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The government reaction to the presence of COVID19 has caused, the very strong US economy to slip into a very steep recession. Because of the stimulus provided by both Fiscal and Monetary Policy, the recovery will begin as soon as the economy is allowed to fully re-open. The question is, “What will the recovery look like?”
The shape depends upon the speed and length of the actual recovery phase as well as how quickly the economy moves past recovery and into expansion.
Economists explain how a recovery/expansion operates using different letters like V or U or L or W. Two of those choices are desirable while the other two represent recoveries that we would like to avoid. The Trump Administration says that the recovery will be a V shaped, which is the most desirable.
The V shape means that the economy declines, often times very sharply, but then hits bottom. Usually because of government policy, the economy rebounds very quickly and starts a short recovery followed by a lengthy high growth expansion. Because the recession was brought about by a government shut-down rather than by a weak economy, this is the shape that Trump’s economic advisors believe is the most likely.
Also somewhat desirable, is the U shape. That means the economy declines but that the recovery does not start immediately. The economy is stagnant for a few months, perhaps one full quarter of the year, before the actual recovery begins. Many economists believe that this is the most likely outcome. That’s because even when the economy re-opens, it will take time, perhaps a few months, to fully re-open.
In other words, even as the economy begins to re-open, businesses will observe social distancing so that many businesses may not operate at full capacity. Even if the economy is re-opening in early May, it will take until July or August to be fully operational. After that the quick recovery will begin.
What we want to avoid is the L shaped recovery. The L shaped means that after the steep decline, the recovery is very, very slow and never really moves to the expansion phase.
This is what we saw after the last recession in 2008/2009, even though the government implemented expansionary policy. On Fiscal Policy, a massive almost $800 billion stimulus package was passed. Because the package 1) targeted key socially responsible industries, 2) was intended to go to industries that said they had shovel-ready jobs that turned out to be not-so-shovel ready, and 3) had only a small tax cut, Fiscal Policy failed to stimulate economic growth.
Monetary Policy was also expansive as the Federal Reserve vastly increased the money supply through the phases of quantitative easing. They also dropped interest rates to near zero. Normally this would have led to a more rapid recovery.
However, in 2010, Congress passed the Dodd/Frank bill, which was designed to eliminate what was referred to as predatory lending. The problem was that the law severely limited all lending. Without banks’ lending money, expansive Monetary Policy will not stimulate growth.
The recovery began in 2009 and lasted until 2016 before an expansion started until 2017.
The fourth recovery type in the W shape. That means the economy declines, but the recovery starts immediately. The recovery is short-lived and the economy declines again, then recovers again. This scenario could be possible, if the COVID19 virus flares up again during the Flu season which begins in early fall.
Many economists believe this is a likely scenario, especially if therapeutics and vaccines are not found.
The Trump Administration believes the V shape is the most likely. They say that since the recession was not caused by economic factors, but rather by a government imposed shut-down, the recovery should be swift. Even with businesses being only partially opened, resourceful entrepreneurs will find ways to bring in customers. They also believe that by late summer, some therapeutics will be available to the market which will reduce the recovery time, if indeed the disease does flare up again.
The Trump Administration also believes that a vaccine will be found and fully approved by early next year, so that the chance of another pandemic is very low.
For the sake of the welfare of US citizens, lets hope we see a V shaped recovery and eventually a future economy that is even stronger than the economy of the three years prior to the COVID19 pandemic.
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