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Big Banks boosting reserves for anticipated failures to collect on loans, mortgages: expecting prolonged recession (==depression). The election will cause disruption.

2020-07-14

credit squeeze– photo by steve buissinne courtesy of pixabay.com

The Washington Post has an article on July 14 reporting that big banks have seen significant drops in their profits and are increasing their credit reserves in anticipation of multiple defaults on their loans.  They apparently expect a prolonged recession as a result of the pandemic.  Prolonged recession will turn into a depression.

The pandemic prompted people to stop going to public events and going out to eat or for entertainment.  State governments ordered shutdowns for restaurants, bars, concerts, movie theaters, barber shops, hair stylists, tattoo parlors, bookstores, and many other establishments– anything nonessential.  Only supermarkets, pharmacies, gas stations, and other “essential” businesses (like gun stores) were allowed to remain open.

Economic activity dropped dramatically in March.  Advertising revenue for newspapers plummeted as businesses stopped placing ads for public events.  Millions of people were laid off.  In the United States, Statista showed a drop in employment from 128 million in March to 114 million in April.  So many people tried to file for unemployment that state agencies charged with registering them were unable to keep up.  As a result of the backlog, millions of people were unable to file.  According to Statista, “As of June 2020, there were 120.17 million full-time employees in the United States. This is a significant decrease from June 2019, when there were 131.54 million…”

These numbers (a drop of more than 10 million employees) are almost certainly an underestimate.  Unemployed people were unable to pay their rent or keep up the payments on their cars or credit cards.  As a result, the banks are experiencing a sudden loss of revenue from people defaulting on their loans.  Now the banks are anticipating that this drop will continue to affect their revenues for some time to come.

A sudden, severe recession, with people unable to feed themselves or pay rent, is going on right now.  A slight improvement in employment for June will soon be followed by further job losses and a prolonged recession.  Starvation and homelessness are on the rise.  Congress responded to this crisis with legislation in March and April but nothing since then.  Another Congressional stimulus is expected towards the end of July, but it will not be enough to relieve the suffering of millions in this country.

Here is a comment to the Washington Post article:

Finally getting through to business executives and Fed officials that no matter how high the stock market gets boosted by liquidity among the wealthy, people who are afraid they will die if they leave their home will not be spending much money even if they kept their jobs.   And millions of unemployed will be spending MUCH less once the extra $600 / week federal unemployment top-up stops in a couple of weeks.  So 70% of the economy is going down the toilet.  Yet the stock market is flying high.  Don’t you love trickle up economics!

This comment points out that the stock market, after dropping almost a third at the start of the crisis, has recovered most of its value despite the worsening infection numbers and death count.  Even people who still have their jobs are afraid to go out.  They are not spending online either because they are afraid that their jobs are at risk even though they are still employed.  Lower consumer spending will perpetuate the recession and the job losses.

The stock market represents the fortunes of the upper half of society, which will do well despite the pandemic and will become increasingly divorced from the fortunes of the lower half, which will sink into depression.

This pandemic is even worse than the one a hundred years ago.  During the 1918-1920 influenza pandemic, 675,000 Americans were killed and an estimated 50 million people worldwide died (cdc historical page.)  We hope that not that many people will die this time, but it is still early.  What makes this pandemic worse than that one already is the severe economic impact.  Back then, the economy was mostly made up of manufacturing enterprises; now, the economy is mostly consumer-oriented.  Manufacturing continued then, but now, consumer spending has cratered.

What makes things worse this time is that concerted action by the federal government could prevent the spread of the virus.  If the feds organized testing, contact tracing, and isolation, there would not be so much confusion, shortages, and political infighting.  Instead, the federal government’s executive branch leadership has consistently denied or downplayed the virus’ impact and refused to get behind public health measures.  Lower level attempts by the CDC and others to offer guidelines and provide information has been undermined by ignorant behavior at the highest levels.

Nothing has been done at the federal level to organize supplies needed for testing or personal protective equipment.  Shortages of everything are as bad as they were at the beginning.  The leadership has denied that these shortages even exist.

On top of the pandemic, police brutality and murder has been captured on cell phone videos starting on May 25, stimulating an outraged response by minority people, their representatives, and the persuadable public at large.  Police brutality (especially towards minorities) has existed since time immemorial, but it has never been seen so widely as now.  Public protests about police brutality have been met with more brutality instead of understanding.  The problem has reached a tipping point.  Broad social change is resulting.  Again, the federal government executive branch leadership has not responded in a constructive fashion.

The result of the presidential failure to respond to the pandemic and public realization that police brutality is ongoing is extreme social polarization.  A majority of the public is aware that the pandemic is spreading out of control and that the police are as brutal as ever, but a large minority is in denial and is violently resisting calls for change.  Society has long been deeply polarized, but matters are worse now than they have ever been.

The nation will soon come forth to vote in presidential elections which will probably see the present administration fall.  That will not be the end of the battle.  Just as before the Civil War of 1861, the election will result in crystallizing society into two opposing groups.  Violent conflict will follow.

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