Re: Coronavirus Is a Reason to Worry About the Economy—the Stock Market Plunge Is Not (fwd )

[robert <http://dummy.us.eu.org/robert>]

Let's hope that the 500,000 people who will die will be blamed on Trump
and his administration.  Unfortunately, we may be stuck with a shitty
President Biden.

 > From: Noelle <noelle>
 > Date: Mon, 9 Mar 2020 14:28:25 -0700 (PDT)
 >
 >  > From: FAIR<http://www.fair.org/~fair>
 >  > Date: Mon,  9 Mar 2020 21:23:54 +0000
 >  > 
 >  > https://us20.campaign-archive.com/?e=6ed8ef48d7&u=e6457f9552de19bc603e65b9c&id=7ae8290249
 >  > 
 >  > FAIR
 >  >
 >  > Coronavirus Is a Reason to Worry About the Economy—the Stock Market Plunge Is Not
 >  > Dean Baker (
 >  > https://fair.org/home/coronavirus-is-a-reason-to-worry-about-the-economy-the-stock-market-plunge-is-not/)
 >  > 
 >  > NYT: Spiraling Virus Fears Are Causing Financial Carnage
 >  > 
 >  > New York Times (3/6/20 (
 >  > https://www.nytimes.com/2020/03/06/business/coronavirus-stock-market.html) )
 >  > 
 >  > Many people have become very concerned about the economy because
 >  > of the stock market’s plunge in the last two
 >  > weeks. While the spread of the coronavirus gives us very good
 >  > reason to worry about the state of the economy, the plunge in
 >  > the stock market does not. In fact, those folks who are very
 >  > concerned about wealth inequality can celebrate, because the
 >  > wealth of the top 1% has just dropped by around 10%, while the
 >  > wealth of the bottom 50% has barely been touched. (I tend to
 >  > focus on income inequality, in large part for this reason.)
 >  > 
 >  > Anyhow, the stock market does not generally provide us with very
 >  > good insight into the future of the economy, except when it
 >  > looks like more of the same. It’s sort of like
 >  > hearing the weather forecaster tell you it’s sunny as
 >  > you step outside into the sunlight. You didn’t really
 >  > need them for this purpose. When it comes to telling about the
 >  > storm just around the corner, the stock market is a much worse
 >  > predictor than weather forecasters.
 >  > 
 >  > We don’t have to look to ancient history to see this
 >  > point. In October 2007, the S&P 500 hit what was at the time a
 >  > record high. That was less than two months before the beginning
 >  > of the worst recession since the Great Depression. The stock
 >  > market did not give us much warning on that one.
 >  > 
 >  > As I noted (https://www.patreon.com/posts/34253130) recently,
 >  > the run-up in the stock market in the last few years had pushed
 >  > price-to-earnings ratios to unusually high levels. I did not
 >  > argue that this necessarily implied a market plunge, but I did
 >  > point out that as a matter of logic, high price-to-earnings
 >  > ratios virtually guarantee low returns in the future. For this
 >  > reason, a sharp market downturn should not be a surprise, even
 >  > if the specific cause is.
 >  > 
 >  > If the stock market is not a very good predictor of the
 >  > economy’s future, it is also not generally a causal
 >  > factor. There is a sort of fairy tale story that a high stock
 >  > market is good for the economy because it means that companies
 >  > can effectively borrow cheaply by issuing new shares. In this
 >  > fairy tale, that means that they can more easily raise money for
 >  > investment, which means more growth, and higher productivity and
 >  > wages.
 >  > 
 >  > The problem with this story is that companies rarely issue new
 >  > shares of stock to finance investment. Most often, large share
 >  > issues are done to allow early investors to cash out some of
 >  > their holdings. Companies will also issue shares to adjust their
 >  > debt position. For example, if they issued bonds that pay a high
 >  > interest rate, high share prices may give a company an
 >  > opportunity to issue shares and use the money to retire some of
 >  > its debt.  However, it is rare that a company issues shares to
 >  > directly finance investment.
 >  > 
 >  > The one major exception to this rule was during the stock bubble
 >  > of the late 1990s. In that bubble, new companies, many of which
 >  > did not even know how they could make a profit, were often able
 >  > to raise hundreds of millions, or even billions, on initial
 >  > public offerings. In that context, the plunge in the market from
 >  > 2000 to 2002 did lead to a sharp reduction in investment, as
 >  > this channel of financing largely disappeared. (The NASDAQ,
 >  > where most of these new companies were listed, lost more than
 >  > 80% of its value from peak to trough.)
 >  > 
 >  > The plunge in the market in 2000–02 also had a major
 >  > impact on consumption, as more than $10 trillion in stock wealth
 >  > (roughly $20 trillion relative to today’s economy)
 >  > was destroyed. Stock wealth was clearly driving consumption at
 >  > the end of the 1990s boom, as savings rates fell to what were
 >  > then record lows. (The housing bubble pushed the savings rate
 >  > even lower.)  It was not only the wealth itself that drove
 >  > consumption, but the expectations of future stock rises. It was
 >  > common at the time for otherwise sane people to expect that the
 >  > stock market would produce double-digit nominal returns for the
 >  > indefinite future.
 >  > 
 >  > Anyhow, this sort of causation from a stock plunge to a
 >  > recession is not plausible today. Investment is already weak and
 >  > clearly not being driven by the stock market. And savings rates
 >  > are considerably higher than they were in the years of either
 >  > the housing or the stock bubble. Losing 10% of the
 >  > market’s wealth will surely have some negative impact
 >  > on consumption, but almost certainly not enough to cause a
 >  > recession.
 >  > 
 >  > In short, those who don’t have a lot of money in the
 >  > stock market should view its ups and downs as you would any
 >  > other spectator sport. It doesn’t have a lot to do
 >  > with you. (Even those who do have lots of money in the market
 >  > can be consoled by the fact that lower prices today mean higher
 >  > future returns – not exactly a disaster story.)
 >  > 
 >  > ** The Coronavirus and the Economy
 >  > ------------------------------------------------------------
 >  > 
 >  > While the drop in the market by itself may not be bad news, the
 >  > prospect of the spread of the coronavirus certainly is. In
 >  > addition to the very serious health risk it poses to tens of
 >  > millions of potential victims, it also could have a very large
 >  > economic impact.
 >  > 
 >  > There already has been much written about how the efforts to
 >  > contain the disease in China have led to the shutdown of many
 >  > factories, leading to shortages of important production inputs
 >  > here. This can force factories to curtail production until
 >  > alternative sources of supply can be found, or Chinese suppliers
 >  > are back up and running. But this is just the beginning of the
 >  > sort of economic disruptions that we may see if the coronavirus
 >  > spreads quickly across the United States.  Huff Post: What Would
 >  > Happen If U.S. Schools Close Because Of Coronavirus?
 >  > 
 >  > Huff Post (2/27/20 (
 >  > https://www.huffpost.com/entry/coronavirus-school-closures_n_5e587016c5b6450a30bc4fe2) )
 >  > 
 >  > In a Huffington Post piece (2/27/20 (
 >  > https://www.huffpost.com/entry/coronavirus-school-closures_n_5e587016c5b6450a30bc4fe2)
 >  > ), Hayley Miller and Arthur Delaney examine the economic
 >  > consequences of the sort of school closures that we have seen in
 >  > Japan and elsewhere. A large percentage of the affected workers
 >  > will be forced to stay home, since they will be unable to make
 >  > alternative childcare arrangements.  This could mean millions of
 >  > workplaces are unable to maintain normal operations, since they
 >  > are understaffed. Look to longer wait times at everything from
 >  > restaurants and barbershops to doctors’ offices and
 >  > hospitals. The lines at the latter will also be affected by the
 >  > increased demand from people who either are infected with the
 >  > virus or are worried that they could be.
 >  > 
 >  > And many people who miss days of work will also be missing days
 >  > of pay, since they don’t have paid sick leave. That
 >  > will mean less demand in the economy, since these people will
 >  > have less money to spend. And, of course, another effect of the
 >  > lack of paid sick leave is that many people will go to work
 >  > sick, causing the virus to spread more widely.
 >  > 
 >  > If the coronavirus becomes very widespread, we could see
 >  > enormous economic impacts. If people become very worried that
 >  > they can catch the disease if they go out in public, this will
 >  > mean many fewer people will go to restaurants, sports events,
 >  > movie theaters and concerts, or anywhere else they are likely to
 >  > be in close proximity to large numbers of people. Many of these
 >  > businesses are likely to shut down, at least until the major
 >  > threat of the virus has passed.
 >  > 
 >  > Plane travel will also be drastically curtailed, as few people
 >  > will want to be on a crowded plane which could include several
 >  > people with the virus.  That will be a huge blow to the tourism
 >  > industry, as people put off vacations until the threat
 >  > lessons. There are few areas of the economy that would not be
 >  > affected if the virus becomes as widespread as was the case in
 >  > Wuhan, China, and possibly now in parts of Japan.
 >  > 
 >  > It would be good if the United States had an effective public
 >  > health team that could take the necessary steps to limit the
 >  > spread of the virus. The Center for Disease Control (CDC) does
 >  > have top-notch experts in this area.
 >  > 
 >  > However, it is not clear that they will be making the big
 >  > decisions. Trump has placed Vice-President Pence in charge of
 >  > the response to the epidemic.  Pence is a person who does not
 >  > believe in evolution or climate change. In other words, science
 >  > is not his strong suit.
 >  > 
 >  > Furthermore, it is clear that Trump and Pence are more worried
 >  > about the politics around coronavirus than effective steps to
 >  > stop its spread. They have demanded that all public statements
 >  > about the disease must first be cleared with Pence. They have
 >  > already acted to punish a whistleblower who called attention to
 >  > the fact that passengers exposed to the virus on a cruise ship
 >  > were greeted by people without protective gear and without
 >  > medical training.
 >  > 
 >  > We may still get lucky, and the spread of the virus may be
 >  > fairly limited in the United States.  But with the containment
 >  > effect being led by a bunch of vindictive clowns, people are
 >  > quite right to be worried about the public’s health
 >  > and prospects for the economy.
 >  > ------------------------------------------------------------
 >  > 
 >  > A version of this post originally appeared on CEPR’s
 >  > blog Beat the Press ( 3/5/20 (
 >  > http://cepr.net/blogs/beat-the-press/the-dangerously-irresponsible-arguments-of-the-responsible-budget-gang
 >  > ) ).