We Are Just Beginning to Understand the Full Cost of the Lockdowns

Dec 6, 2022 | Macro Insights, No Bull Economics

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Occasionally we come across some great research that we immediately know we should share with our readers. To this end, we recently read the best explanation of the unintended economic consequences caused by the public policy response to covid.

Starting with the history of public health scares, it seems that during the great influenza of 1918 only San Francisco & a few other cities implemented quarantines. Notably, because of the failure of these quarantines, the policy responses to the many subsequent health scares excluded this practice until 2020’s massive implementation.

After locking down the country, the government tried to replace normal economic activity with $6 trillion in government transfers. This had the effect of running up the national debt to 121% of GDP. In turn, the Fed purchased all this debt, generating a massive increase in the M2 money level.

Normally, this unprecedented injection of cash into the economy would have caused massive inflation. However, the lockdown tanked spending as consumers primarily used stimulus transfers to pay off debt & to save for a rainy day (haha). Resultantly, inflation was temporarily offset by the deflationary pressure driven by a dramatic spending decline.

A significant unintended consequence to this spending hiatus (among many dislocations), was that semiconductor manufacturers retooled their factories to move chip production from autos (decreased post-covid demand) to phones & PCs (increased post-covid demand). New car manufacturing has still not recovered 2.5 years later because of a lack of chips needed to make modern autos. Notably, “as goes Detroit, so goes the country”.

As economic activity & spending began to return, the implications from the $6 trillion in government transfers began to manifest for real. All this extra cash, aggravated by supply constraints, fueled an unprecedented acceleration in inflation. At first, the consumer seemed immune to higher prices as they tapped their savings and began to tap unused credit card availability.

Of course, this same inflation sparked the Fed to implement its ongoing program of rapid interest rate hikes which is pressuring the real estate market while putting further pressure on the auto industry. The idea is that unemployment must rise sufficiently to stop inflation. What could go wrong here??

Hopefully, the US will not follow China’s ongoing zero covid lockdowns. Please!!        

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