Wednesday 30 September 2020

The 'new normal' economy and the unknowable future

After a lifetime of being interested in and studying macroeconomics and also participating in the coal-face end of Capitalism, I have been unprepared for the loss of insight that I have suffered through the covid pandemic. 

Long time readers will know, I could see the credit crunch coming, before that I knew 9/11 would wreck parts of the economy, I could see QE becoming the chosen too to manage the economy in the West in to 2010's. Whilst seeing the austerity recovery spilling over into more recessions and perhaps underestimating the euro's hardiness, overall I feel I have had good feel for macro conditions for a long time (just don't get me to stock pick, if only I were talented at that...).

Covid world is just mental though:

- Stock prices down less in percentage terms and GDP (utterly insane and unpredictable)

- Government spending slightly higher than during 2008, but no impact on the currency

- Huge increase in unemployment but a huge boost to house prices (in my area, where I am dealing with agents currently who are true sons and daughters of satan, at least 5% in the last 3 months)

- Also huge unemployment but the highest ever savings rate since records began 

- Tourism and trade hugely down, but deflation setting into retail purchase

- Some parts of the economy smashed by the Virus; travel and leisure, retail, but then others like digital and logistics hugely boosted. 

None of the above makes any sense in general economic terms. Asset prices maybe I can see rising as savings increase and need deploying, however the huge unemployment should undermine house prices and rents - but the opposite is happening. 

The Government is busy shellacking the public finance with a second 100-year black swan event in the space of 12 years. Yet relatively the Government remains popular and the pound stable as the same rate as the past years post-Brexit. 

So, with all the above, I have lost all sense of where this is going economically. The world is changing at hyper-speed and 2021 will see a big denouement - but I honestly can't say whether this will be a bounce back to a new level of stability or a 2009 style crisis. The issue with the markets is they are driven by people and investors too and I sense nobody knows what to do or where things are going. This would suggest a huge shakeout when people and markets figure it out eventually - I just can't make out how it will be resolved yet. 


david morris said...

Chris Fildes used to say that because economic crises came around on a generational basis, & each crisis was treated as a unique entity (those involved/responsible for one crisis would be retired before the next one came along).

It seems we're going to break that trend...

Anonymous said...

One of the only good things about the UK economy having a huge "selling coffee and houses to each other" sector is that Rishi can replace wages without any inflationary effect. OK, we have fewer meals out and drink less coffee, but they still can pay the bills.

Can anyone answer - why are so few people dying compared with say April? Is it just the weather? Because April IIRC was glorious sunshine most of the month. What's the difference?

Nick Drew said...

Some guesses:
More diagnoses of people unlikely to show symptoms or succumb, because more tests;
First wave saw off the weak;
Better treatments.

I don't think anyone truly understands macro ecnomics ...

Anonymous said...

Governments in general seem intent on supporting asset prices, decision making seems to flow from that.

I also don't think we're done with Black Swan events, the US election threatens to be one as the ManChild prepares to lose. Trumps claims has set the stage for either side to claim electoral shenanigans, especially as both parties have a history of it.

There would be some irony in a Trump win based on postal ballots, only for Biden to call foul based on Trump's very own claims. Cue tweets asking about petards.

And China... Too many potential points for something not to kick off, maybe a few small skirmishes between various nations in isolation, maybe something bigger. Hopefully not very big.

No Deal Brexit is also on the horizon, and I can't currently see Boris and Cummings at the top table next summer. The current situation allows for a lot of forgiving of screw ups, but the last month or two looks to have found the goodwill fund somewhat sparse.

The global economy needs something of a reset button too, its kept going after the financial crash, but how much of that has been a Chinese illusion we've all bought into?

iOpener said...

Governments are stealing cash by inflating the currency. Those 5% property price rises are inflation in action.

I have some sympathy for the government. The theft is so easy and "savers" who take no risks have had it far too good for too long. Money stuck in a bank with full deposit government guarantee should get the same rate of return as money stuck in a mattress - something negative.

BlokeInBrum said...

Great, so all the things that make up a successful economy and society - hard work, deferred consumption, long term planning for the future are punished so that the profligate, the criminal and the lazy can maintain themselves in the style that they're used to?

Matt said...

@ iOpener

Yep, saving is bad - it's akin to stealing from the economy (and therefore the government coffers). We should all just spend every penny we have and work till we drop dead.

Or perhaps you think the government can use the magic money tree to bail out everyone who can't look after themselves?

E-K said...

The house price rises are just a temporary shuffle during the stamp duty cuts - people deciding that London has gone to rat shit and escaping to the country (falls in the capital.)

Savings increases temporary just before the WFH shakeout happens and people find that either their jobs are gone or their savings in commuting are replaced by costs in taxation.

Let's see how it all looks at the end of furlough and after the first emergency budget.

Your pubs, theatres, restaurants, cafe's and shops are all virtually gone and their local council is about to go bankrupt.

You can't buy a Cockapoo for under £2500 and a set of dumbbell weights now cost a weeks wages for many.

Does anyone seriously think they're richer ?

dearieme said...

I find this idiosyncratic chap is often interesting. Here he predicts the ruin of the great cities such as NYC.

Don Cox said...

"huge unemployment but the highest ever savings rate since records began "

People who expect to be unemployed soon are trying to pay off their debts and save a bit of money for food and clothes.

Don Cox

#FPBE Doom Goblin said...

Anon is fighting 1936

Brexit bad
Trump bad
China bad
We must embrace the League of Nations as the only way to survive.

Poor Anon.
Can’t see that covid is the new 1940.
The Blitzkrieg was new. Fast and deadly. And changed the world forever.

Anonymous said...

@Doom Goblin

I voted *for* Brexit, and whilst a No Deal one would be manageable by a competent government, we ain't got one, so there'll be consequences.

Trump is more nuanced. He's done some good, notably in the ME and tackling China, but by and large he's every bit as guilty of identity politics as the Democrats, he's just picked one larger than they have, and the consequences will leave the US in a place of great fragility.

And no, China in and of itself isn't bad, neither are the Chinese people, the CCP on the other hand? Very bad.

And I think that's more than enough engaging with that kind of post.

andrew said...

[I am not an economist]
I think the recent past and possible future can be explained by some key changes over the last hundred years or so.
- civilization seems to have persisted for a 'long time'
- people seem to believe in 'momentum'
- standards of living are 'high'
I will not specify what 'long time', 'momentum' and 'high' are
but to cherry-pick a few examples,

Interest rates were high because of risk - as things have not gone wrong for some years and so the expectation is that this will remain so, the risk premium has droppped. There is a cost and a risk to holding cash and so interest rates may indeed turn negative.

I do not think interest rates will rise until there is a real risk of loss.

Standards of living are high - a lot of the economy is not devoted to feeding people and keeping them warm. This means that there is a lot of economic activity that can stop and normal life will not 'cease'.

So large segments of the economy may well 'stop' for a while and life will carry on - only ~half of the uk went to the pub in '18 (although culturally impoverished)

House prices remain 'high' because people are willing to lend money at low rates and there has not been a bug fall in prices for about 30 years and the expectation is that that will remain the case.

So long story short, I expect things to carry on like this
...until they do not.

The catalyst is the interesting thing. IMO (and writing it down here makes it almost certainly wrong) there will be a fall in the number of jobs in large cities (london) that are expensive to live in.
People living in the commuter areas will realize they can live better somewhere else. Enough will move to depress rents and so house prices. This will cause financial institutions to re-assess risk.

Interest rates rise.

PushingTheBoundaries said...

Harking back to an earlier post... Blackbaud hack worse than first admitted. Who knew eh?!

Nick Drew said...


Thanks, PtB - hadn't spotted that one. Wonder how long it'll be before their not-for-profit clients fess up to their own members / subscribers etc ..?