The new $484-billion installment of federal rescue funds will balloon this year’s federal deficit to about $3.8 trillion, or 18.6 percent of GDP, the highest proportion since World War Two, according to the private, nonpartisan Committee for a Responsible Budget (CRB).
Adding that amount to the national debt bloats the number to 106 percent of the GDP forecast for 2022, equaling the percentage record set in 1946.
In early March, the Congressional Budget Office predicted a national debt totaling 89 percent of GDP in 2025, with interest costs at 2 percent of GDP. The CRB sees the debt at 107 percent of GDP in that year but interest still costing only about 2 percent of the principal.
It is assumed that printing reams of money to bail out national economies won’t automatically spark inflation. Inflation is set off when demand is high and goods are scarce. Intense demand is unlikely to return to the world’s economy for a while as people pay down debt and tend to necessities such as car repairs and dental work in the wake of the current economic crisis.
Technical analyses suggest that inflation’s rate will be about 1.5 percent five or ten years from now.
If inflation does perk up, the Fed can dampen it by capping yields on treasury securities, as it did in 1942 to control costs during World War Two.
TREND FORECAST: Undoubtedly, with far more supply of products, as evidenced by tanking commodity prices, than demand and wages, when adjusted for inflation, declining before the COVID crisis, inflationary pressures are minimal.
With government debt levels rapidly accelerating and more nations failing to meet debt obligations in the near future, however, inflation will spike as currencies dramatically weaken, thus reinforcing our forecast for continually rising gold prices.
Record Wave of Bankruptcies Looming
A tsunami of business bankruptcies is on the near horizon, especially now that 4.4 million more American ex-workers filed for unemployment compensation during the week ending 18 April.
“The flood” of bankruptcies “is coming,” said Nick Montgomery of New Generation Research, which monitors business bankruptcies. “It has just been slightly delayed as companies resist succumbing, and the markets try and figure out how to triage all of the corporate patients.”
Indeed, businesses shut down by the political establishment exhaust cash and credit first, then file for bankruptcy only as a sign of abject defeat.
Often, creditors will loan bankrupt companies money to keep operating through Chapter 11 proceedings. Such financing is harder to find now, possibly persuading companies not to file yet.
Also, social distancing may be preventing lawyers and accountants from visiting business offices and plants to fully evaluate existing resources. Such inventories are necessary in bankruptcy proceedings.
“When unemployment claims shoot up, you tend to get an increase in bankruptcy filings three to six months later,” according to Mark Roe, a Harvard Law School professor. If a vaccine or cure for COVID-19 is not found soon, he added, “we should expect a surge” in bankruptcy filings starting in late summer or fall.
TREND FORECAST: The economic shutdown will cause a massive reshuffling of the economy. Failed companies that own assets such as oil and gas reserves will be taken over by larger competitors. Retailers and others without assets that have intrinsic value are more likely to simply disappear into the shutdown and never return.
What Will Recovery Look Like?
Forecasters are not able to agree on what a genuine recovery will look like when the U.S. economy reopens on a large scale.
Optimists see a V-shape recovery: the steep drop in economic activity now under way, with pent-up demand pooling at the bottom; then, when businesses reopen, consumers rush back to stores and restaurants, propelled by the pent-up desire for the normal.
Other mainstream analysts see a U shape, with people still reluctant to return to public spaces at first, then suddenly flocking back after taking time to see if public spaces are safe.
Others think a recovery will look more like Nike’s swoosh – a sharp drop followed by a long, slow, gradual return to shopping, dining out, and children going to school.
TREND FORECAST: The economic recovery that follows the lockdown is unlikely to follow a consistent, uniform shape.
Instead, the recovery is likely to vary by sector.
Parents might need to rush back to children’s stores to replace clothing that kids have outgrown but still be reluctant to eat with their families in crowded fast-food restaurants. Everyone will need a haircut but far fewer people will have the money or the irrepressible urge to splurge on a new SUV since they can’t even meet their current debt obligations
Similarly, recovery will vary by area.
With more than 22 million Americans out of work, the recovery, when it comes, is likely to happen in fits and starts, with people far more eager to pay overdue bills and sock away savings against the virus’s next wave than to buy a new sofa or stock up on blouses from TJ Maxx.
