The COVID 19 pandemic is, predictably, worsening again in much of the US. Only the Northeast, and to a lesser extent some Midwestern states, have been consistently improving. And that trend could also reverse as those states fully reopen.
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The problem in the US seems to be widespread public resistance to recommended practices of social distancing and mask wearing. In countries where these practices have been practiced universally, they have shown to halt the progression of the disease.
The US doesn’t have the ability to do that. Each of the 50 states had and has different rules. They instituted and lifted restrictions at different times. The public in each state has a different level of willingness to comply with public health restrictions. Infected people have been able to travel freely between states with different degrees of restriction and compliance, promoting the spread of the virus.
As a result, a number of states, including the three most populous, with 90 million people, are in increasingly bad shape with the pandemic trend. Remember that thing about the virus subsiding when warm weather comes? Well California, Arizona, Texas, and Florida, are pretty damn warm right now, and their COVID case numbers are exploding.
As a result of the continuing spread of the virus, the US economy and Federal tax revenues are unlikely to recover until there’s an effective treatment or vaccine. We don’t know when that will be, despite optimistic predictions that it will happen next year.
Until the virus is largely conquered, Federal debt issuance is likely to continue to be a problem for the financial markets. Federal spending will necessarily need to continue at much higher levels. Federal revenues will remain severely depressed. Deficits will remain enormous, and the amount of debt that the Federal Government will need to issue in the market will continue at a pace of hundreds of billions a month. It will be twice the level, or more than twice the level, of past peak supply of Treasury paper hitting the market.
With COVID cases spreading rapidly in much of the country, some folks will opt to stay home and not spend, lockdowns or not. Particularly, those of us of a certain age who are at risk of something more than a mild case of the flu if we catch the virus. The threat of dying from internally drowning as your lungs fill up with fluid, or your blood vessels exploding and your heart and brain choking with blood clots, kind of takes the edge off the idea of a night at the Cheesecake Factory with your grandkids.
Pictures being worth thousands of words, below are a few charts. Source: Tracktherecovery.org
So the fallout from the lack of a coherent national strategy to fight the pandemic is likely to go on until there’s an effective treatment or vaccine. The economy will be weak until everyone feels safe to go out and spend again.
That will impact the Federal deficit, the supply of Federal debt inundating the financial market, and Fed policy going forward.