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What will come in the aftermath of coronavirus for economy? I'd worry about stagflation – CNBC

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On Sunday, the Federal Reserve implemented an emergency cut in the federal funds rate to a range between 0% and 0.25% and launched quantitative easing with $700 billion of asset purchases. This was the second intermeeting rate cut in two weeks.

The Fed has not taken such drastic actions since the Great Financial Crisis. This policy move occurred in the wake of the more than 8,000-point drop in the Dow Jones Industrial Average over the last month. As coronavirus fears and its economic impact skyrocket, the stock market has been on a rollercoaster ride, losing almost 30% in three weeks and officially ending the 11-year bull market. 

One could argue that, given the turbulent financial market, this action will boost confidence and prevent the possibility of a looming recession. However, the easing of monetary policy, as well as the proposed fiscal stimulus plans, have done little to slow down the cratering stock market. The crisis has virtually erased all of the gains in the S&P 500 since President Donald Trump took office.  Many critics of the Fed had warned that the recent rate cuts over the past six months, when there was no imminent signs of recession, left the Fed without the ammunition to fight a real economic crisis. This has come true. But there is another risk of this move lurking beneath the headlines that has not received much attention: inflation.

Inflation and the Fed

Inflation was well contained up until the middle of last year, with consumer prices rising below 2% in January 2019 and giving the Fed room to pause hiking interest rates. However, CPI inflation has risen steadily over the past six months, from an annual rate of under 2% to nearly 2.5%. Similarly, core CPI, which removes the more volatile food and energy prices, bottomed out in mid-2019 and is now running consistently above the 2% Fed target rate. Over this same period, the Fed has cut the federal funds rate by 75 basis points, and this was before anyone had ever heard of the coronavirus.

The coronavirus crisis has created a perfect storm. In addition to the health consequences and human costs, it is leading to a severe economic crisis. On the one hand, by preventing people from going to work, causing them to be ill and disrupting supply chains, it is a huge shock to productivity. Similar to an oil price shock or a natural disaster, the limited supply of labor and production will create inflationary pressures. On the other hand, the need for social distancing has led to the cancellation of large events, ravaged the travel industry, and closed businesses, restaurants, and shopping centers, leading to a large negative demand shock.

The combination of both shocks will rapidly increase the unemployment rate and trigger a large economic recession. However, the decline of both demand and supply means that we should not expect to see the falling prices and deflation that occurred during the Great Recession and Great Depression.

For years after the Great Recession, the Fed has been trying to lift a low inflation rate closer to their long-run objective. The coronavirus crisis might just be the event that will give them too much of what they have been looking for.

In the short run the Federal Reserve’s emergency lending programs will add the liquidity needed to keep credit markets functioning, and the proposed tax rebates will help individuals and businesses that are most adversely affected. While both of these policies will keep demand from collapsing, lowering interest rates in response to such a health-related event will not put infected individuals back to work. Ultimately, the solution to the economic crisis is a solution to the health crisis, and it must come from the response of public health officials and organizations.

The aftermath of a crisis

While the benefits of cutting a federal funds rate already close to zero is limited, there will be risks associated with the Fed’s policy in the aftermath of the coronavirus crisis. In particular, when containment is achieved, production will still be restrained by those infected and unable to work and by those displaced by unemployment and struggling to find other jobs that may not fit their qualifications. However, there will be a surge in demand as fear abates, customers return to shopping centers and restaurants, and businesses and consumers look to borrow at historically low interest rates.  Ultimately, the imbalance will create a lopsided recovery with slow output growth with accelerating prices and inflation; in other words, stagflation. 

To avoid this dangerous scenario, the Fed would need to take quick action to reverse their recent rate cuts. But the political environment created by a president who calls for zero interest rates even when the economy is near full employment and a weary public emerging out of recession will make this unlikely.

The Federal Reserve is largely credited for ushering in the age of the Great Moderation, a Goldilocks scenario of low unemployment, low inflation and sustained economic growth that followed the tumultuous stagflation of the 1970s.  The Fed was able to achieve this by establishing credible monetary policy rules that emphasized their mandate of price stability and low inflation.

While our economy continues to benefit from the legacy of these policies, keeping interest rates too low for too long threatens to undermine this delicate balance. For years after the Great Recession, the Fed has been trying to lift a low inflation rate closer to their long-run objective. The coronavirus crisis might just be the event that will give them too much of what they have been looking for.

— By Victor Li, professor of economics, Villanova School of Business

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New group in Kawartha Lakes looks to build post-pandemic 'people's economy' – mykawartha.com

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New group in Kawartha Lakes looks to build post-pandemic ‘people’s economy’ | MyKawartha.com

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How to grieve the old economy – Marketplace

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We’re heading into July 4th weekend, but many people might not feel like celebrating as the world and the economy keep changing. Part of that change involves grieving – and that’s all right.

Megan Devine is a psychotherapist and author of the book, “It’s OK That You’re Not OK.

“Marketplace Morning Report” talked to her about grief and what it has to do with the economy.

Kimberly Adams : When we talk about grief and loss, especially in the moment we’re in, how can we use that language around what’s happening to the economy?

Megan Devine: If we think about how we use the language of loss to talk about pain and grief around joblessness, it’s like we sort of have to have a bigger conversation of how do we talk about grief at all. And certainly in our culture, we tend to look at grief as sort of a problem to be solved. You have to be resilient, you have to be strong and look on the bright side, and that’s not going to fly right now. What’s really important here is to acknowledge that this is hard. That is true for any kind of loss across that entire [grief] continuum, from those smaller everyday losses through job loss, through concerns about being able to pay your mortgage or find childcare, through the death of somebody you care about.

Adams: Grieving the loss of a way of life, that kind of shows up in so many ways, given what we’re going through. Not just people who lost their jobs, but maybe [you’re] working from home when you don’t want to be, wishing your kids could be in camps so that your work can get done, or even just missing the before times.

Megan Devine, psychotherapist and author. (Courtesy photo)

Devine: There’s so much to grieve. I don’t think we’ve ever really had a time, certainly in sort of recent history, of such compound and cascading losses. And I think you’re right to call it a loss of a way of life. We can’t rush back to normal. We can’t rush back to the way life used to be because that life doesn’t exist anymore. I think another really tricky part of this is the new normal hasn’t arrived. That story is still unfolding. And that’s really hard for people when they want to be able to hold on to something stable, and I think that’s also why we sort of rush to [the idea of] let’s reopen the economy, let’s be resilient, find another way to be strong.

Adams: If we use the language of grief and loss to talk about the changes that are happening in the economy right now and how we’re dealing with them, what does that mean for the eventual recovery?

Devine: I think that we’ve sort of built this idea that resilience is good for business, right? This might be a little bit of a stretch, but that sort of American economic narrative of being strong and resilient, that way of doing business and that way of life has also sort of been turned on its head during all of this. So it’s a loss and it’s also an opportunity. I’m really careful about using opportunity in the same sentence as grief because we rush into that transformation narrative, [which is] here’s this really difficult thing that happened and how can we very quickly turn it around so that things are even better than before. That’s not going to work here. I think that sort of transformation narrative of grief does a real disservice to those who have lost so much, not just their jobs, but they’re concerned for health care, they’re concerned for their families, and the ongoing ripple effects that will play out for a very long time in a lot of different sectors for a lot of different people.

Thinking about that idea of, times of crisis are also times of great opportunity, is going to be really tricky. What we can pull from the grief language is acknowledgement. That seems really weird, but we can’t build a new life until we tell the truth about what’s happening. Naming the loss and allowing yourself to have your feelings about it. Not so that you say stay sort of stuck in those feelings and rumination. There’s a difference between acknowledging your experience so that you can see your clear path forward versus ruminating about your feelings. That’s sort of an amorphous how we take the skills of grief to address job loss and economic uncertainty, but the the foundation is the same. Acknowledging what is real, allowing yourself to state that and to validate the truth of that situation, and then looking at creative ways forward while standing in that truth of your own experience.

Adams: Changes we’re experiencing in the economy and to some extent, even a lot of these job losses, it’s a collective loss. Does that make a difference in how we’re processing the grief around all of this loss?

Devine: I think it does make a difference. Very often when there is a mass tragedy, we as bystanders, as people not affected by that tragedy, sort of are like, “We’re with you. You’re not alone.” And the reality for the people who actually directly experience it, they’re like, “We actually are alone, you know. You’re not with me.” This pandemic and all of the things that have rippled out and happened because of and within this pandemic, nobody has been immune. There are no bystanders. That means we are actually all affected by this and we’re all in this together. So that idea, you’re not alone, in this [pandemic], isn’t lip service this time. That’s powerful.

Adams: Given how the American culture handles grief, specifically, what does that mean for how we’re processing this moment of what’s happening in the economy?

Devine: I think we tend to separate the “economy,” from the human scale. And that’s sort of an odd quirk here, where we elevate the economy above the culture. There’s a great astrologer, Caroline Casey, who talks about, do we have an economy or do we have a culture? And a culture is what we cultivate together. What do we grow together as a community. That’s a really interesting way to frame thinking about how do we move forward with this new economy in this new world that is still forming.

There’s this sort of idea around branding and marketing — just to take that that segment of the business world for a moment — marketers tell stories. The old story of the world is gone now. The new world story hasn’t yet arrived. How are we going to talk about that middle space, the world that is still dissolving and still forming? That sounds like sort of metaphysical and woo, but the truth is we don’t know how this story is going to be in six months, or a year from now, or 18 months from now. What do we want to cultivate together? What sort of culture do we want to create? What do we want to grow together? And how does our economy reflect what we have cultivated? What have we cultivated in the past? And how do we want that to change for the future? If we want to create a community that is more equitable, more just across a lot of different segments of of humanity and the world itself? It’s an important question to ask how does the economy serve the culture, and as a culture, what do we want to cultivate together? What do we grow in this new world, given that we have to rebuild?

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Reconstruction planning must take into account existing economic trends – Policy Options

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Before COVID, decarbonization and digitization were already reshaping the economy. A massive reconstruction planning effort would address the trends.

While the government has begun to consult broadly about the conditions needed to reopen the economy post-pandemic, it needs to think and plan with two other longer-term economic trends in mind: the rapid diffusion of digital technology and the transition to a post-carbon economy. The policy measures needed must support the adoption and use of digital technologies, as well as promote the transition of our energy systems to sustainable sources of energy.

Economic changes of this magnitude are rare occurrences. The last time Canada experienced change on this scale was in the reconstruction that followed the Great Depression and the end of the Second World War. Some commentators have even compared the current emergency to that wartime situation with the virus as our enemy. While this analogy is a bit stretched, one aspect of it is highly relevant – the need for post-pandemic reconstruction planning.

Reconstruction planning

The changes in patterns of social behaviour and economic activity that will follow the pandemic will intersect with the broader changes already underway, on a scale comparable to that which occurred after 1945 in the transition from wartime production to a peacetime economy.

Wartime production in Canada and the US entailed a massive shift in production from civilian goods to military armaments, with governments assuming control over the coordination of production in an unprecedented fashion. The effort involved the establishment of whole new industries, such as fighter aircraft in Montreal and Toronto and synthetic chemicals in Sarnia, but there were grave concerns about the ability of the economy to transition back to a peacetime basis of production after the end of hostilities.

Leading economists in Canada and the US predicted the end of the war would be followed by a return to the Depression and a prolonged period of secular stagnation (negligible growth). In response to these fears, the federal government undertook a massive effort to plan for postwar reconstruction to convert the economy back to civilian production. The effort, led initially by an advisory committee of outside experts and then transferred to the Ministry of Reconstruction and Supply, involved a massive cross-government organizing effort as well as extensive coordination with the provinces through a series of Dominion-Provincial conferences on reconstruction that laid the basis for the postwar recovery. The success of these efforts paved the way for the growth of new industries in these sectors and Canada’s economic prosperity in the postwar era.

Major global trends that will impact post-pandemic planning

The lessons to be gleaned from our success in using the vast production capacity that had been built during the war to lay the basis for Canada’s postwar economic expansion can guide us in planning for a post-COVID recovery. The economy will slowly reopen as the threat of the pandemic recedes, but many of the changes that occurred during our lockdown will linger, including remote working and learning, as well as declining demand for conventional sources of energy.

The recovery will require a comprehensive planning effort that also takes account of the two broader trends altering the shape of the economy.

The first trend involves the growing digitization of all aspects of the economy, placing greater reliance on cloud computing, mobile telephony, data analytics and artificial intelligence. For the past two decades, the pace of innovation has been accelerating, dramatically compressing the time it takes to disrupt established industries and bring new products and processes to market. The impact of exponential growth has been accentuated by the shift to virtual work and learning during the pandemic. The pandemic has accelerated a new wave of digitization across virtually every aspect of our lives. These changes will persist into the recovery

The second trend is the accelerating shift away from carbon-based forms of energy to renewable forms, including wind, solar, battery electric, fuel cells and hydro power. This shift has been occurring for the past decade, with the cost of renewable energy and energy storage falling steadily and rapidly approaching the crossover point with natural gas.

In many jurisdictions, wind and solar energy is already cheaper than coal power. The trend away from carbon-based energy sources has been underlined by the steady stream of announcements from leading investment firms and sovereign wealth funds of their divestment from conventional fossil energy producers. Recent reports underline the vulnerability of existing oil and gas reserves, much of which may well end up as stranded assets. While some demand for carbon-based energy sources will return with a restoration of economic activity, the new normal of remote working and distance learning may well persist. Over the medium-term the adoption of virtual technologies to replace physical ones will reinforce the broader shift that is already underway to reduce the demand for these conventional energy sources.

Central and Western Canada’s interests aligned

The combined effects of digitization and decarbonization have the potential to accentuate regional tensions in Canada, but a comprehensive approach to reconstruction planning would allay these tensions. From Western Canada’s oil and gas economy to the traditional manufacturing sectors in Ontario centred on the automotive industry, early signs of this transition were apparent through falling capital investments in new energy projects and shutdowns or reduced shifts in traditional automotive plants. The move to renewable sources of energy and new forms of connected, autonomous, shared, and electric (CASE) transportation combines both trends – the digital and decarbonizing – into a new mobility paradigm.

The reality is that the regional interests of Western and Central Canada will be more aligned in terms of their response to this transition than they have been for many decades. Since the discovery of oil at Leduc, Alberta, in 1947 and the dramatic expansion of Central Canada’s manufacturing economy in the 1950s and 1960s, the prosperity of both regions has been tied to the fate of the carbon-based energy economy. The threats and opportunities created by these trends require a comprehensive planning approach that cuts across the conventional departmental boundaries within government and integrates initiatives at both the federal and provincial levels of jurisdiction. In this respect, the post-COVID planning effort must be comparable to the reconstruction planning efforts at the end of the Second World War.

To the growing clean energy sectors of the economy and the further expansion of the digital revolution underway for the past two decades, we need enhanced policies to support:

  • the growth of domestic firms in the digital and cleantech sectors of the economy to accelerate the transformation of existing industrial processes to a more digitally enabled and sustainable basis;
  • greater provision of renewable sources of energy, including, wind, solar and hydrogen;
  • rethinking and redesign of urban mobility systems, including public transit;
  • more attention focused on our public health system, through the effective use of digital technologies to track diseases;
  • the application of new computing techniques to accelerate the discovery and development of new vaccines and antiviral drugs; and the use of these technologies to support and protect frontline workers in the health sector and other parts of the service economy.

The challenge is massive but many of the solutions are readily available in the form of existing technologies and the firms to develop them. The economy that emerges from the current lockdown, and the economic opportunities it presents, will differ significantly from the one that we have been accustomed to.

Planning for the reconstruction of the economy depends on our ability to recognize these trends and differentiate their longer-term effects from the short-term impact of the coronavirus. The current pause in economic and social life as we (used to) know it provides an opening to map the terrain of the current transition and chart a new economic path that takes full advantage of the emerging opportunities through digital technologies and sustainable energy.

Conventional policy processes are unlikely to produce the desired result; governments need to embrace a contemporary equivalent of the reconstruction planning process adopted towards the end of the Second World War. The lessons learned through that experience can serve us well in responding to the challenge of preparing for the transition to a post-pandemic economy and society. Now is the time for governments at all levels working collaboratively to design and implement the measures necessary to deploy our knowledge assets and technology resources to solve the emerging economic, health and energy challenges of the 21st century.

This article is part of the Building a More Inclusive Innovation Economy After the Pandemic special feature.

Photo: Shutterstock/By IR Stone

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