To say that 2020 has been a wild ride is an understatement. Millions of Americans are tired of having to live in fear of COVID, they\u2019re tired of the constant threat of lockdowns, and they\u2019re ready to return to normal. But with an economy that crashed over 30% in the second quarter of 2020 and that still hasn\u2019t returned to pre-COVID output levels, is it even possible to return to normal? Or are we seeing a new normal, an economy that will be increasingly dependent on the government to continue functioning?<\/p>\n
In many ways the economy never returned to normal after the 2008 crisis. With the Federal Reserve\u2019s massive amounts of quantitative easing and bloated balance sheet, there was a lot of talk about \u201cnormalizing\u201d the Fed\u2019s balance sheet, but not a lot of action. And once things started looking rough for the economy, all those normalization plans went out the window.<\/p>\n
With COVID upon us now, and no end in sight, it\u2019s likely that we won\u2019t see a return to a normal economy anytime soon. If more than a decade after the 2008 crisis we hadn\u2019t returned to normal, don\u2019t be surprised to see yet another decade of abnormal economic policy. Here are five of the prime ways the new normal will differentiate itself from what we\u2019ve known before.<\/p>\n
With millions of Americans still out of work, and with potentially hundreds of thousands of businesses closing forever, COVID lockdowns took a toll on the US economy that it will take years to recover from. And because many of those out of work are unemployed through no fault of their own, but rather as the result of government action, the federal government extended stimulus payments to individuals and households as a result of its COVID relief package. But those $1,200 payments are long since gone, and now the debate rages over whether workers will get further government stimulus payments.<\/p>\n
On the one hand, stimulus payments cost the government money, money which will ultimately have to be repaid by taxpayers. On the other hand, given the fraud that was rampant in aid to businesses, one would hope that a $900 billion relief package would prioritize helping those households that most need the help, rather than companies who are able to game the system.<\/p>\n
Regardless, it seems that stimulus payments may be here to stay. Rather than a one-off attempt at helping households, demand for further payments will likely increase, especially if more people remain out of work for extended periods of time. That could even expand into a universal basic income scheme, meaning that increased social welfare payments are here to stay.<\/p>\n
Millions of households have also been kept afloat through extension of unemployment benefits. Normally, unemployment benefits aren\u2019t intended to replace income, they\u2019re merely intended to provide some assistance to workers suddenly left out of work and give them some support while they look for new jobs. But because these recent job losses were the result of government actions to lock down the economy, and because those lockdowns and restrictions on businesses haven\u2019t completely disappeared, unemployment benefits continue to be extended. Most of those extensions are set to run out at the end of 2020, but there will likely be significant pressure on Congress and state governments to continue extending them.<\/p>\n
Tens of millions of Americans have become dependent on them, and with their job prospects looking dim due to continued restrictions on small businesses, many of the recently unemployed face the likelihood of long-term unemployment. The danger, of course, is that many people may come to depend on these benefits too much. They can\u2019t go on forever, since eventually the economy has to recover. But the process of weaning households off benefits that in some cases are very generous could be very painful.<\/p>\n
Many states, and federal housing agencies, have enacted moratoria against evictions. Those renters who lost their jobs and could no longer make rental payments were supposed to be safe from eviction, allowing them time to find new work and be able to pay their back rent. But those eviction safeguards are set to expire soon. Will they be renewed?<\/p>\n
On the one hand, there are certainly many households who paid rent responsibly and, through no fault of their own, were suddenly left with no income. But there were also many other households that took advantage of the eviction moratoria to stop paying rent and game the system. There will be significant pressure to keep these moratoria in effect, to wit, campaigns against evictions during the holidays or during cold weather. And these moratoria could be made semi-permanent, making it harder for landlords to evict non-paying tenants.<\/p>\n
That hurts other renters, too, who otherwise would be able to move into vacated houses or apartments. But eviction moratoria have the result of decreasing the number of available rental units, making it harder for responsible renters to find a place to live.<\/p>\n
The federal government ran a budget deficit of $3.1 trillion in fiscal year 2020, more than triple the deficit of FY 2019, and over 15% of GDP. But no one seemed to bat an eye when Congress passed its massive $2 trillion COVID relief package. And no one seems to care that Congress is intent on spending nearly $1 trillion more in COVID relief on top of a budget that was already predicted to carry a $1 trillion deficit.<\/p>\n
The name of the game going forward may be for the government to continue spending enormous amounts of money. After all, the negative effects of this spending haven\u2019t been felt yet, and by the time they are, the politicians who spent this money will be dead or out of office. So why not pass the buck?<\/p>\n
The national debt is currently over $27.5 trillion, annual budget deficits will likely exceed $1 trillion for years to come, and there\u2019s no one in Washington trying to preach any sort of fiscal responsibility. The new normal may very well result in even more massive budget deficits and an explosion of the national debt.<\/p>\n
The only reason the federal government was able to spend $2 trillion that it didn\u2019t have was because the Federal Reserve was willing to monetize that debt. Within a matter of weeks, the Fed\u2019s balance sheet expanded by $3 trillion, as the Fed added its own credit facilities to the mix.<\/p>\n
Now that the traditional hesitance of the central bank to monetize \u201cemergency\u201d spending has been overcome, how many more times will Congress expect to take advantage of the Fed, spending trillions of dollars that it doesn\u2019t have and expecting the Fed to monetize the newly issued debt?<\/p>\n
We could be facing a brave new world of massive federal budget deficits, debt monetization by the central bank, and a quick and rapid collapse of the value of the dollar. We\u2019re now in the era of permanent bailouts, with the \u201cno more bailouts\u201d mantra of the post-2008 crisis era now only a faded memory. Both Wall Street and Main Street now expect the government to step in and help whenever anything bad happens. And with creation of money out of nowhere being the method of choice to bring that about, this cycle of bailouts could end very badly.<\/p>\n
Millions of investors will undoubtedly continue to act as they always have, assuming that this crisis too shall pass, that economic growth will resume its course, and that the economy and stock markets will continue to grow as they always have. But that may not be the case.<\/p>\n
If the new normal means permanently higher budget deficits, more bailouts, and a continued devaluation of the dollar, it may call for a completely different way of investing than most people expect. That\u2019s why so many investors today are turning to gold.<\/p>\n