An Economy At Rest, Stays At Rest

Closing the economy for 3 months will remove momentum that may take a decade to recover.

Rough model from the few States reporting some daily unemployment filings

A couple of weeks ago a half the population became unemployed with pay. Since then, the ratio of those with no pay is increasing and will continue to increase for the foreseeable future. The number of loans going into default is also increasing, which is to be expected.

Most Wall Street economic models extrapolate from smooth changes in activity. Though we remember 2008 as a time of massive foreclosures and Lehman employees clutching their belongings, the data shows it was a gradual process.

Credit card pain grew slowly over 2 years and declined slowly over 2 years

If the following chart was generated by a piece of equipment in a factory the conclusion would be quick and definite — the machine (economy) has stopped running.

The facts are simple. In modern history, every economic change in direction has been gradual. The last known abrupt economic dislocation — don’t laugh — happened thousands of years ago. Until recently, any economist who modeled a sudden and complete global economic shutdown would have been relegated to crankery.

How does one adjust from a life-time of experience in gradual economics to abrupt (at rest) economic modeling? That too, will take months to develop. Financial tools also take time to theorize, test and accept.

When I read anything these days I put it to the test. If it is at rest, why won’t it stay at rest? Even if the government told everyone to get back to their normal lives, would they? Could they?

Why won’t debt with momentum to default not default? The CARES bill may flatten the default curve. But won’t the number of bankruptcies end up the same?

The pandemic won’t end on a Tuesday in July. It will end slowly. Some people will go back to their original routines, or try to. An interesting aspect of any habit is that it’s difficult to break, even if you want to. Whatever diet one goes on, if they make it a month, they end up eating less in the months after. The same will happen after isolation is officially lifted. It will take time for people to get back to their old habits.

Restaurants, air travel, concerts, conferences, etc. No matter how hard people try to get back to that lifestyle they’ll have to overcome their new inertia to stay home.

As much of this is borne out, remember, Newton’s Law first law of inertia explains why growth economies can expand for so long. It also explains what happens when momentum stops.