fed’s successful $5 trillion bailout of the financial side of the economy), then the 5.5% fiscal stimulus embodied in the CARES Act will certainly prove insufficient for real economic recovery as well in 2020!

In short, the fiscal stimulus as of midyear 2020 is woefully inadequate to ensure a sustained recovery of the US economy in 2020—let alone anything resembling a V-shape recovery.

As of June 30, 2020 the $500 billion in unemployment benefits and income checks has been spent already. There is no further stimulus effect for the coming 3rd quarter. Only $517B of the $660 billion small business PPP program has been loaned out. No more than $100 billion of the $500 billion allocated for loans for big businesses has been loaned. And the additional $600 billion for loans for medium sizes businesses, called the ‘Main St.’ program, has yet to lend anything.

Congress never intended the CARES ACT as a fiscal stimulus bill but rather as a ‘mitigation’ effect, to put a floor under the collapsing economy to prevent it from plummeting even further than it has. Rather, Congress, or at least the US House of Representatives, intended it to be followed up by a subsequent, true fiscal stimulus package. This package was introduced by the US House in May and is called the ‘HEROES ACT’. But at this writing, this actual fiscal stimulus is being held up by Mitch McConnell and the Republican Senate, who are opposed to further stimulus in the form of continued unemployment benefits and income checks, the former of which expires on July 31, 2020.

Nor are McConnell and Republicans interested in adding more to the large and medium size corporations’ $1.1 trillion loans allocated by the CARES ACT. Neither large or medium corporations have taken up the loans. $1 trillion is still allocated but not being used. Even $135 billion of the small business PPP program is still not taken up. The question is why, if the economy has contracted so sharply? The answer is that big businesses are already bloated with cash they’ve been accumulating since January 2020. They don’t need the loans and don’t want them, if they come with the condition of using 70% to maintain their workers’ wages.

The cash-bloated US big corporations have accumulated a cash war chest of at least $3 trillion. In January-February they quickly drew down their bank credit lines by hundreds of billions of dollars and issued record levels of corporate bonds, raising another more than $1.3 trillion in March-May, more than in all of 2019. They suspended hundreds of billions of dollars in their dividend payouts to shareholders and, in some cases, sold off their minority equity (stock) ownerships in other companies to gather in more cash. They issued more stock of their own, and cut facilities and wages in the shutdown. Bloated with cash, they have had no need of the CARES ACT loans, and Republicans McConnell & Co. know this. Their main constituency of big business, bankers and investors don’t need their further financial assistance.

What the Senate Republicans have been proposing in negotiations on the HEROES bill is to convert the money spent on unemployment insurance after July 31 to a direct wage subsidy to employers. Instead of issuing unemployment checks to workers, they propose issuing checks to their employers to pay their wages instead of the employers having to pay them wages out of their revenues and profits. Another provision proposed is more tax cuts for business: a permanent payroll tax cut, more capital gains tax cuts, and more tax cuts for business expenses.

With an election in just months, it is highly unlikely any further significant fiscal stimulus will be forthcoming this summer—with ominous consequences for achieving a sustained economic recovery in 2020.

When combined with a reopening of the domestic economy which is intensifying a second COVID wave underway, and with a continuing decline in the global economy and therefore global trade, and given the likely end of extended unemployment benefits come July 31, 2020, it is increasingly likely the US economy will deteriorate further in the second half of 2020. Making matters worse, after July a wave of renter evictions and mortgage payment defaults is expected, further intensifying the negative economic effects in the US.
In addition, the reopening of the US economy will not result in a full and rapid return of jobs and therefore of wage income and consumption. Household credit is also tightening, reducing potential consumption as well. Employers are calling back workers selectively and carefully, with many re-employed with fewer hours to be worked. Uncertain of the recovery, businesses will not return to robust investing and production expansion; households, uncertain of future employment prospects, will not return to prior levels of spending either.

But it will appear as if recovery has begun in the 3rd quarter as GDP recovers moderately. It is not impossible for any economy to continue to contract at 30% every quarter. A modest 5-10% ‘rebound’—not recovery—is likely in the 3rd quarter simply as the economy reopens, even if only partially. Similarly, some of the current 40 million plus jobless will return to work. Politicians will hype the GDP and jobs data to spin it as a ‘recovery’.

But a mere rebound is not a recovery.

2020 Phase 2: Great Recession or Great Depression?

It remains to be seen whether the 20th century’s second Great Recession, now in its fourth month and still early in its trajectory—in just Phase 1 thus far—will be contained. The alternative scenario is a failed containment and a subsequent descent into the first true Great Depression of the 21st century in 2021-22. It’s inherent in the nature of a Great Recession to be unstable. It either moderates or it intensifies and morphs into a Great Depression. For the latter to happen, however, a major financial system crash must occur—i.e. the seventh ‘wild card’ force noted above.

Thus far the US central bank, the Federal Reserve Bank, has undertaken historic and unprecedented action to forestall a financial crash of the banking system. In the first Great Recession, the Fed bailed out the banks to the tune of more than $5 trillion. In the current crisis, it has pre-emptively bailed out the banks with more than $3 trillion thus far, and promised ‘whatever it takes’ in additional virtual free money capital injections, should the banks need it. A pre-emptive bail out of the banking system has never before occurred in US history, but is underway today.

The Fed is pre-bailing out non-financial corporations for the first time as well. That too has never occurred in US economic history. Trillions of dollars more are being allocated by the Fed to buy the bonds of corporations directly. Even derivatives of corporate bonds, called ‘Exchange Traded Funds’ (ETFs). Even junk bonds of corporations. This massive corporate bond buying program by the Fed is designed to throw trillions of dollars at corporations in order to offset the waves of corporate defaults expected to come. Defaults and bankruptcies will mean banks that provided the companies with loans will have to assume their corporate debt when they default. That could lead to bank insolvencies and a banking crash in turn. So the Fed is flooding both banks to have sufficient cash to absorb the coming defaults as well as the potentially defaulting corporations. It is an historic experiment in monetary policy. And it is uncertain whether the even historic money injections will succeed in preventing the waves of defaults that are likely to be coming.

The areas of major corporate defaults expected are not just the obvious travel, leisure and hospitality, and big box retail companies. Defaults are already spreading as well in the fracking energy industry, in commercial properties (malls, office buildings, hotels, theme parks, etc.), and soon in local governments and agencies.

All Great Recessions are characterized by mutually amplifying negative effects between financial cycles and real economic cycles. In 2008 a major financial instability event precipitated and exacerbated the subsequent steep contraction of the US real economy from October 2008 through June 2009. Today, in 2020, the real side of the economy has contracted even more severely first. It remains to be seen whether and when that real contraction might precipitate a subsequent financial crash in turn. Should that occur, the feedback effects on the real economy will intensify, driving the real economy even further into contraction—and into a possible Great Depression.
The economic jury is still out and will remain so for months as to whether the Fed’s historic massive pre-emptive bailout of both banks and non-bank corporations can succeed in preventing a bona fide descent into depression. The failure of fiscal policy will be decided much sooner, well before the November 2020 elections. A failure of central bank monetary policy, should it occur, will likely be sometime in 2021.

In the interim, the trajectory of the US economy will be more W-shaped—as is the case in all Great Recessions. While V-shape recoveries are more frequent in normal recessions, it appears capitalist economies no longer undergo normal recessions, with contractions of only three to six months and GDP declines of only 1-3%. Capitalism in the 21st century is more prone to major crises, like Great Recessions and Great Depressions. The mutual amplifying effects of financial cycles and real cycles, and the growing financialization of capitalism, are likely the cause of this phenomenon of growing mutual cycle amplification and more intensified Great Recessions.

Much of the trajectory of the US economy in the second half of 2020 and beyond depends on the response of fiscal and monetary policy both this year and in 2021, after the November 2020 national US elections. Will Congress continue to fail to provide sufficient fiscal stimulus, as it did in 1929-32? Will the Federal Reserve’s March-June 2020 even more massive—and this time pre-emptive bank bailout—successfully forestall a banking crash in 2021?

Other key questions impacting the economic trajectory include whether the reopening of the US economy now underway significantly exacerbates the COVID-19 negative effects on the economy. Rising infections and hospitalizations will discourage and dampen further both business investment, job recalls, and household consumption, and lead to further layoffs. What will happen with global trade and other economies’ recoveries?

Political instability events should not be discounted as well. A growing direct conflict between two wings of the US capitalist elite and their political constituencies has been assuming constitutional forms as well as grass roots protests and conflicts between their supporters. It is not impossible that the upcoming November 2020 elections will result in an intensification of these conflicts and a general political and constitutional crisis not seen since the 1850s. The economic fallout of that would be severe.

The most likely scenario for the US economy in 2020-21, is an extended, weak and unstable economic recovery—not to be confused with a temporary ‘rebound’ over the summer—that will take years to unfold.

The trajectory and scenario of the current Great Recession 2.0 is therefore strongly in favor of a W-shape recovery at best, in the shorter run, with the possibility of a descent into the first great worldwide economic depression of the 21st century in the intermediate to longer run.

What Lies Ahead?

The US economy at mid-year 2020 is at a critical juncture. What happens in the next three months will likely determine whether the current Great Recession 2.0 continues to follow a W-shape trajectory—or drifts over an economic precipice into an economic depression. With prompt and sufficient fiscal stimulus targeting US households, minimal political instability before the November 2020 elections, and no financial instability event, it may be contained. No worse than a prolonged W-shape recovery will occur. But should the fiscal stimulus be minimal (and poorly composed), should political instability grow significantly worse, and a major financial instability event erupt in the US (or globally), then it is highly likely a descent to a bona fide economic depression will occur.

The prognosis for a swift economic recovery is not all that positive. Multiple forces are at work that strongly suggest the early summer economic ‘rebound’ will prove temporary and that a further decline in jobs, consumption, investment, and the economy is on the horizon.

A Second Wave of Job Losses

Through mid-June to mid-July, the COVID-19 infection rate, hospitalization rate, and soon the death rate, have all begun to escalate once again. Daily infections consistently now exceed 60,000 cases—i.e. more than twice that of the earlier worst month of April 2020. Consequently, states are beginning to order a return to more sheltering in place and shutdowns of business, especially retail, travel, and entertainment services. The direction of events cannot but hamper any initial rebound of the economy, let alone generate a sustained economic recovery.

Exacerbating conditions, a second wave of job layoffs is clearly now emerging—and not just due to economic shutdowns related to the resurging virus. Reopening of the US economy in June resulted in 4.8 million jobs restored for that month, according to the US Labor Department. That number included, however, no fewer than 3 million service jobs in restaurants, hospitality, and retail establishments. These are the occupations that are now being impacted again with layoffs, as States retrench once more due to the virus resurgence underway. But there’s a new development as well: A second jobless wave is now emerging in addition to the renewed layoffs due to shutdowns not only of the resumed service and retail occupations, but reflecting longer term and even permanent job layoffs across various industries.

Household consumption patterns have changed fundamentally and permanently in a number of ways due to both the virus effect and the depth of the current recession. Many consumers will not be returning soon to travel, to shopping at malls, to restaurant services, to mass entertainment or to sport events at the levels they had, pre-virus.

In response, large corporations in these sectors have begun to announce job layoffs by the thousands. Two large US airlines—United and American—have announced their intention to lay off 36,000 and 20,000, respectively, including flight attendants, ground crews, and even pilots. Boeing has announced a cut of 16,000, and Uber,n just its latest announcement, a cut of 3,000. Big box retail companies like JCPenneys, Nieman Marcus, Lord & Taylor, and others are closing hundreds of stores with a similar impact on what were formerly thousands of permanent jobs. Oil & gas fracking companies like Cheasepeake and 200 other frackers now defaulting on their debt are laying off tens of thousands more. Trucking companies like YRC Worldwide, the Hertz car rental company, clothing & apparel sellers like Brooks Brothers, small-medium independent restaurant and hotel chains like Krystal, Craftworks—all are implementing, or announcing permanent layoffs by the thousands as well.

Reflecting this, since mid-June new unemployment benefit claims have continued to rise weekly at a rate of more than 2 million—with about 1.3 million receiving regular state unemployment benefits plus another 1 million independent contractors, gig workers, self-employed receiving the special federal government unemployment benefits. The latter group’s numbers are rising rapidly since mid-June.

As of mid-July no fewer than 33 million are receiving unemployment benefits, with another 6 million having dropped out of the labor force altogether and no longer even being counted as unemployed. Unemployment therefore remains at what will likely be a chronically high number, at around 40 million—with about 25% of the US labor force unemployed—as renewed service-retail sector layoffs, plus new permanent layoffs, both loom on the horizon.

Added to the growing problem of renewed service layoffs and the 2nd wave of permanent layoffs in the private sector is the growing likelihood of significant layoffs in the public sector, as states and cities facing massive budget deficits are forced to lay off several millions of the roughly 22 million public sector workers in the US. This potential public employee layoff wave will accelerate and occur sooner, should Congress in summer 2020 fail to bail out the states and cities whose budgets have been severely impacted by the collapse of tax revenues while facing escalating costs of dealing with the health crisis. Estimates as of last May are that the states and cities will need $969 billion in bailout funding this summer—roughly two-thirds for the states and the rest for cities and local governments.

The resurgence of layoffs from all these sources is a sure indicator that the economy’s rebound—let alone recovery—is in trouble. Rising joblessness means less wage income for households and therefore less consumption and, given that consumption is 70% of the economy, a slowing of the rebound and recovery. Problems in consumption in turn mean business investment suffers as well, further slowing the economy and recovery. Exacerbating the decline in personal income devoted to consumption due to unemployment is the evidence that even those fortunate enough to return to work after spring 2020’s economic shutdown are doing so increasingly as part time employed—which means less wage income for consumption compared to the pre-COVID period before March 2020.
Overlaid on these negative prospects for employment, consumption, business investment is the intensification of economic crisis-related problems.

Rent Evictions, Child Care & Education Chaos

There is an imminent crisis in rents affecting tens of millions. At the peak in April, it is estimated that roughly one-third of the 110 million renters in the US economy had stopped making rent payments due to the COVID-related shutdowns of the economy. The CARES ACT, passed in March, provided forbearance on rental payments, although perhaps as many as 20 states failed to enforce it. That forbearance directive expires at the end of July, with as many as 23 million rent evictions projected in coming months. A major housing crisis is thus brewing, as well as the second wave of job layoffs.

A combined education-child care crisis is about to occur almost simultaneously. The K-12 public education system is approaching chaos, as school districts plan to introduce remote learning on a major scale in order to deal with the renewed COVID-19 infection and hospitalization wave. The heart of the crisis is that tens of millions of US working class families dependent on two paychecks to survive economically cannot afford to accommodate school district practices for remote learning—especially for young children in the K-6 grade levels. Even if such families could afford to pay for expensive child care, the current US child care system is far from being able to accommodate them. Many minority and working class households, moreover, lack the computers and networking equipment, or even the requisite skills to set it up, to enable their children participate in remote learning.

Several forces are driving the shift to remote learning: school district fears of liability actions by parents if children become ill, the significant cost of ensuring disinfected classrooms, the lack of classroom space to allow distance learning on site, and the growing concern of teachers regarding their own exposure to infection. At least 1.5 million public school teachers are over age 50 and have health conditions that put them at greater risk of serious infection, should they attend closed-in classroom environments.

The child care plus K-12 education crisis will likely erupt within months on a major scale. Chaos in education is around the corner.
This fall, higher education—colleges and universities—will also experience chaos of their own kind. While distance learning will not be as serious an implementation problem as it will in K-12 levels, costs from the pandemic will force many smaller, private colleges into bankruptcy, consolidation or closure. Public colleges’ funding problems will require them to sharply reduce available services. Remote education will create a two-tier system of higher education—educational services delivered remotely and those of a more traditional nature on campus; or a hybrid of both.

However, demand for higher education services will likely decline sharply in the short term, during which higher education will experience a devastating decrease in tuition and other sources of college revenues. Some estimates show a third of freshmen plan to take what’s called a ‘gap year’: i.e. accept entrance but not attend for a year. That’s a massive revenue loss. Some estimates foresee a 15%-30% decline in new student attendance, with another 5%-10% decline in transfer students, and a similar decline of 5%-10% in continuing students. In addition, the attendance by international students, the ‘cash cow’ for most colleges, will also decline sharply due to the Trump administration’s new rules.

Still other developments will sharply reduce college revenues. Students forced to attend classes via remote learning will demand lower tuition. One can expect a wave of legal suits as students seek to ‘claw back’ full tuition expenses. Other secondary sources of college revenues—from fees, on-campus room and board, endowment earnings and gifts, and sports revenues—also spell a looming revenue crunch.

A wave of college consolidations and closures is inevitable. And with student loan debt at $1.6 trillion it is unlikely that the federal government will introduce new aid through that channel. Nor will States increase their subsidization of public colleges, given the severe state budget deficits on the horizon.

In short, the economic crisis is about to assume more socio-economic dimensions and character: rent, child-care, education chaos will soon overlay the continuing unemployment problem and worsening recession. Social and political discontent, frustration, and anxiety are almost certainly to rise in turn in coming months as a consequence.

Global Recession & Sovereign Debt Defaults

The weakness of the global economy is yet another factor likely to ensure the US economy’s W-shape trajectory. As noted previously, with 90% of other countries in recession, global demand for US exports will remain weak or declining. In addition, global supply chains have also been severely disrupted by the health crisis, or even broken, and will not be restored soon. The global economy is suffering from deep problems of both demand and supply. This too is a unique historical event. Never before have demand and supply problems occurred congruently. Together, they increase the potential for a global depression.

Commodity producing economies have been hard hit, especially oil and metal producing countries. Many were in a recession well before the COVID health crisis. Global trade in general had stagnated, registering little to no growth in 2019, for the first time since modern records were kept. Many countries had over-extended their borrowing, expanding their sovereign debt loads during the last decade. This was money capital borrowed largely from western banks and capital markets (i.e. shadow banks).

Now, with global trade flat and declining, and prices for their export goods deflating in price as well, these debt-extended countries cannot earn sufficient income from exports in order to pay the principal and interest on their debt. As a result, several countries in the worst shape may soon default on their debt payment to western banks, hedge funds, private equity firms, and so on. Debt defaults potentially mean the same western financial institutions that loaned the funds now experience financial crises in turn. In such a manner, financial instability events abroad are often transmitted to the domestic US economy through its banking system. It would not be the first time, moreover, that foreign bank crashes have spilled over the US and rest of the world economy and in the process significantly exacerbated a recession already underway.

Theoretically, countries experiencing severe sovereign debt crises could borrow from the International Monetary Fund. However, the IMF has nowhere near the funds to accommodate multiple large sovereign defaults that occur simultaneously. Nor is it likely that the US and Europe will increase the IMF’s funding to enable it to do so. Once it becomes clear the IMF cannot handle a crisis of such potential dimensions, the global capitalist economy will slip even further toward global depression.

The further deterioration now already occurring in economic relations between the US and China may also potentially impact the Great Recession in the US, and ensure its continued W-Shape recovery. Trump’s trade pact with China signed December 2019 has proven thus far a colossal failure. The president declared at the deal’s signing it would mean $150 billion in China purchases of US goods in 2020—especially farm products, oil & gas, and manufactured goods. At mid-year, China has purchased only $5 billion of the agreed $40 billion in farm products and only $14 billion of $85 billion in US manufactured goods. Trump’s promised $150 billion was never agreed to by China, even before the Covid pandemic struck the US economy in 2020. China never agreed to a dollar value of purchases of US exports, but announced it would purchase based on conditions in 2020-21. Trump’s $150 billion was typical Trump misrepresentation of a deal never made. At best China would purchase perhaps $40 billion in agricultural goods—i.e. about the level of it purchases before Trump launched a trade war with it in March 2018. Failure to deliver his exaggerated public promise in 2020 Trump turned on on China and embraced further his anti-China hard line advisors on trade and other matters. The former ‘trade war’ with China will likely transform now, in the wake of Covid, into a broader economic war with China. Furthermore, the deterioration of relations with China, set in motion by the current recession and the collapse of global trade, shows signs of spilling over to other political and even military affairs.

Permanent Industry Transformation

The COVID health crisis is accelerating the transformation of entire industries and sectors of the economy, US and global. As noted above, household consumption patterns are already changing fundamentally and will continue as changed even after the health crisis passes. Entire industries will shrink as a consequence. Company consolidations and downsizing are inevitable in airlines, cruise lines, and even public land transport. So too will companies fail, consolidate and restructure in the hospitality, leisure and hotel industries, in mall-based retail establishments, inside entertainment (movies, casinos, etc.) to name but the obvious. Sports and public entertainment companies are struggling to redefine their business models and how they bring their ‘product’ to the public for consumption. Even education—public and private—is undergoing a radical shift. Not so obvious is similar fundamental change in oil & energy industries, and later as well in manufacturing as supply chains are slowly returned to the US economy.

Not only will these changes significantly (and often negatively) impact employment levels and wage incomes, but business practices as well. Already businesses are instituting new cost cutting practices under the pressure of the health crisis and shutdowns. These practices will become permanent. And since much of the practices and cost cutting will focus on workers’ pay and benefits, more of what economists call ‘long term structural unemployment’ will result—in addition to the current ‘cyclical unemployment’ occurring due to the current recession.

An historic consequence of the current Great Recession precipitated by the COVID-19 health crisis is the accelerating introduction underway of what some call the Artificial Intelligence revolution. AI is about cost-cutting. It’s about new data accumulation, data processing and statistical evaluation, to allow software machines to make decisions previously made by human beings. AI will eliminate millions of low level decision-making by workers in both services and manufacturing. A 2017 report by the business consulting firm, McKinsey, predicted no less than 30% of all workers’ occupations will be severely impacted by AI by the end of the present decade. 30% of jobs will either disappear or have their hours reduced significantly. That means less wage income and less consumption still.

The important linkage to the current Great Recession 2.0 is that the introduction of AI by businesses will now speed up. What McKinsey formerly predicted for the late 2020s decade will now take place by mid-decade. The economic consequences for the next generation of US workers, the late Millennials and the GenZers will be serious, to say the least. After decades of the permeation of low pay, low benefits ‘contingent’ part time and temp jobs since the 1990s, after the impact of the 2008-09 crash and aftermath on employment, after the acceleration of ‘gig’ jobs with the Uberization of the capitalist economy since 2010, and after the even more serious negative economic effects of the current Great Recession 2.0, the tens of millions of US workers entering the labor force today and in coming years will have to face the transformation of another 30% of all occupations. The future does not portend very well for the 70 million millennials and GenZers. US neoliberal economic policies and the Great Recession 2.0 is accelerating the long term structural unemployment crisis of both the US and the global capitalist economy.

Return of Fiscal Austerity

The US federal budget deficit under Trump averaged more than a trillion dollars annually during his first three years in office. The federal national debt at the end of 2019 was $22.8 trillion. As of July 2020 it has risen to $26.5 trillion—and rising. Earlier projections in March were that it would increase by $3.7 trillion in 2020. That has already been exceeded. So, too, will projections for 2021, or another $2.1 trillion. The deficit and debt will likely rise to more than $4 trillion in this fiscal year and another $3 trillion in 2021. That means the current national debt within 18 months will reach $30 trillion. And that’s not counting the debt level rise for state and local governments, already $3 trillion; nor the debt carried on the US central bank, the Federal Reserve, balance sheet which is scheduled to rise another $3 trillion at minimum.

The point of presenting these statistics is that the US elites, sooner or later, will introduce a major austerity program. It will likely come later in 2021. And it will make little difference whether the administration that time is headed by Democrats or Republicans. It will come and it will target social security, Medicare, Medicaid, Obamacare, education, housing, transport and other social programs.

A The first Great Recession provides a historical precedent. Obama’s recovery program in January 2009 provided for $787 billion in stimulus. But the joint Republican-Democrat austerity agreement introduced in August 2011 took back nearly twice that stimulus, or $1.5 trillion, in 2011-13. That austerity contributed significantly to the W-shape recovery from the 2008-09 economic crash and contraction—i.e. the first Great Recession. With the current deficit surge of $6 trillion to date, likely to increase to $9 to $10 trillion, the US economic elites will no doubt pursue a new austerity regime at some point within the next few years. That austerity will, like its predecessor, ensure at best a W-shape recovery typical of Great Recessions. At worst, it may prove the final event that pushes the US economy into another Great Depression.

Financial Instability

Those who deny that the US and global economy have already entered a second Great Recession offer the argument that the 2008-09 crash and recession was caused by the banking and financial crash of 2008-09, and therefore, since there has not yet been a financial crash, the economy at present is not in another Great Recession. But they are wrong.

Great Recessions are always associated with a financial crisis, but that crisis need not precede the deep contraction of the real, non-financial economy. The COVID-19 pandemic has played the role of a financial crash in driving the real economy into a contraction that is both quantitatively and qualitatively worse than a ‘normal’ recession. Furthermore, a subsequent banking system-financial crash is not impossible in the coming months, although not yet likely in 2020.

The preconditions for a financial crisis are in development. It won’t be precipitated by a residential mortgage crisis, as in 2007-08. But there are several potential candidates for precipitating a financial crash once again. Here are just a few:

• The commercial property sector in the US is in deep trouble. Commercial property includes malls, office buildings, hotels, resorts, factories, and multiple tenant apartment complexes. Many incurred deep debt obligations as they expanded after 2010 or just kept operating by accruing more high cost debt when they were unprofitable. Today they are unable to continue servicing (i.e. paying principal and interest) on their excessive debt load. Many have begun the process of default and chapter 11 bankruptcy reorganization. Banks and investors hold much of the commercial property debt that will never be repaid. Excess derivatives (credit default swaps) have been written on the debt. A debt crisis and wave of defaults and bankruptcies in 2020-21 in the commercial property sector could easily precipitate a subprime mortgage-like debt crisis as occurred in 2008-09. And derivatives obligations could transmit the crisis throughout the banking system—as it did in 2009. Regional and small community banks in the US are particularly vulnerable.

• The oil and gas fracking industry, where junk bond and leverage loan debt had already risen to unstable levels by the advent of the COVID crisis. The collapse of world oil and gas prices—which began before the COVID-19 impact and continues—will render drillers and others unable to generate the income with which to service their debt. Already more than 200 companies in this sector are in default and bankruptcy proceedings. Again, regional banks that financed much of the expansion of fracking in Texas, the Dakotas, and Pennsylvania will be impacted severely by the defaults. Their financial instability could easily spread to other sectors of banking and finance in the US.

• State and local governments, should Congress fail to appropriate sufficient bailout funding in its next round of fiscal spending in July 2020. State and local governments are capable of default and bankruptcy—unlike the Federal government, which is not. The US has a long history of state defaults associated with the onset of Great Depressions. This time around, state financial instability will quickly spill over to public pension funds, and from public to private pensions, and from there to the municipal bond markets with which state and local governments raise revenue by borrowing to fund deficits.

• Global sovereign debt markets, as previously noted. Defaults on massive debt accumulated since 2010 by many countries could result in serious contagion effects on the private banking systems of the advanced economies, including the US, Europe, and Japan. Should the IMF fail to contain a chain of sovereign debt crises that could follow in the wake of the current Great Recession, a chain reaction of defaults across emerging market economies in particular has the potential to precipitate a global financial crisis.
History shows that financial crises often originate from unsuspected corners of the economy. The above candidates are the ‘known unknowns’. There may also lurk in the bowels of the capitalist global financial system still more ‘unknown unknowns’—i.e. what are sometimes called ‘black swan’ events.

Political Instability

The US and other countries are on new ground in terms of potential political instability. The piecemeal curtailment of democratic and civil rights has been progressing at least since the mid- 1990s. In the 21st century it has been accelerating, both in the US and across the globe. Recent years have seen a growing public confrontation between contending wings of the capitalist elites and their political operatives. Institutions of even limited capitalist democracy are under attack and atrophying. And now political instability is growing as well at both the institutional and grass roots levels. One should not underestimate the potential for even more intense political confrontation among elites, or between segments of the US population itself, from having a negative impact on the current economic crisis and 2nd Great Recession. A Trump ‘October Surprise’ or a November 2020 constitutional crisis are no longer beyond the realm of the possible, but even likely.

The expectations of both households and business may serve as transmission mechanisms propagating political instability into more economic and financial instability. Political instability has the effect of freezing up business investment and therefore employment recovery. It has the further effect of causing households to hoard what income they have and raise the savings rate—at the expense of consumption. It also leads to government inaction on the policy necessary to provide stimulus for recovery.

On a global front, political instability may even assume a global dimension. History in general, and US history in particular, reveals that US presidents seek to divert public attention from domestic economic and social problems by provoking foreign wars. Targets for US attack, in the short term, are Iran and Venezuela—especially the latter, which is more susceptible to US military action. But tomorrow, in 2021 and after, it could well be Russia (Ukraine or Baltics US provocations), North Korea (a US attack on its nuclear facilities) or China (a US naval confrontation in the South China sea)—irrespective of the unlikely success of such ventures.

Like another financial-banking crash, a major political instability event—domestic or foreign—could easily send an already weak US economy struggling in the midst of a Great Recession into the abyss of the first Great Depression of the 21st century.

Overall, the future looks grim.

Dr. Jack Rasmus

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