Accountability for the Unanticipated Lockdown

“I don’t take responsibility at all.”

by  Agent d’Amore

The governors of many states who had the authority to order lockdowns to address the spread of Coronavirus did not anticipate what would happen if they made people stay home or “shelter in place” for an extended period of time.   And they tried to come up with ad hoc responses, such as no evictions or a moratorium on mortgage payments.

They didn’t have the money to fund the impact of what they were declaring.   So they basically made promises they couldn’t keep.   Even with things like eviction moratorium, what’s going to happen after it ends?   Apparently nobody has thought about that, or at least they have not publicized a consistent plan.   They’re still trying to deal with the impacts of their decisions: how we are going to keep this pandemic from overwhelming all of our health care facilities, how we are going to keep our people healthy.

So we’ve had two months locked down, and many places are opening up.   Based on a two-month lock-down, we have over 40 million newly unemployed people, countless firms going out of business, countless people not paying their rent, and many other negative downstream impacts.   ( The Year the Earth Stood Still: Shutting Down a Global Economy )   Not only are people not paying their rent, but large corporations are not paying their rent.   Everyone is minimizing spending and hoarding their cash.

This was above and beyond what anybody could anticipate.   Nobody had ever done this before.   By shutting off the flow of transactions—for employees not receiving income, landlords not receiving rent payments, mortgage holders not receiving payments—the economy “OFF” switch was pushed and pushed hard.   Did anyone even know there was an “OFF” switch, or what it would do?   The impact is well beyond what anybody anticipated.   Now that the “OFF” switch has been flipped, everyone seems to assume there is an equivalent “ON” switch that just needs to be hit to make everything go back to the way it was.   Think again!

And there’s no idea how anybody’s gonna pay for it.   The federal government came up with three and a half to four trillion dollars of spending that went basically to the largest corporations.   Maybe there’s some money out there for states, but only around three or four hundred billion dollars.   There’s some money for individuals, but what we look at in aggregate is: the amount of money destroyed by stopping the flow of money through the economy, of employees not getting paid, of employees not buying things, of businesses not buying things, of no corporate payments on rent.

The fact that we’ve stopped all this economic activity is destroying money.   “Destroying money” is the definition of deflation—the same amount of goods and services, but less money chasing those things.   And money will continue to be destroyed for some time as people remain unemployed, as rents don’t get paid, and as debts get written off as uncollectible.

The problem is: nobody knows how much money is being destroyed—so no idea of how much money needs to be replaced.   And people who are living in apartments that they can’t pay the rent on: they can’t be evicted until the end of this month.   But then you’re going to have all that many more homeless people.   What’s that going to cost?

And they’re not likely to get their jobs back, because small businesses will fail.   Even though “things are open”, who’s gonna go out and spend “money they don’t have” at bars, restaurants, and other kinds of mom-and-pop shops?   So then what we’re going to have is a wave of small business bankruptcies.

So we have all these problems by forcing people out of society and into their homes.   Somebody blew the whistle and stopped the economy.   Nobody’s ever done that before.   They did it very, very quickly.   And nobody knows what the impact is, because we don’t have statistics on this.

I don’t think anybody has ever modeled what would happen to an economy if you just stopped it.

And some people say, oh, the economy was going great, we had low unemployment, the stock market was booming.

Despite the fact that the federal government has “borrowed or created” 3 trillion dollars and the Fed is gonna get that out to people (actually out to corporations mostly), if 10 or 20 trillion dollars has been destroyed, 3 trillion dollars put back into the economy is not going to be sufficient to make up for that!

Plus, the fact that the Fed cannot direct money to where it needs to be doesn’t help either.   We all need individual consumers (those 40 million newly unemployed) spending money the way they were.   Maybe we need more spending to get things restarted.

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We end up with a deflationary environment whereby the prices of things are going to go down.   As an example, Hertz car rental agency declared bankruptcy.   They have half a million cars that they were financing.   One of their plans is to sell some of these cars on the used car market.   Well, many of those cars are not going to sell for enough to cover the cost to Hertz.   So even though they may sell 20,000 cars, they’re going to be receiving less money than the market said they were worth two months ago.   And they have half a million of them.   So the used car market is being severely depressed, i.e., prices are going down.

So a car owner gets a note today saying their 10-year old vehicle is now worth 15% to 20% less than it was a month ago.   And that’s just companies saying, hey, the value of your car went down.   It’s not necessarily fewer buyers (but with over 40 million unemployed we can assume that too).   It’s both the supply and the demand; there are shocks on both sides.   So even if demand were to stay the same, there are so many cars for sale that the price of used cars is going down, because the supply of used cars has gone up tremendously.

And demand has also gone down.   But if you’re somebody who has an old car, and you need a new one in order to get to work, maybe you’ll go buy one.   But you’re going to get a good deal, because you’re one of the few buyers.

And again, that’s deflationary!   The prices of things that you can sell have gone down.   Which means you have to sell more of them to get the same amount of money.

It’s the same thing with labor.   If we’ve got 40 million more unemployed people, when it comes time to go look for a job in a restaurant, a bar, a small business, you’re going to end up getting paid less, because, well, you want the job, but there are 50 other people who are just as qualified and just as willing to work, and so whoever bids the lowest wins.   New jobs for all the unemployed will likely be at or near minimum wage in a lot of industries.

We find ourselves going into Great Depression II—a created depression.

The people who created the problem—who declared the lockdown (in the US at least)—were the governors, independent of the federal government that was doing nothing.

So it was either I, as the governor of this state, declare a lockdown and try to save our people, or we wait for the US president—who’s dithering and just doesn’t want to do anything for fear of it looking bad for him—to act.   So the governors did what needed to be done for the public health.

However, the governors, who created the depression out of necessity for the health and safety of the populace, can’t fix it.   And the people who can fix it said, we didn’t cause it.

“I don’t take responsibility at all.”   That was the declaration of the president of the United States.   So the head of the executive branch of the US government—the leader of the Republican Party—takes no responsibility for bringing the largest economy in the world out of the Second Great Depression: a very different response from that of the US president during the First Great Depression ( He Dealt with Crisis—Whither the Trajectory He Left Us on: a diamond jubilee remembrance of FDR’s passing ).   So we may ask whether he and the Republicans in Congress (in particular, in the Senate, which they have majority control of) even care.

And the Democrats (in particular, in the House of Representatives, which they have majority control of) appear to have been unable to secure money for the people when they had the chance.   They seem either to have been unable to or chose not to—thinking, oh, we’ll come back later for that.   But first and foremost, they were going to get bailouts for corporations.   Because apparently they’re corporatists more than anything else.   So not only did they not get money for individual citizens, but they did not get money for state governments; they weren’t going to help the states—even knowing that, yes, the state governments made the right decision.   So we may also ask to what extent the Democrats in Congress care about the health and functioning and survival of the state governments, of the local governments, and of the American people.

For the most part, except for those people who worked in advanced technology environments—people who could work from home (such as by computer)—the lockdown made it so that people could not work.   And those positions where people could continue to work “from home” are mostly white collar jobs.

There’s a whole class of professionals that are not impacted.   And I think most of the people who are staffers or who work in Washington, or whom the Washington people come in contact with, are also in the professional classes.

They’re not working people, and they deem working people—especially service people, such as food delivery people, nurses, anybody who might actually have to go somewhere to do the work that they do—to be menials: doing only menial work.   So, given that these working people are menials, these people are not relevant to their group.   These menials are not truly part of their constituency, because menials are not relevant to our economy, because menials just don’t make enough money and are not part of the right people.

What we’ve seen is a radical acceleration of any potentially virtual job into an actually virtual job.   So if you have a virtual job, it’s probable that’s the only way you’re going to do it from now on.

Which again, as noted before, impacts commercial real estate.   And this change to virtual work could impact more than commercial real estate; it can impact local property and other tax structures.   There are a lot of things that will be impacted.   For instance, part of the time when I lived in New York, I traveled to New Jersey to work.   If I become a virtual worker in New Jersey but am actually doing the work from home in New York, should I be paying taxes in New Jersey anymore?   Would New Jersey now lose income tax payments from me?

The answers to those questions are not apparent, because these massive shifts might just be starting to take place.

The Federal Reserve Banks are limited by law as to what kinds of securities they can buy.   Basically they are allowed to buy the securities of the federal government (Treasury securities, government-sponsored agency securities, etc.).   The 2008 crisis allowed the Fed to buy mortgage-backed securities from banks or others. [*]

The CARES Act recently passed by Congress allows the Fed to buy additional types of securities.   This allows injection of money into various parts of the economy.   In fact, corporate bonds can now also be purchased by the Fed.   The mechanism is a bit unorthodox, as it is done through ETF (exchange-traded funds, which are bought and sold like stocks) bond funds, which the Fed has only authorized Blackrock, the largest hedge fund, to market.

The Fed could inject money into cities and states if the law were widened to allow it to buy municipal bonds or state bonds.   This would allow these governmental entities to raise money to deal with COVID-related expenses.   The Fed chairman, Jerome Powell, has suggested that he could buy those securities just as easily as others and has encouraged Congress to think about the possibilities in this area.   Again, the federal government is the one who controls the creation of money ( Into the Heart of Darkness—of Money: Upstream to Its Source ) and who could change the rules and use banking powers to create money for things that are urgently needed.   Will this happen?

The answers to questions like this, which have been brought on by the onset of Great Depression II, depend on Congress and the president and how much they want to help the states and the American people.   ( More to come on this. )

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