In an article in May of last year we explained why the US economic rebound from the H1-2020 plunge into recession probably would look like a ‘V’. Our conclusion at that time was:
“There will be a ‘V’ shaped recovery, but due to the destruction of real wealth stemming from the lockdowns the rising part of the V is bound to be much shorter than the declining part of the V. This will lead to a general realisation that life for the majority of people will be far more difficult in the future than it was over the preceding few years.”
This assessment was close to the mark, but not totally correct.
During the few months after we posted the above-linked article, our views regarding the likely strength and longevity of the economic rebound—as outlined in our commentaries—shifted. Specifically, in commentaries we published on our blog between June and November of last year we began to anticipate a longer rebound with an acceleration of economic activity during the first half of 2021.
This was due to a) the central bank’s promise to maintain accommodative monetary conditions for years despite the emerging evidence of an “inflation” problem, b) the eagerness of the US federal government to continue showering the populace with money, c) the expected natural release of pent-up demand as COVID-related restrictions were removed and d) the likelihood of the US government approving a multi-trillion-dollar infrastructure spending program regardless of the November-2020 election outcome.
Due to this combination of factors, a full ‘V’ recovery has occurred when measured in GDP terms. This is illustrated by the following chart.
The GDP rebound does not reflect sustainable progress. Due to the way that GDP is calculated, a dollar of counterproductive spending is the same as a dollar of productive spending. For example, if the government pays people to dig holes in the middle of nowhere and then fill them in, the payments will add to GDP even though the process wastes resources and adds nothing to the economy-wide pool of wealth. Over the past 12 months there has been a lot of counterproductive spending.
The popular economic indicator called “GDP” actually reflects money-supply growth more than it reflects economic progress. By simultaneously giving the money supply a hefty boost and pretending that the purchasing power of money is essentially unchanged, the impression can be created that the economy is moving ahead in leaps and bounds while the total amount of real wealth actually shrinks.
When speculating and investing, however, it’s important to take advantage of the artificial boom and not fritter away your personal wealth betting against the monetary tide. Such bets will become appropriate at some point (as determined by various leading indicators), but they haven’t been appropriate over the past six months and they are not appropriate today.