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Anatomy of a Meltdown VII – We Are Not All in This Together

Garrett Fisher
May 23, 2020

It is a common refrain to hear aphorisms of solidarity, that we are facing a common global enemy with COVID-19 and banding together to deal with it, despite class and national boundaries. While it is a stirring notion, the economic reality paints a different picture. Job losses, while staggering, are not universal but rather targeted and specific. Some companies are doing just fine, while others are dealing with the loss of a majority or all of their revenue, at the same time, side by side. To say that these binary experiences are somehow similar is fallacious.

One significant paradigm that nobody seems to be speaking of is the nature of the jobs lost. Much of the service, travel, entertainment, and hospitality industries have been gutted by shock job elimination, yet the world seems to continue to hum along, as though the worst is behind us, despite the fact that the jobs have not returned. What if the economy does not need these jobs?

Before I come off like some pontificating asshole, I am attempting to call things by their right names and identify an economic seismic shift that could be taking place before our very eyes. As it was, automation had been chipping progressively away at jobs and, while we experienced continued job creation for a decade, wage growth, workers’ rights, and quality of these jobs was not necessarily on the upswing. It was a fact that was discussed before the pandemic struck, and now we face significant unemployment alongside an otherwise functioning economy.

That beckons a question: with increases in automation, the ability to work remote like never before, corporations forced to adopt such remote work in practice, and rapid cultural shifts when it comes to socializing and entertainment, how many of these jobs will come back? Secondly, if they do not, what will happen?

A common social and political refrain is to point to the collective damage of poor policy or untended problems. The idea is this: if we as a society do not find a way to re-employ those who are displaced by such changes, our society could face consequences that would affect us all. The concept is that a problem affecting one group would drag the rest down, so we should act, out of principle of inclusion.

I am asking if that statement is economically true. As we are seeing, dominoes are so far not knocking over in rapid fashion as one might expect. Parts of the global economy hum along, and parts are facing certain insolvency and near permanent reduction. What is most telling is that we seem to accept it as a society, as opposed to fighting as hard as we can to restore things the way that they were. It is a given fact that we will dine out less, travel on airplanes less, work more from home, engage in less retail browsing, and may witness the end of American malls. Nobody seems too wound up about these realities; instead, the zeitgeist is that we’ll adjust and do something else.

That would leave a rather large crowd of formerly employed people holding the bag. Would their ensuing economic miseries drag the rest of us down? I think the evidence so far points to the contrary. It appears that the world is content to continue performing economically to the extent it can, although there would be a dent of purchasing power parity when a large chunk of the economy is no longer employed. However, social and political perceptions that consequences for society would be atrocious are just that: social and political perceptions and not economic ones. All one has to do is look at places like Latin America or, for that matter, extant American inequalities to note that society is capable of performing while sustaining surprising levels of economic class disparity. A skyscraper with investment bankers can exist a block away from a homeless camp, with the only cost being increased security services.

It is obvious that a more inclusive, less economically polarized society is a better one, by many measures. In the strictest sense of economic fundamentals, I do not see a self-correcting mechanism whereby economic forces would significantly address such inequality, for the sake of its social strains. Where there are economic opportunities and advancements possible, then certain adjustments would be factored by the market, and that is it. If we would like to address such rapid industry shifts and the people it leaves behind, then it will have to be done through policy measures.

One might ask why the recession of 2008 seemed to bring everyone down, whereas the current recession, albeit far worse in employment numbers, is selective. It is my view that it has to do with the idea that the “domino effect” might be an inappropriate metaphor for economics. Dominoes imply that knocking any one over knocks the rest down, an unspoken interconnectedness of all parties involved. I think dominoes in the economy only fall in one direction: top down, and not bottom up.

2008 featured a rotting and imploding of financial systems. Banks, mortgages, home values, investment banks, insurance conglomerates…. they were all failing. Industry was next, along with broader demand and therefore employment. Asset prices fall, defaults rise, and the system piles upon itself. The reality is, it started at the top (or the core) of our financial system and ended at the average worker. This current crisis, while it featured an initial panic and financial meltdown, was not triggered by it. Central banks pointed the firehose at the panic, and the pandemic worked its effects, directly hitting the employed first. In effect, the first dominoes to fall were the ones that are usually the last, or rather at the bottom: the average worker.

It is a reality that, if enough people are unemployed, one can wonder who will have money to spend that would feed the rest of the system. While that is true, it also takes some time to work through the system, whereas solvency crises tend to be destructive and contagious. That leads to a separate question: are we out of the woods yet?

The feeling on the street, if one is not personally unemployed, is that things will soon be improving and we’ll be off to the races. I almost wonder if many think that the problem will just go away, despite many unanswered questions about second waves, vaccines, treatments, and the like. Does the virus mimic the Spanish Influenza, striking in three waves, where the second dwarfed the first? It seems that nobody knows….and nobody cares. Fear is not at present as pervasive as it was during the initial panic.

Is this in line with economic reality? I have been reluctant to believe that there will not be a toxic hangover down the line from the problems that are happening now. Recall that the first hiccups in the mortgage market materialized in August 2007. The economy officially entered recession in December 2007. Bear Stearns failed in March of 2008, yet the view at the time was that things would work themselves out. By September 2008, with the failure of Lehman Brothers and banks beginning to fail, it wasn’t something to be overlooked. The economy began recovering in early 2009, though the bottom of the real estate market and end of general feeling of doom took a few years. Could it be that we are in the incipient stage of something much worse, telling ourselves it will all be alright? Is it early 2008 for us now?

It sounds a bit like fearmongering, which I prefer not to do, so I will rephrase my argument. Airlines, cruise lines, hotels, theaters, and restaurants…many of them are trying to survive by taking on incredible amounts of debt. They all have a cash burn rate and a period where that comes to an end. If revenues do not increase adequately by that point, then bankruptcy reorganization or outright closure is the only option. While that is logical, the problem doesn’t end there. Who is holding the debt and equity for these companies? What happens to those firms and individuals when those investments are written down or written off entirely? Much like 2008, solvency crises weigh down the entire system; there is no way around that reality in conventional economic terms. I am relatively certain we will face some kind of very specific toxic hangover in the private sector; the questions are when, how severe, and how pervasive?

The wildcard is central bank lending. It appears that the Federal Reserve is willing to engage in emergency liquidity operations, lending to companies that one wonders if these companies should be lent to. The options are to let them fail now, lend to them and let them fail or linger later, or, if the idea achieves a pinnacle of ideological optimism, allow an otherwise solvent company to survive, recover, and thrive in better times. In any case, these new rescue operations throw a very large wildcard into toxicity presumptions, especially if the Fed is the one holding the bag when eventual solvency issues materialize. In that case, the system would not collapse, though there would be a many a raised eyebrow and how we as a society choose to spend our resources.

I recall interviewing for a job in early October 2008, which was an odd time as I was in the second largest banking city in the United States as banks there were literally failing. The person I interviewed with, a regional investment banker, was almost excited, telling me that “we’re witnessing history right now. What is happening will be studied for years.” He was correct, as it’s hard not to bring up “the economy” without saying “2008.” I contend that we are witnessing history now, and the ripple effect from changes in our economy, good, bad, and otherwise, will be studied for a long time. This is by no means over.