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Where We Stand: The Present and the Future of Dollar

Economists and policy makers generally recognize that growth will be weaker than was anticipated at the end of last year. Price pressures are going to…

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2 years ago

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Economists and policy makers generally recognize that growth will be weaker than was anticipated at the end of last year. Price pressures are going to be stronger and last longer than previously projected. The supply shock has been exacerbated by Russia's invasion of Ukraine and the social restrictions in China stemming from Covid.  

With the major central bank meeting past, the highlight in the week ahead will be the flash PMI readings. The risks are on the downside.   And if those risks do not materialize, many will assume they will later. At the same time, major and many emerging market central banks feel compelled to continue the tightening cycles. The Swiss National Bank and the Bank of Japan are notable exceptions. So is the People's Bank of China, which is more likely to ease policy than tighten.  

While a recession has been a risk scenario,we worry that the odds are increasing, and it could become the base case.  Fiscal policy is tightening.  Monetary policy is tightening.  The rise in energy and food prices act as a large tax on consumption.  It weakens discretionary spending.  Russia's invasion of Ukraine exacerbates many of the economic headwinds that were already bedeviling policymakers.  Some see more dangerous implications. In particular, the freezing of Russian reserves and banning trading with the central bank may hasten the demise of the dollar, warn the doomsayers. Ironically, many share the perspective of Beijing and Moscow that the West is in decline.  It is an old refrain.  Oswald Spengler's book with that title was published in 1926.  

Indeed, many times over the past quarter of a century or so, some observers make the argument that the dollar's role as the numeraire-the main reserve asset, invoicing currency, and benchmark for most commodities, is going to end. Purported successors have included the Japanese yen, the euro, the Chinese yuan, and even crypto. The argument now is that the sanctions imposed on Russia, and especially the Russian central bank, will expedite the shift away from the dollar. It sounds reasonable, and I, too, have expressed fears in the past about the implications of the broad sanction regime.  

However, the critical issue that I identified in my 2009 book Making Sense of the Dollar remains largely unaddressed. There is no compelling alternative. Europe has shown itself to be as willing to sanction Russia's central bank as America. That would seem to preclude the euro, even though the Sino-Russian multi-year energy deal announced before the war will be settled in euros, and Russia's central bank boosted its euros reserves as it shifted out of dollars.  

Even with some common bonds, the European bond market remains fragmented, yields are low.   Its breadth and depth are nothing like the US Treasury market. To move out of the dollar and US Treasury market is to give up yield, liquidity, and security. We already live in a multiple reserve currency regime.  The most authoritative source of central bank reserve holdings is the IMF (here). Despite the handwringing and chin-wagging, as of the end of Q3 2021, foreign central banks held more dollars than ever before (~$7.08 trillion). Of those holdings, nearly half ($3.43 trillion, as of early March) are held in custody at the Federal Reserve. 

After the dollar's 59.15% share of allocated reserves, the euro is a distant second at 20.48%. It is smaller than the sum of its parts. I mean that the only legacy currencies, like the German mark, French franc, Belgian franc, etc., together accounted for a greater share of global reserves than the euro does now. The yen is the third most used reserve currency, with an almost 5.85% share. Reserves themselves are highly concentrated. The top 10 holders accounted for more than 62% of reserves. Nearly 30% of the central banks' reserves are accounted for by China and Hong Kong. The Chinese yuan cannot really be a reserve asset for the PBOC or Hong Kong. And when everything has been said and done, the Hong Kong dollar remains pegged to the US dollar.  The Hong Kong Monetary Authority hiked rates 25 bp within hours of the Fed's move. 

Before Bretton Woods collapsed, a Yale economist, Robert Triffin, warned of its coming demise. The essence of the argument was that there was a contradiction at the heart of the practice of using a national currency as the dominant reserve asset. To be used as a reserve asset, the supply of the currency must increase in line with the demand for reserves. Yet as the supply increases, its credibility preserving its value decreases.

I purposely turned Triffin on his head and suggested it was precisely that the role of the euro and yen would be limited because of their current account surpluses and the lack of deep and liquid bond markets. Yet, the supply of euros and yen are also provided by governments and companies issuing euro and yen-denominated bonds. Their role as reserve assets could increase under different financial and economic conditions, but don't think that a shift in the dollar's value of euro or yen reserves attacks the current system. Moreover, when the greenback trend turns lower, the dollar value of non-dollar reserves will increase by definition even central banks do not alter their allocation one iota.    

One of the things that follow from this is that many pessimistic observers who argue that Russia's attack on Ukraine weakens the international order seem to be as if looking through the wrong end of the telescope. The US-centric international order is stronger today than it was a year ago. Violating the rules and norms does not weaken the system as long as those rules and norms are enforced. It is true in sports, civil society, and geopolitics.  

What weakens the system is when the rules are broken with impudence. During the Great Financial Crisis, the Nobel-prize-winning economist Joseph Stiglitz explained that the difference between a prizefight and a barroom brawl are rules and a strong referee. When the referee or law enforcer is compromised, the system suffers. Similarly, I submit that what weakens the international system is when the US, the world's gendarme, violates the norms.  It is undermined when it attacks another country without the support of the United Nations, when it threatens to pull out of NATO, or when it leaves the Trans-Pacific Partnership, the Paris Accord, and UNESCO.  Its stronger when the US hold the moral high ground, helps enforce the rule of law, and lives being the "beacon of hope", the what its Puritan forebearer Jonathan Winthrop called "the city on a hill."

Some US strategic objectives proved elusive through several administrations. Then in a matter of a few weeks, a few are at hand: the Nordstream 2 pipeline is all but toast, Germany and several other European countries will boost defense spending, and public opinion has shifted more pro-NATO in Sweden and Finland.  

Europe and the US are pulled together by this security crisis. Europe will have to build some facilities to turn liquid natural gas back into a gas, but it will likely rely more on the US in the coming years. Similarly, consider that Germany indicated that it would replace its aging Tornado bomber jets (made by Italy, Germany, and the UK) with the 35 of the US made F-35 Lightning II fighter jets capable of carrying nuclear payloads. Other countries appeared to send older military hardware to Ukraine with the idea replace it with more modern equipment, for which the US producers will likely benefit.

Another observation that follows is that China's agenda has been set back. The inflationary implications of higher commodity prices that have resulted from Russia's invasion of Ukraine are not the most pressing for Beijing. Remember February CPI was slightly less than 1%. Its PPI (8.8%) has fallen for four consecutive months. Instead, the higher commodity prices are a headwind to growth. It is clear that officials have shifted their emphasis to facilitating growth from structural reforms.  

The tighter US-European relationship seems to reduce the chances that China could push a wedge between them through trade and investment.   President Xi has reportedly launched a diplomatic offensive with calls to several European leaders since the war began. At the same time, seeing the brave efforts by the Ukrainians, Japan, South Korea, and Australia maybe even more resolute in checking China's projection of power in the region and boosting their own defense spending. The speed, depth, and breadth of the public and private response to Russia's invasion are unprecedented and impressive. It would seem to raise the cost of taking Taiwan in Beijing's calculus.  

China accuses the US of building a NATO for the Pacific  The US denies this, but given the architecture, Beijing sees something else (5, 4, 3, 2): Five Eyes, the Quad, the new US, UK, Australia security pact, and several US bilateral pacts with countries in the region. The US-centric world that it chafes under seems stronger than before the Russian invasion.  NATO is stronger and will possibly be larger.  

While former US President Trump threatened to leave NATO and reduce US military presence in Europe (which may help to explain why Putin did not do this in 2016-2020), the opposite is likely to be the case.  Some resources the US may have wanted to commit to the Indo-Pacific region may have to go to Europe, but the means are elastic. As the pandemic winds down, some of the health dividends will go to military spending. This is true in Europe as well.  

Occasionally over the last several years, talk surfaces about OPEC taking other currencies for their oil besides dollars.  A couple of weeks ago, reports noted that if the US sanctions were lifted on Iran, Tehran wanted only euros for its oil and trade. Last week, reports indicated that Saudi Arabia was considering accept yuan for the oil it sells China.  

Such talk has surfaced before.  China buys about a quarter of Saudi Arabia's oil exports.  At a $100 a barrel, the oil is worth about $155 mln a day.  However, the amount is minor in the foreign exchange that sees an average daily turnover of $6.6 trillion, according to the Bank for International Settlements triennial survey in 2019.  Capital flows and their drivers are more important for the massive 24-hour a day foreign exchange market than trade. Moreover, China did not need to go buy the dollars to purchase oil.  It essentially recycles the some of the dollars it earns from its record trade surplus (~$676.4 bln in 2021).   

There are other constraints.  For example, Saudi Arabia pegs the riyal to the dollar. It has been a critical source of stability. Concretely, what this means is that Riyadh has outsourced it monetary policy to the Federal Reserve.  That means that after the Fed hiked rates last week, so did the Saudi Arabian Monetary Authority.  

Saudi Arabia runs a trade surplus with China.  What will it do with more yuan?     Its companies do not have yuan loans that need to be serviced like they do the dollar.   Saudi Arabia's reserves are valued at around $440 bln.  The total yuan held by central banks in reserves as of the end of Q3 last year was almost $320 bln.  Saudi Arabia could boost the share of its reserves held in yuan and Chinese bonds, but the impact on the dollar in terms of price or role is likely minor at best.   If Saudi Arabia really wanted to help China, it should export more oil.  

With the yuan shadowing the dollar, the diversification benefit of Chinese bonds over Treasuries is not clear. The 10-year yield premium narrowed to almost 60 basis points last week. The premium has tightened by about 100 bp over the past year.  Also, there may not be a compelling business case to accept the buyer's currency. It is not clear what Saudi Arabia receives in exchange for accepting the currency mismatch and risk that it entails.  Moreover, the yuan is not freely convertible.

In the Great Game of geopolitics, countries that can switch sides are often the epicenter of intrigue by definition.    The tensions between the US and Saudi Arabia are palpable.   There has been a significant divergence of interest: Yemen, Iran, and Afghanistan generated significant differences. There is no doubt where Saudi Arabia falls in the popular US narrative of a struggle between authoritarianism and democracies.  The murder of the journalist Khashoggi in 2018 seemed to be a catalyst.

The Crown Prince Mohammed bin Salman's rise is part of the weakening ties, but there is also a material basis.The US used to import 2 mln barrels a day of oil from Saudi Arabia. At the end of last year, it was a quarter of it and surpassed by imports from Russia (after Canada and Mexico). Saudi Arabia has repeatedly rebuffed US calls to boost output. Many oil producers have not made the investment necessary to boost output.   Riyadh could have forced this to be recognized and compensated for by others boosting the production to bring it to the 400k barrels a day that had been agreed upon by OPEC+.  

In summary, we are concerned US monetary and fiscal policy is becoming pro-cyclical when it works best going against the tide.  The median forecasts from the Federal Reserve are not persuasive.  Growth this year was redcued to 2.8% from 4.0%. The median dot raised the appropriate level for Fed funds 100 bp in March from December.  Yet, the unemployment rate (median forecast) is unrevised to 3.5% this year and next. Perhaps counterintuitively, the dollar has fallen on average, according to the BIS 4% on average during the past four tightening cycles.  The greenback's rally may have some more gas in it, but we think a signifcant high is near and expecte it to finish the year lower than where is as as Q1 winds down.  

Despite these economic challenges, there is not need to accept Putin, Xi, and cynics argument that the America is caught in an inexorable decline.  Russia's invasion of Ukraine allows the US to take the moral high ground and be an exemplary and exceptional national. Several US strategic goals have been achieved in the last three weeks or so.  Russia is isolated in a way that the Nogoodnik leader could not have imagined.  Beijing may wish there was an alternative, but it knows there is not, which is why large Chinese (state-owened) banks appear to be respecting the US financial sanctions. This is not  new developments, but large Chinese banks did not violate previous US sanctions, including sanctions on HK officals and companies that were doing Beijing's bidding.  Of the myriad of problems the US and the world faces now, some kind of existential challenge to the dollar is not among them.   

 


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Mistakes Were Made

Mistakes Were Made

Authored by C.J.Hopkins via The Consent Factory,

Make fun of the Germans all you want, and I’ve certainly done that…

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March 17, 2024

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Mistakes Were Made

Authored by C.J.Hopkins via The Consent Factory,

Make fun of the Germans all you want, and I’ve certainly done that a bit during these past few years, but, if there’s one thing they’re exceptionally good at, it’s taking responsibility for their mistakes. Seriously, when it comes to acknowledging one’s mistakes, and not rationalizing, or minimizing, or attempting to deny them, and any discomfort they may have allegedly caused, no one does it quite like the Germans.

Take this Covid mess, for example. Just last week, the German authorities confessed that they made a few minor mistakes during their management of the “Covid pandemic.” According to Karl Lauterbach, the Minister of Health, “we were sometimes too strict with the children and probably started easing the restrictions a little too late.” Horst Seehofer, the former Interior Minister, admitted that he would no longer agree to some of the Covid restrictions today, for example, nationwide nighttime curfews. “One must be very careful with calls for compulsory vaccination,” he added. Helge Braun, Head of the Chancellery and Minister for Special Affairs under Merkel, agreed that there had been “misjudgments,” for example, “overestimating the effectiveness of the vaccines.”

This display of the German authorities’ unwavering commitment to transparency and honesty, and the principle of personal honor that guides the German authorities in all their affairs, and that is deeply ingrained in the German character, was published in a piece called “The Divisive Virus” in Der Spiegel, and immediately widely disseminated by the rest of the German state and corporate media in a totally organic manner which did not in any way resemble one enormous Goebbelsian keyboard instrument pumping out official propaganda in perfect synchronization, or anything creepy and fascistic like that.

Germany, after all, is “an extremely democratic state,” with freedom of speech and the press and all that, not some kind of totalitarian country where the masses are inundated with official propaganda and critics of the government are dragged into criminal court and prosecuted on trumped-up “hate crime” charges.

OK, sure, in a non-democratic totalitarian system, such public “admissions of mistakes” — and the synchronized dissemination thereof by the media — would just be a part of the process of whitewashing the authorities’ fascistic behavior during some particularly totalitarian phase of transforming society into whatever totalitarian dystopia they were trying to transform it into (for example, a three-year-long “state of emergency,” which they declared to keep the masses terrorized and cooperative while they stripped them of their democratic rights, i.e., the ones they hadn’t already stripped them of, and conditioned them to mindlessly follow orders, and robotically repeat nonsensical official slogans, and vent their impotent hatred and fear at the new “Untermenschen” or “counter-revolutionaries”), but that is obviously not the case here.

No, this is definitely not the German authorities staging a public “accountability” spectacle in order to memory-hole what happened during 2020-2023 and enshrine the official narrative in history. There’s going to be a formal “Inquiry Commission” — conducted by the same German authorities that managed the “crisis” — which will get to the bottom of all the regrettable but completely understandable “mistakes” that were made in the heat of the heroic battle against The Divisive Virus!

OK, calm down, all you “conspiracy theorists,” “Covid deniers,” and “anti-vaxxers.” This isn’t going to be like the Nuremberg Trials. No one is going to get taken out and hanged. It’s about identifying and acknowledging mistakes, and learning from them, so that the authorities can manage everything better during the next “pandemic,” or “climate emergency,” or “terrorist attack,” or “insurrection,” or whatever.

For example, the Inquiry Commission will want to look into how the government accidentally declared a Nationwide State of Pandemic Emergency and revised the Infection Protection Act, suspending the German constitution and granting the government the power to rule by decree, on account of a respiratory virus that clearly posed no threat to society at large, and then unleashed police goon squads on the thousands of people who gathered outside the Reichstag to protest the revocation of their constitutional rights.

Once they do, I’m sure they’ll find that that “mistake” bears absolutely no resemblance to the Enabling Act of 1933, which suspended the German constitution and granted the government the power to rule by decree, after the Nazis declared a nationwide “state of emergency.”

Another thing the Commission will probably want to look into is how the German authorities accidentally banned any further demonstrations against their arbitrary decrees, and ordered the police to brutalize anyone participating in such “illegal demonstrations.”

And, while the Commission is inquiring into the possibly slightly inappropriate behavior of their law enforcement officials, they might want to also take a look at the behavior of their unofficial goon squads, like Antifa, which they accidentally encouraged to attack the “anti-vaxxers,” the “Covid deniers,” and anyone brandishing a copy of the German constitution.

Come to think of it, the Inquiry Commission might also want to look into how the German authorities, and the overwhelming majority of the state and corporate media, accidentally systematically fomented mass hatred of anyone who dared to question the government’s arbitrary and nonsensical decrees or who refused to submit to “vaccination,” and publicly demonized us as “Corona deniers,” “conspiracy theorists,” “anti-vaxxers,” “far-right anti-Semites,” etc., to the point where mainstream German celebrities like Sarah Bosetti were literally describing us as the inessential “appendix” in the body of the nation, quoting an infamous Nazi almost verbatim.

And then there’s the whole “vaccination” business. The Commission will certainly want to inquire into that. They will probably want to start their inquiry with Karl Lauterbach, and determine exactly how he accidentally lied to the public, over and over, and over again …

And whipped people up into a mass hysteria over “KILLER VARIANTS” …

And “LONG COVID BRAIN ATTACKS” …

And how “THE UNVACCINATED ARE HOLDING THE WHOLE COUNTRY HOSTAGE, SO WE NEED TO FORCIBLY VACCINATE EVERYONE!”

And so on. I could go on with this all day, but it will be much easier to just refer you, and the Commission, to this documentary film by Aya Velázquez. Non-German readers may want to skip to the second half, unless they’re interested in the German “Corona Expert Council” …

Look, the point is, everybody makes “mistakes,” especially during a “state of emergency,” or a war, or some other type of global “crisis.” At least we can always count on the Germans to step up and take responsibility for theirs, and not claim that they didn’t know what was happening, or that they were “just following orders,” or that “the science changed.”

Plus, all this Covid stuff is ancient history, and, as Olaf, an editor at Der Spiegel, reminds us, it’s time to put the “The Divisive Pandemic” behind us …

… and click heels, and heil the New Normal Democracy!

Tyler Durden Sat, 03/16/2024 - 23:20

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Harvard Medical School Professor Was Fired Over Not Getting COVID Vaccine

Harvard Medical School Professor Was Fired Over Not Getting COVID Vaccine

Authored by Zachary Stieber via The Epoch Times (emphasis ours),

A…

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10 hours ago

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March 16, 2024

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Harvard Medical School Professor Was Fired Over Not Getting COVID Vaccine

Authored by Zachary Stieber via The Epoch Times (emphasis ours),

A Harvard Medical School professor who refused to get a COVID-19 vaccine has been terminated, according to documents reviewed by The Epoch Times.

Martin Kulldorff, epidemiologist and statistician, at his home in Ashford, Conn., on Feb. 11, 2022. (Samira Bouaou/The Epoch Times)

Martin Kulldorff, an epidemiologist, was fired by Mass General Brigham in November 2021 over noncompliance with the hospital’s COVID-19 vaccine mandate after his requests for exemptions from the mandate were denied, according to one document. Mr. Kulldorff was also placed on leave by Harvard Medical School (HMS) because his appointment as professor of medicine there “depends upon” holding a position at the hospital, another document stated.

Mr. Kulldorff asked HMS in late 2023 how he could return to his position and was told he was being fired.

“You would need to hold an eligible appointment with a Harvard-affiliated institution for your HMS academic appointment to continue,” Dr. Grace Huang, dean for faculty affairs, told the epidemiologist and biostatistician.

She said the lack of an appointment, combined with college rules that cap leaves of absence at two years, meant he was being terminated.

Mr. Kulldorff disclosed the firing for the first time this month.

“While I can’t comment on the specifics due to employment confidentiality protections that preclude us from doing so, I can confirm that his employment agreement was terminated November 10, 2021,” a spokesperson for Brigham and Women’s Hospital told The Epoch Times via email.

Mass General Brigham granted just 234 exemption requests out of 2,402 received, according to court filings in an ongoing case that alleges discrimination.

The hospital said previously, “We received a number of exemption requests, and each request was carefully considered by a knowledgeable team of reviewers.”

“A lot of other people received exemptions, but I did not,” Mr. Kulldorff told The Epoch Times.

Mr. Kulldorff was originally hired by HMS but switched departments in 2015 to work at the Department of Medicine at Brigham and Women’s Hospital, which is part of Mass General Brigham and affiliated with HMS.

“Harvard Medical School has affiliation agreements with several Boston hospitals which it neither owns nor operationally controls,” an HMS spokesperson told The Epoch Times in an email. “Hospital-based faculty, such as Mr. Kulldorff, are employed by one of the affiliates, not by HMS, and require an active hospital appointment to maintain an academic appointment at Harvard Medical School.”

HMS confirmed that some faculty, who are tenured or on the tenure track, do not require hospital appointments.

Natural Immunity

Before the COVID-19 vaccines became available, Mr. Kulldorff contracted COVID-19. He was hospitalized but eventually recovered.

That gave him a form of protection known as natural immunity. According to a number of studies, including papers from the U.S. Centers for Disease Control and Prevention, natural immunity is better than the protection bestowed by vaccines.

Other studies have found that people with natural immunity face a higher risk of problems after vaccination.

Mr. Kulldorff expressed his concerns about receiving a vaccine in his request for a medical exemption, pointing out a lack of data for vaccinating people who suffer from the same issue he does.

“I already had superior infection-acquired immunity; and it was risky to vaccinate me without proper efficacy and safety studies on patients with my type of immune deficiency,” Mr. Kulldorff wrote in an essay.

In his request for a religious exemption, he highlighted an Israel study that was among the first to compare protection after infection to protection after vaccination. Researchers found that the vaccinated had less protection than the naturally immune.

“Having had COVID disease, I have stronger longer lasting immunity than those vaccinated (Gazit et al). Lacking scientific rationale, vaccine mandates are religious dogma, and I request a religious exemption from COVID vaccination,” he wrote.

Both requests were denied.

Mr. Kulldorff is still unvaccinated.

“I had COVID. I had it badly. So I have infection-acquired immunity. So I don’t need the vaccine,” he told The Epoch Times.

Dissenting Voice

Mr. Kulldorff has been a prominent dissenting voice during the COVID-19 pandemic, countering messaging from the government and many doctors that the COVID-19 vaccines were needed, regardless of prior infection.

He spoke out in an op-ed in April 2021, for instance, against requiring people to provide proof of vaccination to attend shows, go to school, and visit restaurants.

“The idea that everybody needs to be vaccinated is as scientifically baseless as the idea that nobody does. Covid vaccines are essential for older, high-risk people and their caretakers and advisable for many others. But those who’ve been infected are already immune,” he wrote at the time.

Mr. Kulldorff later co-authored the Great Barrington Declaration, which called for focused protection of people at high risk while removing restrictions for younger, healthy people.

Harsh restrictions such as school closures “will cause irreparable damage” if not lifted, the declaration stated.

The declaration drew criticism from Dr. Anthony Fauci, head of the National Institute of Allergy and Infectious Diseases, and Dr. Rochelle Walensky, who became the head of the CDC, among others.

In a competing document, Dr. Walensky and others said that “relying upon immunity from natural infections for COVID-19 is flawed” and that “uncontrolled transmission in younger people risks significant morbidity(3) and mortality across the whole population.”

“Those who are pushing these vaccine mandates and vaccine passports—vaccine fanatics, I would call them—to me they have done much more damage during this one year than the anti-vaxxers have done in two decades,” Mr. Kulldorff later said in an EpochTV interview. “I would even say that these vaccine fanatics, they are the biggest anti-vaxxers that we have right now. They’re doing so much more damage to vaccine confidence than anybody else.”

Surveys indicate that people have less trust now in the CDC and other health institutions than before the pandemic, and data from the CDC and elsewhere show that fewer people are receiving the new COVID-19 vaccines and other shots.

Support

The disclosure that Mr. Kulldorff was fired drew criticism of Harvard and support for Mr. Kulldorff.

The termination “is a massive and incomprehensible injustice,” Dr. Aaron Kheriaty, an ethics expert who was fired from the University of California–Irvine School of Medicine for not getting a COVID-19 vaccine because he had natural immunity, said on X.

“The academy is full of people who declined vaccines—mostly with dubious exemptions—and yet Harvard fires the one professor who happens to speak out against government policies.” Dr. Vinay Prasad, an epidemiologist at the University of California–San Francisco, wrote in a blog post. “It looks like Harvard has weaponized its policies and selectively enforces them.”

A petition to reinstate Mr. Kulldorff has garnered more than 1,800 signatures.

Some other doctors said the decision to let Mr. Kulldorff go was correct.

“Actions have consequence,” Dr. Alastair McAlpine, a Canadian doctor, wrote on X. He said Mr. Kulldorff had “publicly undermine[d] public health.”

Tyler Durden Sat, 03/16/2024 - 21:00

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Correcting the Washington Post’s 11 Charts That Are Supposed to Tell Us How the Economy Changed Since Covid

The Washington Post made some serious errors or omissions in its 11 charts that are supposed to tell us how Covid changed the economy. Wages Starting with…

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March 16, 2024

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The Washington Post made some serious errors or omissions in its 11 charts that are supposed to tell us how Covid changed the economy.

Wages

Starting with its second chart, the article gives us an index of average weekly wages since 2019. The index shows a big jump in 2020, which then falls off in 2021 and 2022, before rising again in 2023.

It tells readers:

“Many Americans got large pay increases after the pandemic, when employers were having to one-up each other to find and keep workers. For a while, those wage gains were wiped out by decade-high inflation: Workers were getting larger paychecks, but it wasn’t enough to keep up with rising prices.”

That actually is not what its chart shows. The big rise in average weekly wages at the start of the pandemic was not the result of workers getting pay increases, it was the result of low-paid workers in sectors like hotels and restaurants losing their jobs.

The number of people employed in the low-paying leisure and hospitality sector fell by more than 8 million at the start of the pandemic. Even at the start of 2021 it was still down by over 4 million.

Laying off low-paid workers raises average wages in the same way that getting the short people to leave raises the average height of the people in the room. The Washington Post might try to tell us that the remaining people grew taller, but that is not what happened.

The other problem with this chart is that it is giving us weekly wages. The length of the average workweek jumped at the start of the pandemic as employers decided to work the workers they had longer hours rather than hire more workers. In January of 2021 the average workweek was 34.9 hours, compared to 34.4 hours in 2019 and 34.3 hours in February.

This increase in hours, by itself, would raise weekly pay by 2.0 percent. As hours returned to normal in 2022, this measure would misleadingly imply that wages were falling.

It is also worth noting that the fastest wage gains since the pandemic have been at the bottom end of the wage distribution and the Black/white wage gap has fallen to its lowest level on record.

Saving Rates

The third chart shows the saving rate since 2019. It shows a big spike at the start of the pandemic, as people stopped spending on things like restaurants and travel and they got pandemic checks from the government. It then falls sharply in 2022 and is lower in the most recent quarters than in 2019.

The piece tells readers:

“But as the world reopened — and people resumed spending on dining out, travel, concerts and other things that were previously off-limits — savings rates have leveled off. Americans are also increasingly dip into rainy-day funds to pay more for necessities, including groceries, housing, education and health care. In fact, Americans are now generally saving less of their incomes than they were before the pandemic.

This is an incomplete picture due to a somewhat technical issue. As I explained in a blogpost a few months ago, there is an unusually large gap between GDP as measured on the output side and GDP measured on the income side. In principle, these two numbers should be the same, but they never come out exactly equal.

In recent quarters, the gap has been 2.5 percent of GDP. This is extraordinarily large, but it also is unusual in that the output side is higher than the income side, the opposite of the standard pattern over the last quarter century.

It is standard for economists to assume that the true number for GDP is somewhere between the two measures. If we make that assumption about the data for 2023, it would imply that income is somewhat higher than the data now show and consumption somewhat lower.

In that story, as I showed in the blogpost, the saving rate for 2023 would be 6.8 percent of disposable income, roughly the same as the average for the three years before the pandemic. This would mean that people are not dipping into their rainy-day funds as the Post tells us. They are spending pretty much as they did before the pandemic.

 

Credit Card Debt

The next graph shows that credit card debt is rising again, after sinking in the pandemic. The piece tells readers:

“But now, debt loads are swinging higher again as families try to keep up with rising prices. Total household debt reached a record $17.5 trillion at the end of 2023, according to the Federal Reserve Bank of New York. And, in a worrisome sign for the economy, delinquency rates on mortgages, car loans and credit cards are all rising, too.”

There are several points worth noting here. Credit card debt is rising, but measured relative to income it is still below where it was before the pandemic. It was 6.7 percent of disposable income at the end of 2019, compared to 6.5 percent at the end of last year.

The second point is that a major reason for the recent surge in credit card debt is that people are no longer refinancing mortgages. There was a massive surge in mortgage refinancing with the low interest rates in 2020-2021.

Many of the people who refinanced took additional money out, taking advantage of the increased equity in their home. This channel of credit was cut off when mortgage rates jumped in 2022 and virtually ended mortgage refinancing. This means that to a large extent the surge in credit card borrowing is simply a shift from mortgage debt to credit card debt.

The point about total household debt hitting a record can be said in most months. Except in the period immediately following the collapse of the housing bubble, total debt is almost always rising.

And the rise in delinquencies simply reflects the fact that they had been at very low levels in 2021 and 2022. For the most part, delinquency rates are just getting back to their pre-pandemic levels, which were historically low.  

 

Grocery Prices and Gas Prices

The next two charts show the patterns in grocery prices and gas prices since the pandemic. It would have been worth mentioning that every major economy in the world saw similar run-ups in prices in these two areas. In other words, there was nothing specific to U.S. policy that led to a surge in inflation here.

 

The Missing Charts

There are several areas where it would have been interesting to see charts which the Post did not include. It would have been useful to have a chart on job quitters, the number of people who voluntarily quit their jobs during the pandemic. In the tight labor markets of 2021 and 2022 the number of workers who left jobs they didn’t like soared to record levels, as shown below.

 

The vast majority of these workers took other jobs that they liked better. This likely explains another item that could appear as a graph, the record level of job satisfaction.

In a similar vein there has been an explosion in the number of people who work from home at least part-time. This has increased by more than 17 million during the pandemic. These workers are saving themselves thousands of dollars a year on commuting costs and related expenses, as well as hundreds of hours spent commuting.

Finally, there has been an explosion in the use of telemedicine since the pandemic. At the peak, nearly one in four visits with a health care professional was a remote consultation. This saved many people with serious health issues the time and inconvenience associated with a trip to a hospital or doctor’s office. The increased use of telemedicine is likely to be a lasting gain from the pandemic.

 

The World Has Changed

The pandemic will likely have a lasting impact on the economy and society. The Washington Post’s charts captured part of this story, but in some cases misrepr

The post Correcting the Washington Post’s 11 Charts That Are Supposed to Tell Us How the Economy Changed Since Covid appeared first on Center for Economic and Policy Research.

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