Things are looking up

Here are some chart updates, followed by my impressions of the key things we have learned so far about the coronavirus:

As Chart #1 shows, the Fed has responded rapidly and decisively to the Covid-19 crisis by almost doubling the supply of excess bank reserves in the span of about 6 weeks. This was accomplished by massive purchases of notes and bonds. As with other periods of Quantitative Easing, this most recent move was not massive money printing: it was simply the transmogrification of notes and bonds into bank reserves, which are effectively T-bill substitutes. The economic shutdowns that were sparked by the novel virus caused a sudden and dramatic increase in the world’s demand for safe assets, and it looks more and more like the Fed and other central banks have done their job and accommodated the increased money demand with an increased supply of risk-free liquidity. Central bank actions effectively short-circuited what could have been another threatened collapse of financial markets. Bravo!

Chart #4 shows the TED spread—the difference between 3-mo Treasury bill yields and 3-mo LIBOR. This spread is a barometer of the market’s confidence in banking systems (tighter spreads = more confidence, and vice versa). Spreads are still elevated, but have come well off their initial surge, and they are nowhere near as wide as they were during most of the 2008-9 financial crisis. The main area of concern for credit markets remains the energy sector, since oil prices have tumbled.

The huge decline in oil prices can be traced to global economic shutdowns. In the US we saw an almost immediate 50% drop in automobile traffic, and that shows up in Chart #5, which shows the plunge in motor gasoline supplied (in thousands of barrels per day terms). Recently there are signs that drivers are beginning to return to the highways, and this will only increase as more and more states lift their lockdowns. That in turn will ease the strain on bulging gasoline inventories and sooner or later allow oil prices to move back in the direction of pre-crisis levels.

Chart #8 shows my calculation of the burden of our federal debt (debt owed to the public, which now stands at $18.8 trillion). I’ve estimated total interest costs for the debt for the period April through June, and I’ve guessed that nominal GDP will decline by about 15% in the first half of this year. Repeat: these are my estimates and they are very likely to be wrong to some degree since it is extremely difficult at this point to judge how badly GDP will be affected by economic shutdowns. Regardless, I think the magnitude of the debt burden is very unlikely be much higher than what I estimate, and even then it will still be much lower than it was for most of the 1980s and early 90s. In short, we are not facing imminent financial disaster as a nation.

I used ourworldindata.org to produce Chart #12. I selected 5 countries and compared them on the basis of total covid-19 deaths per million of population. The dotted red line is the US. Note that all 5 countries (indeed almost ALL countries) have seen a pronounced slowdown in the rate of growth of covid-19 deaths. This shows up as a flattening of the curve, which uses a semi-log scale for the y-axis. In short, the growth of deaths has slowed dramatically, which proves that the virus is no longer spreading at dangerous geometric rates. Note also that the experience of Sweden, which has not resorted to the use of mandatory lockdowns, is substantially similar to that of other European countries and to the US. The virus is running its course, with or without government shutdown help.

What follows is my summary and impressions of the emerging facts surrounding the covid-19 crisis: