The New Great Depression

1. Pandemic Response, Not Virus, Caused Depression

This book is about a virus that caused a global depression. More precisely, it’s about how our reaction to a virus caused a global depression.

Human choices matter. The author argues that while the virus caused disease, it was the policy choices made in response to the pandemic that triggered the economic collapse. The virus itself didn't directly cause the depression; it was the human reaction to it. This highlights the importance of considering the economic consequences of public health measures.

Muddled and contradictory. The choices made were often informed by science and economics, but these fields were themselves in disagreement, leading to muddled and contradictory policies. The suddenness and lethality of the disease created extreme duress, and while experts acted in good faith, it's not clear that any other team would have done better under the circumstances.

Unsung heroes. Despite the policy failures, there were many heroes, including nurses, doctors, hospital staff, sanitation workers, and charitable groups. These individuals worked tirelessly to care for the sick and maintain essential services, often at great personal risk. The author emphasizes that their sacrifices should not blind us to the economic misery caused by the policy response.

2. Lockdowns: Unnecessary, Ineffective, and Costly

In the fullness of time, the 2020 lockdown of the U.S. economy will be viewed as the greatest policy blunder ever.

Lockdowns don't work. The author contends that lockdowns were unnecessary and ineffective, based on flawed science and a failure to consider the costs. They were implemented inconsistently, with varying definitions of "essential" businesses and a patchwork of state-by-state orders. The virus spread regardless of the lockdowns, and people simply found ways around them.

Flattening the curve. The primary goal of lockdowns was to "flatten the curve" of infections, not to reduce total infections or fatalities. This meant slowing the spread to avoid overwhelming hospitals, but it did not reduce the overall number of cases. The author argues that this was not clearly explained to the public, and that other solutions were available.

Unconsidered costs. The economic costs of the lockdown were enormous, including trillions of dollars in lost wealth and output, as well as tens of thousands of deaths from drugs, alcohol, suicide, and deferred medical care. The author argues that these costs were not adequately considered by policy makers, who focused solely on the virus and ignored the broader consequences.

3. The New Great Depression: A Unique Economic Collapse

The 60 million U.S. job losses in the New Great Depression have played out in just over four months, and more losses are coming.

Not just a recession. The author emphasizes that the current economic crisis is not a typical recession but a depression, characterized by depressed growth relative to trend growth, not just continuous declining output. It's a psychological as much as a numeric phenomenon, with profound behavioral changes that will persist for years.

Unprecedented job losses. The speed and scale of job losses in the New Great Depression are unprecedented, with 60 million jobs lost in just four months. This is far worse than the job losses during the first Great Depression, which played out over several years. Many of these jobs will never return, and the recovery will be long and hard.

Divorced from reality. The stock market's recovery is divorced from the real economy, driven by robots, passive investing, and Federal Reserve money printing. The author argues that the stock market is not a reliable indicator of economic health and that the real economy is suffering deeply.

4. Monetary Policy: Printing Money Isn't Stimulus

Money printing and big spending may help keep the lights on in the economy, but those policies should not be confused with “stimulus.”

Fed's failures. The Federal Reserve has a history of policy failures, including its inability to normalize interest rates or its balance sheet after the 2008 financial crisis. The author argues that the Fed's current money printing is not stimulus but merely a way to keep markets liquid and banks open.

Velocity is key. The author explains that the Fed's policies are ineffective because they ignore the importance of velocity, the turnover of money. When people save rather than spend, velocity declines, and money printing becomes impotent. The Fed cannot control velocity, which is a behavioral phenomenon.

Monetarism's flaw. The author critiques monetarism, the theory that changes in money supply are the most important cause of changes in GDP. He argues that monetarism fails because it assumes velocity is constant, which is not the case. The Fed's money printing is not creating growth because velocity is declining.

5. Fiscal Policy: Deficit Spending Isn't a Cure

The United States is past the point where stimulus is even possible, except for one little-known policy.

Keynesian limits. The author argues that while deficit spending can be effective in certain conditions, it is not a cure for the current depression. The Keynesian multiplier, which suggests that each dollar of government spending produces more than one dollar of growth, only works when debt is low and the economy is in a true liquidity trap.

Reinhart-Rogoff threshold. The author cites the research of Carmen Reinhart and Kenneth Rogoff, which shows that when debt-to-GDP ratios exceed 90%, the Keynesian multiplier falls below one. At this point, more debt does not produce commensurate growth, and the economy enters a phase of slow growth and eventual default.

Addiction to debt. The author argues that the U.S. is addicted to debt, and that the current level of deficit spending is unsustainable. The government's spending is not creating growth, and the debt burden is becoming increasingly difficult to manage.

6. Deflation: The Real Economic Threat

The real source of money status is not state power; it’s confidence.

Deflation's dangers. The author argues that deflation, not inflation, is the real economic threat. Deflation increases the real value of debt, making it harder to repay, and it also reduces the nominal value of GDP, increasing the debt-to-GDP ratio.

Fed's fear. The Federal Reserve fears deflation because it makes government debt harder to manage and threatens the banking system. The Fed prefers inflation because it erases debt, reduces the debt-to-GDP ratio, and props up banks.

Liquidity trap. The author explains that the U.S. economy is in a liquidity trap, where people prefer to save rather than spend, leading to a deflationary spiral. The Fed's money printing is ineffective in this environment because it cannot change people's behavior.

7. Civilization's Thin Veneer: Social Disorder Rises

Society cannot function if it is every man for himself. By definition, civilization cannot survive that.

Mental health toll. The author highlights the mental health consequences of the pandemic and lockdown, including cognitive impairment, depression, anxiety, and increased substance abuse. These issues are not limited to those infected by the virus but affect the entire population.

Erosion of community. The lockdown has eroded social bonds and created a sense of isolation and despair. The author argues that this has contributed to the rise of social disorder, including protests, riots, and violence.

Breakdown of order. The author argues that the pandemic and lockdown have revealed the fragility of social order. He cites examples of defiance, protests, and police overreach, all of which are symptoms of a society under stress.

8. Investing in Chaos: A New Approach

The perception gap creates huge opportunities for gains by investors.

Markets are often wrong. The author argues that markets are not efficient and are often wrong in their forecasts. This creates opportunities for investors who can identify the gap between perception and reality.

Key to profits. The key to beating the market is to get the forecast right, understand the policy reaction function, and trade ahead of both. This requires a combination of rigorous modeling, market timing, and a willingness to be nimble.

Optimal portfolio. The author recommends a portfolio allocation that is robust to deflation, inflation, and social disorder, including cash, gold, residential real estate, Treasury notes, and a small allocation to equities in specific sectors. He emphasizes the importance of diversification across asset classes, not just within them.

Last updated: January 18, 2025