A Sobering Thought About What's To Come
I got on the email list for the Johns Hopkins Center for Health Security. One of last week's updates contained this sobering message:
"Without a vaccine, it is likely that any effective effort to relax social distancing will be a prolonged and incremental process, paired with enhanced surveillance and testing mechanisms."
In addition, I also read a sobering reflection on our current C-virus World, as I've taken to calling it. Things may turn out to be a bit worse than most of us might be expecting. This assessment is based on the enormous new claims for unemployment - numbers that have far exceeded expectations. But it also noted the decline in what's known as "velocity of money." It's approaching levels last seen in the Great Depression.
Most of us get the seriousness of the unemployment numbers. At this rate, we may see unemployment exceed levels of the Great Depression. This is especially daunting when you combine this with the fact that so many of us live paycheck to paycheck. The very concept of saving has fallen into virtual disrepute for many.
Yeah, I know what some may be thinking: Who can save when so many jobs pay so little these days? Maybe there's something to this. But, based on personal observation, as well as what I've dealt with in the financial planning side of our business, it does seem that a growing number of people have simply lost the desire to save. A "consumer" mentality has inculcated a sometimes uncontrolled obsession with buying anything and everything that strikes our fancy. Those whose brains have been taken over by this way of thinking are hitting a wall. With no money coming in, it would seem a switch from "consumer" to "survivor" is in order. For some this may be traumatic. If so, just recall that, in the past, people simply "tightened their belts" to not only meet their obligations, but did so in order that they might continue to save even during hard times. It wasn't pleasant. Sometimes you didn't get to eat steak or sushi when the it suited your fancy.
Here's a simple example of how many of us have morphed into consumers over the last few decades:
In certain working-class and middle-class neighborhoods in New York City, you once could find a parking place anywhere at anytime. If someone stopped by for a visit, they could easily park within half a block of your front door. The cars people owned were, for the most part, mostly modest sorts of vehicles. If you saw a BMW or Benz, heads would turn. And you'd wonder who in their right mind would park one of these on the street. Many people fixed their own cars, and most cars were well-worn. New cars were few and far between.
Not only that, but many if not most people bought their cars, rather than leased them. In fact, leases were unknown. If you couldn't afford to pay cash you took out a loan - the shorter the term, the better. Today's 6 and 7 year car loans were unheard of.
Now it seems everyone has a car no more than 3-4 years old - most of which are leased vehicles. What are categorized as luxury cars are not uncommon. As for parking, well, it's still available - sometimes. At other times we're all parked up. The "family car" has blossomed to a car for everyone in the family.
And that's just one example. How about shoes? Owning lots of shoes used to be female thing. Now I now guys who have a dozen or more. (Where do they keep them all?)
Or clothes: They've gotten a lot cheaper since China started making stuff. The idea was that cheaper stuff would make it easier for more people to afford certain items. But instead of taking the savings from cheaper stuff and socking away a few bucks for a rainy day, folks starting buying 3 or 4 where you once would buy 1. That, of course, negated that benefit.
The fact is too many people buy up to the limit of their income and then some. Hence the ridiculous balances so many of us carry on our credit cards - paying 20%+ on the unpaid balances to boot!
Then there are all those restaurants and fast food joints? They've exploded as people spend as much on eating out and taking out as they do on buying groceries - something that never happened in the past. We once considered "eating out" a treat. Take out too. (I still do.) Now it's just an everyday thing. What will happen to that whole industry - and it's a big one - now?
While some of this "evidence" is anecdotal, I don't think it's far from the truth. People have no savings. What will people do now that they've lost their jobs? Will unemployment be enough to pay the mortgage or the rent?
All of that addresses the developing unemployment problem. What about the continuing "velocity of money" problem?
I say "continuing" because the drop in velocity of money has been steadily developing since around the year 2000. There are many theories about why this has occurred. For now, though, just look at this graph from the St. Louis Fed website. It shows the velocity of M2. (M2 is one of the ways the Fed measures money supply.)
Here's how the Fed describes "velocity of money":
The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.
The frequency of currency exchange can be used to determine the velocity of a given component of the money supply, providing some insight into whether consumers and businesses are saving or spending their money.
If the current direction of this trend, it will equal levels not seen since the Great Depression.
Obviously this trend began far in advance of our current mess. If the Fed's definition is accurate, it would seem that consumers and businesses haven't been spending at levels they once did. Does this contradict our comment that people spend all they have, with nothing left for savings? Not really. It could be that people simply have less "excess" spending money than they once did - perhaps because they make less than they once did. Indeed, the average middle-class person/family has not seen any increase in wages.
That fact would certainly go a long way in explaining the current phenomenon of many Americans living "paycheck to paycheck." Combine the lack of wage growth with an increase in discretionary spending that a couple of generations ago would have characterized on those considered spendthrifts, you get a lot of people one paycheck from financial Armageddon. What will these folks do when the government's enhanced unemployment insurance benefit ends in a few months?
As for businesses, we already know that many public corporations have curtailed spending for traditional business purposes and directed their money to buying back their shares - for some in massive amounts. This had did wonders for stock market prices (until recently, that is), but not much for expanding the economy.
So it seems we've gotten to the point where: 1) Individuals spend till there's nothing left to spend; 2) Businesses spend, but much of it goes towards buying their own shares rather than growing the business. The result: Spending isn't generating as much buying of goods and services per unit of time as it once did.
One important group we didn't cover here: non-public companies. But even if they have been spending more on business growth, if the Fed's numbers are to be believed, it's not enough to up the velocity of money. And, to use the Fed's own language, if the velocity of money continues to decrease at the current rate, then transactions are occurring between individuals in an economy.
Combine fewer transactions with dramatically higher unemployment and the end product isn't very promising.
Of course, some have speculated that once we all exit our self-imposed isolation the economy will come roaring back. But that's simply speculation. And when reasons are offered, they're usually along the lines of: The economy was strong before the virus hit. When everyone's back at work, there's no reason to think it won't be strong again.
The above assumes the economy was indeed "strong" pre-virus. But even if that was the case, what would cause us to think that a) "everyone" is going to go back to work/be re-hired right away; b) businesses that curtailed or shut down operations will be able to simply flip a switch and resume "business as usual" in some relatively short period; c) that factors that had already led us to anticipate an oncoming recession have simply, miraculously disappeared.
With all that in mind, and without sounding too loud an alarm, it might be a good idea to prepare for what could be a rather deep recession if not a depression. And it might also be a good idea to brace ourselves for one or the other lasting more than a few months.
I'll leave it at that. I simply have not firm evidence to think things will be horrendous. But I've also seen no evidence that the economy will pop up hot out of the toaster.
"Without a vaccine, it is likely that any effective effort to relax social distancing will be a prolonged and incremental process, paired with enhanced surveillance and testing mechanisms."
In addition, I also read a sobering reflection on our current C-virus World, as I've taken to calling it. Things may turn out to be a bit worse than most of us might be expecting. This assessment is based on the enormous new claims for unemployment - numbers that have far exceeded expectations. But it also noted the decline in what's known as "velocity of money." It's approaching levels last seen in the Great Depression.
Most of us get the seriousness of the unemployment numbers. At this rate, we may see unemployment exceed levels of the Great Depression. This is especially daunting when you combine this with the fact that so many of us live paycheck to paycheck. The very concept of saving has fallen into virtual disrepute for many.
Yeah, I know what some may be thinking: Who can save when so many jobs pay so little these days? Maybe there's something to this. But, based on personal observation, as well as what I've dealt with in the financial planning side of our business, it does seem that a growing number of people have simply lost the desire to save. A "consumer" mentality has inculcated a sometimes uncontrolled obsession with buying anything and everything that strikes our fancy. Those whose brains have been taken over by this way of thinking are hitting a wall. With no money coming in, it would seem a switch from "consumer" to "survivor" is in order. For some this may be traumatic. If so, just recall that, in the past, people simply "tightened their belts" to not only meet their obligations, but did so in order that they might continue to save even during hard times. It wasn't pleasant. Sometimes you didn't get to eat steak or sushi when the it suited your fancy.
Here's a simple example of how many of us have morphed into consumers over the last few decades:
In certain working-class and middle-class neighborhoods in New York City, you once could find a parking place anywhere at anytime. If someone stopped by for a visit, they could easily park within half a block of your front door. The cars people owned were, for the most part, mostly modest sorts of vehicles. If you saw a BMW or Benz, heads would turn. And you'd wonder who in their right mind would park one of these on the street. Many people fixed their own cars, and most cars were well-worn. New cars were few and far between.
Not only that, but many if not most people bought their cars, rather than leased them. In fact, leases were unknown. If you couldn't afford to pay cash you took out a loan - the shorter the term, the better. Today's 6 and 7 year car loans were unheard of.
Now it seems everyone has a car no more than 3-4 years old - most of which are leased vehicles. What are categorized as luxury cars are not uncommon. As for parking, well, it's still available - sometimes. At other times we're all parked up. The "family car" has blossomed to a car for everyone in the family.
And that's just one example. How about shoes? Owning lots of shoes used to be female thing. Now I now guys who have a dozen or more. (Where do they keep them all?)
Or clothes: They've gotten a lot cheaper since China started making stuff. The idea was that cheaper stuff would make it easier for more people to afford certain items. But instead of taking the savings from cheaper stuff and socking away a few bucks for a rainy day, folks starting buying 3 or 4 where you once would buy 1. That, of course, negated that benefit.
The fact is too many people buy up to the limit of their income and then some. Hence the ridiculous balances so many of us carry on our credit cards - paying 20%+ on the unpaid balances to boot!
Then there are all those restaurants and fast food joints? They've exploded as people spend as much on eating out and taking out as they do on buying groceries - something that never happened in the past. We once considered "eating out" a treat. Take out too. (I still do.) Now it's just an everyday thing. What will happen to that whole industry - and it's a big one - now?
While some of this "evidence" is anecdotal, I don't think it's far from the truth. People have no savings. What will people do now that they've lost their jobs? Will unemployment be enough to pay the mortgage or the rent?
All of that addresses the developing unemployment problem. What about the continuing "velocity of money" problem?
I say "continuing" because the drop in velocity of money has been steadily developing since around the year 2000. There are many theories about why this has occurred. For now, though, just look at this graph from the St. Louis Fed website. It shows the velocity of M2. (M2 is one of the ways the Fed measures money supply.)
Here's how the Fed describes "velocity of money":
The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.
The frequency of currency exchange can be used to determine the velocity of a given component of the money supply, providing some insight into whether consumers and businesses are saving or spending their money.
If the current direction of this trend, it will equal levels not seen since the Great Depression.
Obviously this trend began far in advance of our current mess. If the Fed's definition is accurate, it would seem that consumers and businesses haven't been spending at levels they once did. Does this contradict our comment that people spend all they have, with nothing left for savings? Not really. It could be that people simply have less "excess" spending money than they once did - perhaps because they make less than they once did. Indeed, the average middle-class person/family has not seen any increase in wages.
That fact would certainly go a long way in explaining the current phenomenon of many Americans living "paycheck to paycheck." Combine the lack of wage growth with an increase in discretionary spending that a couple of generations ago would have characterized on those considered spendthrifts, you get a lot of people one paycheck from financial Armageddon. What will these folks do when the government's enhanced unemployment insurance benefit ends in a few months?
As for businesses, we already know that many public corporations have curtailed spending for traditional business purposes and directed their money to buying back their shares - for some in massive amounts. This had did wonders for stock market prices (until recently, that is), but not much for expanding the economy.
So it seems we've gotten to the point where: 1) Individuals spend till there's nothing left to spend; 2) Businesses spend, but much of it goes towards buying their own shares rather than growing the business. The result: Spending isn't generating as much buying of goods and services per unit of time as it once did.
One important group we didn't cover here: non-public companies. But even if they have been spending more on business growth, if the Fed's numbers are to be believed, it's not enough to up the velocity of money. And, to use the Fed's own language, if the velocity of money continues to decrease at the current rate, then transactions are occurring between individuals in an economy.
Combine fewer transactions with dramatically higher unemployment and the end product isn't very promising.
Of course, some have speculated that once we all exit our self-imposed isolation the economy will come roaring back. But that's simply speculation. And when reasons are offered, they're usually along the lines of: The economy was strong before the virus hit. When everyone's back at work, there's no reason to think it won't be strong again.
The above assumes the economy was indeed "strong" pre-virus. But even if that was the case, what would cause us to think that a) "everyone" is going to go back to work/be re-hired right away; b) businesses that curtailed or shut down operations will be able to simply flip a switch and resume "business as usual" in some relatively short period; c) that factors that had already led us to anticipate an oncoming recession have simply, miraculously disappeared.
With all that in mind, and without sounding too loud an alarm, it might be a good idea to prepare for what could be a rather deep recession if not a depression. And it might also be a good idea to brace ourselves for one or the other lasting more than a few months.
I'll leave it at that. I simply have not firm evidence to think things will be horrendous. But I've also seen no evidence that the economy will pop up hot out of the toaster.
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