‘Just damage containment’: Cost of the coronavirus shutdown keeps rising

“The Federal Reserve and Congress are helping to avert a massive economic and financial downturn that threatens a devastating combination of the depression of the 1930s and the global financial crisis of 2008. That is the good news,” said Mohamed A El-Erian, chief economic advisor to Allianz. “It will definitely need a phase four.”

The timetable for further action would “depend on how long it takes health policy to deal with virus containment, treatment and immunity,” said El-Erian. “The faster this happens, the more phase four will be about reactivating economic activity and not just about limiting damage.”

The need for a rapid and massive infusion of federal funds became clear on Thursday when the government reported that 3.3 million Americans applied for unemployment benefits within one week, by far the largest number in history. The previous record was just under 700,000 in 1982.

Federal Reserve chairman Jerome Powell took the most unusual move to appear on television on Thursday before the damage figures were released to calm the public and the markets.

“We may be in recession,” Powell said on NBC’s Today show. But he added that it could be sharp and short, especially since the central bank is taking unprecedented measures to support markets and direct money to small and medium-sized businesses that are most at risk. “We won’t run out of ammunition when it comes to lending,” he said. “That will not happen.”

The extreme volatility that has hit the markets in the past month has driven stocks in the past few days, and investors have seen a wave of momentum associated with the expected passage of the economic bailout package. However, stocks remain far from last month’s records, and most investors expect significant volatility in the coming weeks.

Few analysts suggest that the “phase three” package is anything but massive. Many believe that it will be a great relief when Americans put money in their pockets and lose jobs in large quantities, while many small and medium-sized businesses are in danger of being closed in the coming weeks.

Money is also flowing into states, hospitals, and airlines, as well as other large companies that are badly affected. Some governors, including New Yorker Andrew Cuomo, said aid to states is far too small to help with what is expected to be a massive drop in tax revenues that would ruin many state budgets. This is expected to be on the legislature’s plate in the coming months.

Above all, economists and Wall Street analysts suggest that the package, combined with massive Fed stimulus measures, will intensify the fight against the virus and cushion the massive blow to businesses and individuals.

But they mostly describe it as a triage, not a major operation. How much more is needed depends on when the country can return to something that resembles normal business.

President Donald Trump is pushing to get the economy going again by Easter Sunday, April 12th. However, due to the still rapid spread of the virus and the need for buy-ins from government and local officials and employers, this date could easily occur postpone for weeks if not months.

In this case, Washington has to open the money again.

“The Senate stimulus package was designed to prevent millions of Americans from getting into trouble while not working, and to keep many of the companies they work from going out of business in the meantime,” said Lou Brien, DRW economic strategist Trading group. “But there is a double calculation of how long the quarantine will take and how quickly life will normalize again.”

Brien added: “If the answers to these two questions are longer than expected, there will be problems because it is not clear how much more reserve there is.”

Of course, a lot of money is running out, but it remains to be seen how quickly.

The package would send 1,200 checks to many Americans and an additional $ 500 per child for qualified families. Taxpayers who do not yet have direct deposit agreements with the IRS may have to wait a considerable amount of time to get their money. Payments will decrease according to income and will fully expire at $ 99,000 for individuals and $ 198,000 for co-applicants.

The bill also includes a dramatic expansion of unemployment insurance, the need for which became clear on Thursday with the weekly unemployment application numbers.

The increase in unemployment includes an increase in the maximum payment of USD 600 per week. Minority Leader of the Senate Chuck Schumer This would mean that “on average, redundant workers are paid their full wages for four months”.

The bill would also extend unemployment benefits to gig workers who have no traditional employers. This would also extend the period in which people are entitled to benefits by four months.

The Ministry of Finance can use $ 500 billion of credit, loan guarantees, and direct investment for businesses, including $ 25 billion for the aerospace industry. Democrats managed to closely monitor this pile of money, including the restrictions that it be used by companies controlled by Trump or other officials. Recipients should do their best to keep 90 percent of their workforce and face restrictions on dividend payments and share buybacks.

The deal also includes a $ 367 billion small business loan program that has access to up to $ 10 million in loans and can be used to pay workers who earn up to $ 100,000.

All in all, it is the largest single intervention ever carried out by Congress and the executive. And it adds to the Fed’s massive efforts that could actually overshadow the size of the bill.

The central bank cut interest rates to zero and then promised to buy unlimited amounts of government bonds and mortgage-backed securities. The Senate bill includes $ 454 billion to offset potential losses on Fed-lending facilities that the central bank could use in the form of $ 4 trillion in corporate loans. This has prompted some to label the bailout package as potentially $ 6 trillion, or nearly a third of the country’s gross domestic product.

This should give many individuals and companies that have stayed afloat more time to continue paying bills and meeting pay slips.

But even these large numbers may not be able to fight an ongoing recession, and annualized growth is likely to decrease from 10 to 50 percent in the second quarter.

And if forecasts prove to be true that the virus will not be checked for months, it may not be able to prevent double-digit unemployment. Some economists, such as the President of the St. Louis Federal Reserve, James Bullard, have suggested that unemployment could reach 30 percent. That would dwarf the record of 24.9 percent from 1933 during the Great Depression.

It will also take some time for many of the loan programs to go live, which means that more business failures will occur in the meantime.

“It is now a matter of course that the world plunges into a sharp global recession,” Barclays wrote in a research report. “Although the announcements regarding fiscal incentives have been impressive, it is operationally more difficult to support the small and medium-sized businesses that will bear most of the economic costs.”

The damage in the entire economy is already increasing beyond the number of unemployment claims. Car sales are expected to decrease by at least 15 percent this year, and America’s largest automakers have stopped all production. Restaurant, hotel and flight reservations have dropped to zero in many cases.

JPMorgan analysts this week expected growth to decrease 10 percent annually in the first quarter of this year and 25 percent in the second quarter, with unemployment at 10 percent. These types of numbers will likely require Congress to act again.

“If economic data is much worse than current forecasts in the coming weeks, this package may not be enough and Congress will be back in first place,” said James McCann, senior global economist at Aberdeen Standard Investments, in a note.

The third phase package could be largely inadequate because the US response to the virus was so slow that it increases the time it takes to slow down the rate of new cases and cause more mass layoffs. Congress responded to the bailout relatively quickly, but it still needs to vacate the house on Friday, and the money will only flow after a week, and in some cases, much longer.

“We wasted the lead we had and we need to maintain widespread testing capacity and mask use. In this way, we can save lives while ending the widespread quarantine, ”said economist Aaron Sojourner. “Only the federal government can take out loans that match the scale of the problem.”

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