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Tuesday, May 12, 2020

New Information Trickling In Slowly

Chart: U.S. CPI Inflation

New information is trickling in quite slowly, and I doubt that we will have much in the way of clarity with respect to the economic outlook for awhile. The movement towards re-opening in various countries is dominating narratives, but it will take a few weeks for us to find out whether this will lead to a flare-up of infections.

The initial release of CPI data in the data (above) depicts a deflationary shock. The collapse of gasoline prices was guaranteed to blow a hole in headline inflation. The question remains whether supply side disruptions can cause inflation to bounce back.

I am supposed to be working on the index of the paperback edition, so I will offer a few brief comments on what information I am most interested in.

Medical Developments

  • The information that could have the most impact in the near run is the possibility of treatments or remedies for COVID-19. Unfortunately, one probably needs some medical expertise to judge the quality of this information; we are already seeing amplification of questionable treatments. The added difficulty is that our divided society has once again split, with one camp insisting that the dangers of COVID-19 is a media hoax.
  • Putting aside the possibility of treatments, the most important news is the question of what activity is safe. I am in the camp that sees the mains risks as being associated with indoor transmission. (Outdoor markets may make a comeback.) This will determine what forms of re-opening will work.
  • Finally, getting a proper random sample of broad populations to see what percentage are immune is a key piece of information. Is any country even close to a level of immunity where transmission rates will be suppressed?

Health Policy

  • Roughly speaking, office workers and the wealthier segments (including retirees with pension incomes) have removed themselves from high-risk activities. This has suppressed transmission rates, and so the effects of policy differences are diminished. The key differences will be school openings, and to what extent workers are forced to work in unsafe conditions. The latter issue cannot be understated. It does not matter how effective controls are for transmissions within cities and suburbs if there is mass transmission in places like meatpacking plants.
  • There is a great deal of magical thinking about using apps for tracing. There is a convergence of interest between government and Silicon Valley firms whose main contribution to society is surveillance capitalism. This surveillance is utterly worthless unless testing capacity exists, and some means to quarantine infected or suspect individuals.

Economy Watching

  • Economic data of all types is surging in an unprecedented fashion. There should be an initial stabilisation within two months. The most interesting thing to look at will be the divergence in activity between regions with high and low levels of infection. Within Canada, one could compare Quebec to Manitoba or Saskatchewan.
  • Large corporations have attracted bailouts due to the sensitivity of the gerontocracy to the stock market. I expect that tendency to continue. The question will be the extent of small businesses to attract aid. My feeling is that entire swathes of small businesses -- e.g., bars, nail salons -- are doomed, and there is no clean solution to keep them from failing.
(c) Brian Romanchuk 2020

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