The economy is now at a perilous point of departure. There was no V-shaped recovery, and one should not be expected. There was a severe contraction in March–April 2020, followed by a recovery in July–September 2020. However, the recovery only made up part of the lost ground, not all of it.

We had a partial V or a truncated V. The economy recovered somewhat, but growth is not back to the prior trend, bearing in mind that the prior trend (from 2009–2019) was itself below the long-term trend.

Now we are experiencing slowing growth and metrics in employment and wages that are moving sideways or down without having recovered previous highs.

For the past 18 months, the economic damage of the pandemic has been papered over with federal handouts of various kinds. We had a $2 trillion bailout under Trump in June 2020, followed by another $900 billion bailout during Trump’s final days as president in December 2020.

President Biden followed with another $2 trillion bailout bill in February 2021 and is still pushing for an additional $1 trillion infrastructure bill and a $3.5 trillion welfare bill now pending before Congress. We got $1,200 and $600 checks from Trump and another $1,400 check from Biden.

We had Paycheck Protection Program loans, $50 billion airline bailouts and similar large-scale bailouts for cruise ships, resorts, casinos and other affected industries. Everyday Americans could receive an additional $600 per week on top of regular unemployment benefits, and the benefits period was extended.

Other programs included rent moratoria, eviction moratoria and extended grace periods on repayment of student loans. The list goes on. The total tab could easily exceed $10 trillion in relief-type deficit spending before all is said and done.

No doubt some of this spending was needed; especially in the initial March–June 2020 period when there was so much uncertainty and the economy was locked down tight.

Still, economists question whether this much relief was actually needed and whether the $4.5 trillion of additional spending still on the drawing boards is needed also.

The immediate problem is that the economy is clearly slowing right now, just as many of these programs expire and before new programs come online. New York state will not fill the gap as federal unemployment benefit boosters expire.

The federal unemployment benefit addition of $600 per week expired on Sept. 6. States have the ability to make up the difference from their own resources, but most don’t have the money. New York is clearly a state that has a huge budget deficit on its own and is not allowed by law to engage in more deficit spending to undertake new programs.

Other states may have the funds but are choosing not to spend the money because they believe that unemployment recipients should be motivated to get a job. Apart from the merits of these debates, there is no doubt that the federal supplement to incomes is expiring at the same time the economy is slowing for other reasons.

Already Too Much Debt

The Biden administration will slow U.S. and global growth with a combination of higher taxes, more regulation and wasteful spending on programs such as the Green New Deal.

Biden administration deficit spending, which will approach $6 trillion of new authorizations in fiscal 2021, is continually claimed as stimulus.

In fact, there is no stimulus from such spending because the U.S. debt-to-GDP ratio is now approaching 130%. There is good evidence that debt-to-GDP ratios in excess of 90% produce less growth than the amount of new debt itself.

In other words, there is no stimulus and only an increasing debt-to-GDP ratio that makes the situation worse.

The U.S. was facing slower growth in the years ahead with or without the Biden administration’s policies because of high debt and a central bank that does not understand monetary economics.

Now that Biden’s policies are fully revealed and becoming law, it is clear that growth will be even worse than would otherwise be expected.

This is characteristic of a new great depression.

A recession is technically defined as two or more consecutive quarters of declines in GDP. A depression is not technically defined but is understood as a prolonged period of growth that is either below the long-term trend or below potential growth.

Technical recessions can occur during depressions. There were two technical recessions (1929–1933 and 1937–1938) during the Great Depression (1929–1940), yet the entire period was characterized by below-trend growth, high unemployment and deflation. Stock markets and commercial real estate prices did not recover their 1929 highs until 1954, a full 25 years later.

The New Depression Continues

We are in a new depression now. Growth declined in 2008. The 2009–2019 recovery averaged annual growth of about 2.2%, well below the long-term trend of 3.5–4.5%. GDP declined again by 3.4% in 2020, the steepest one-year decline since 1946.

Annualized growth for the first half of 2021 is 6.4%, but that is slowing quickly; the latest estimate for the third quarter of 2021 from the Atlanta Fed is annualized growth of 3.7%.

The December 2019 level of output was not recovered until July 2021. Interest rates have been declining sharply. That’s a sign of disinflationary expectations and may be an early warning of a new recession in 2022.

This is characteristic of a new great depression that can last for many years. Once the inflation narrative fades and the disinflation narrative comes to the fore, we can expect a stock market correction as asset prices adjust to the return of an era of slow growth.

Looking out even further ahead, the effects of the pandemic on the economy will be intergenerational. Most financial panics or recessions are followed by recovery within a year or less.

Pandemics produce different patterns.

No Recovery Until 2045?

One study from the Federal Reserve Bank of San Francisco in collaboration with outside academics showed that of the 19 highest fatality pandemics since the Black Death in the mid-1300s, the average time needed to return to normal levels of interest rates, growth and employment is more than 30 years.

This pattern of recovery from extreme events was seen in the aftermath of the Great Depression (although that was an extreme economic collapse, not a pandemic). While the Great Depression was over in 1940 (partly because of war spending as the U.S. moved toward World War II), the behavioral changes it produced did not fade until the late 1960s.

The 1950s were a period of peace and prosperity in the U.S. Still, Americans maintained high savings rates, mostly avoided conspicuous consumption and lived frugally as they had learned to do in the 1930s and during World War II.

This did not change until the baby boomers became young adults and teenagers in the late 1960s. The behavioral changes induced by the Great Depression did not fade until 30 years after the Depression was over. Such is the staying power of social trauma whether it be war, depression or pandemic.

We will not recover from this pandemic fully until 2045 or later in terms of savings, consumption, disinflation, low interest rates and low growth.

The only exception to this estimate would be if the pandemic were followed by another equally shocking event such as war or a financial panic.

Isn’t that reassuring?

Regards,

Jim Rickards