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A Fake Recovery Is Worse Than a Healthy Recession

Submitted by Taps Coogan on the 9th of March 2020 to The Sounding Line.

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As I write this article early in the morning of March 9th, 2020, S&P 500 futures are limited down after crashing 5%, WTI crude has fallen by $13 a barrel, and the 10-Year treasury is now yielding just 0.34%.

The proximate cause of today’s historic selloff is the worsening Coronavirus outbreak. As a point of unfortunate irony, it is not China’s widely ridiculed authoritarian response to the outbreak that now appears to be the biggest risk, it is the apathetic response in many Western countries. Despite months of forewarning, testing is only now being adequately scaled up, travel restrictions have not been placed on countries and regions with thousands of cases, and travelers coming from virus hot spots are still not being screened at airports.

Nonetheless, it would be a great loss if history remembers this selloff and whatever follows it as having been a result of the Coronavirus. While the Coronavirus was the match, the kindling was provided by the misguided monetary and economic policies that central banks and governments have maintained since the Global Financial Crisis. Those policies have created enormous systemic fragility that now threatens to turn a transitory economic shock into something much more destructive. It need not have been this way.

The original sin at the core of it all is the “Wealth Effect.” It is the idea that endless accommodation and hand-holding by central banks around the world could launder artificial gains in financial assets into some sort of self-sustaining expansion. Although the gains in financial assets have been astounding, the transfer to the real economy has always been pyrrhic. Debt levels have exploded higher, capital misallocation has been rampant, and investors hypnotized. Most Western governments never addressed the structural problems eroding their economic competitiveness, relying instead on the crutches of endless accommodative monetary policy and deficit spending.

In short, it has been a matter of policy to disconnect risk assets from their risks.

For years, critics have been tediously warning that something would eventually come along that central banks couldn’t paper over. I, for one, thought it would be the eventual rise of inflation. At the moment, it appears that the Coronavirus outbreak may be ‘it.’ It is certainly something that central banks have no control over.

Remember, however, that even if the Coronavirus outbreak passes, or markets somehow learn to ignore it, eventually something will come along and end this charade. A recession is what the global economy needs and sooner or later it is going to get one.

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