By Jeffrey P. Snider|January 21st, 2021|Currencies, Economy, Federal Reserve/Monetary Policy, Markets

Why isn’t the inflation monster right upon us? Well, for one, central banks only pretend to do money. But setting that aside, it’s worth asking how even if they did do money, could inflation result given the current conditions? 

Hard no.

It’s a combination of enormous macro slack joining destructive forces with the underside of the permanent income hypothesis. The point of unemployment insurance is to reduce the negative effects for those who face a loss of income. While it won’t be the same coming from Uncle Sam (and his state nieces and nephews), it’s at least a steady payment.

Unemployment aid isn’t supposed to be permanent, however, since recoveries are believed to just happen; organic and symmetrical. An end to a recession necessarily produces an end to the macro slack limiting employment. On the way back up, unemployed persons naturally regain meaningful employment and roll off government assistance.

This is why the regular form of state insurance is limited to (in most states) 26 weeks. You get half a year because that’s all it takes for recovery, right?

Yes, for a real recovery. 

If you remember back a dozen years ago, it didn’t work out. Payments had to be extended because, for one big reason, the job-cutting didn’t actually end until almost a year after the Great “Recession” was “officially” declared otherwise. The NBER said the contraction stopped in June 2009 while the unemployment deluge kept on going well into 2010.

And then the recovery never really kicked in; at most, the bloodletting stopped and some minimal rebound took shape. Consequently, the labor force continued to shrink for several more years as workers realized what central bankers would never publicly admit: QE wasn’t working and inflationary acceleration never once close to materializing. 

Even over the years following 2012, the economy was only notable for its slack (perfectly captured, unintentionally, by central bankers forever confusion as to their “inflation puzzle”).

Here we are once again, only with the slack somehow even greater than before. Blamed on COVID and recurring social distance, lockdown rules, that’s partly true but so is permanent income; the lack thereof. 

Not just in how jobs haven’t come back, the dead-as-a-doornail “V”, but of the tens of millions dependent now on the government, the unemployment payments have become just as unsteady and undependable as the labor market. This unfortunate multitude includes (between the week of December 5 and the week of January 2) 3.6 million fewer receiving Pandemic Unemployment Assistance as well as 1.8 million fewer accepted under the PEUC.

That’s more than 5 million unemployed in a single month who didn’t suddenly become employed.

And there’s only more of this dysfunction on the horizon coming at it from both directions. First:

The $900 billion stimulus bill passed by Congress this week [December 20] extends the CARES Act’s Pandemic Unemployment Assistance program by at least 11 weeks into March 2021. But it also adds a new verification process to curb fraud that could impact nearly 10 million people currently drawing from the program as well as new applicants in 2021.

As soon as the latest stimulus bill is signed into law, individuals currently claiming PUA benefits will have 90 days to submit documents proving their eligibility for the program. Failure to do so puts them at risk of having to return PUA funds provided after the bill’s enactment.

So, you can get more extraordinary aid – but it’ll only last for a few more months and provided you swim through an ocean of red tape first. It doesn’t quite, but this nearly defeats the purpose, the government jerking people around who can least afford such gross uncertainty.

The “unemployment cliff” has been reached already, and the response to it isn’t “stimulus” in any way.

Then on the other side of the labor market, the economy keeps adding even more to the already swollen throng of the dispossessed. Initial claims were at 900k for the second straight week in January, not just increasing the likelihood of another even larger negative payroll figure but in real economy terms upping the very real quantity of misery that’s ongoing in the real world outside most financial and media context. 

Here we are two weeks into 2021, and initial jobless claims have yet to drop back below what before last March had been (the wrong kind of) record levels. 
You’d be forgiven for thinking everything is awesome or is just about to be. That’s really the whole point of what goes for “stimulus” these days. So far as it has been conducted through the media, huge success. You’d never know it was this bad. 

This seems very likely it will matter one way or another, no matter how big the next eventual government TGA draw. People all the time say I’m “too” negative too much the time. OK, so tell me where the positives are in any of this? Or what positives supersede this level of deficit right in the economy’s heart, the labor market? The tiniest little bit of empathy is all it really takes to truly absorb the scale of this misery, the unfortunately, unnecessarily swelled herd of so many misfortunates. 

If a recovery does ever show up some year, it’ll make a case study for the beyond improbable.