Thread by @yishan

Contrarian opinion: the recession we're having now (or heading into) is caused primarily by covid, and not by monetary policy or inflation or anything like that.

To be clear, excess liquidity injected into the system has had distortive effects, but my assertion here is that the prevailing macroeconomic force that is responsible for our current downturn is covid.

This should be obvious but it's not, because neither political party wants to acknowledge it (R's never wanted to, and D's have given up too), but it's still happening. You can only fight things so much via media and politics, but economics will reflect the underlying reality.

Common sense says that if you kill a million Americans (even retired ones), and cripple tens of millions more with chronic fatigue, it is going to have an effect on a nation's productivity.

You'll have increased health care spending because the ones who die don't die right away: they incur very expensive ICU health care first, plus ongoing treatments for the ones with chronic illness. This is a tax on the entire economy.

We're talking millions of people suddenly spending more on health care.

Next, all of the people who are ill but recover still do drop out of the economy and aren't working, even if only temporarily. We can get an order-of-magnitude estimate on the size of this:

We're roughly at 100,000 new officially reported cases per day. Estimates of the real number of cases based on wastewater and other measures is 8-12x this, so we can estimate that 1,000,000 Americans are catching covid every day.

It's likely one of the Omicron strains, so while vaccines reduce the death rate, they don't prevent infection, and BA.5 appears to be somewhat worse.

I just had a pretty healthy friend who get infected, and he said he was out of commission for about 2 weeks.

To be very generous, we assume here that EVERYONE makes a full recovery and has no lingering effects. We know that's not true, but let's start there - we'll factor it in later.

Given a 14-day illness cycle and 1 million new infections per day, that means roughly 14,000,000 people are out of work or otherwise compromised (maybe they are still coming into work because they have no choice) on any given day.

There are roughly 150 million people in the working population of the US, so 50% of the population is working, and we'll distribute the 14 million sick evenly into that (i.e. 7 million people sick on any day out of the working population).

This means that nearly 5% of the working population is compromised at any one time. With variants evading both vaccines and prior immunity, and no mitigation methods in place, people will continue getting reinfected over and over, so no herd immunity will be reached.

Thus, if you have a team of 20, there's going to be on average one person out on any given day. Factoring in a 20% long-covid rate, about 1-2 of those people who are out won't come back for a while.

In total, you're looking at about 10-15% of your team out sick or compromised. Covid seems to cause brain inflammation, people who are infected (or long-covid) often make errors in their work that they don't even detect.

So you're also going to have about 5-10% of your team making errors repeatedly at a higher rate than before due to the brain inflammation: some long-haul people go back to work, or try to.

(Say 5% do make a full no-brain-inflammation recovery)

It's actually a bit more than that, because the half of the 14 million sick who aren't working are probably children or dependents, which then affects the work ability of their working parents/caretakers.

If we were to assume that every child that gets sick also puts their parent out of work (or reduces their performance), you could be seeing as much as 30-40% of a team compromised.

Either way you try to cover for that, it's going to affect a business's output.

And that's what we're seeing: stores with reduced hours because staff is out sick. Restaurants that don't have enough staff for full capacity. Slower production, canceled flights, supply chain disruption leading to longer delivery times and reduced stock in stores.

It's not a total collapse: you can't get your favorite brand but you can get the other one. Your flight's canceled but you can fly tomorrow. You can go to another restaurant. Starbucks can't do in-store but drive-thru is open. It's just a reduced level of service.

All of this is tolerable, but it's going to ripple through an interconnected economy and reduce total economic throughput.

And that is a true recession: human beings are what produce value, and if you kill their elderly relatives and then make 10-15% of them sick, the rate of value creation will go down.

(I'm not a real economist, but as Galloway and Krugman have taught us, real economists don't seem to be any better than the rest of us at figuring this stuff out)

This is in contrast to the last two recessions, which involved a destruction/lack of collateral.

(h/t to our CFO Prem, with whom I had this discussion yesterday that prompted all this)

The 2000-01 dot-com crash happened because margin lending based on tech stocks collapsed from stock declines (illusory value creation that wasn't there or never materialized).

The 2008 recession happened because home loans based on housing value collapsed from similar small (at first) declines in price.

This is not that. This isn't a situation we can capitalize our way out of, nor did we really capitalize our way into it.

What we did was fail to contain a pandemic when we could have closed borders, done a short, sharp lockdown to isolate and ride out existing infections, vaccinate everyone before variants arose, and then adopt a mask mandate to keep r0 of remaining infections under 1.

We didn't do that, and to be fair, it's possible that we couldn't have if the rest of the world wasn't willing to do it too (the variants didn't arise in the US).

And it seems like we are culturally very far away from anything of the sort (though I really think masking would go a long way because it is variant-agnostic).

Instead, we printed a bunch of money, which was great for asset prices - especially since at the time, relatively few people were infected, and much of the SP500 is dominated by tech companies: they can sustain productivity even when people are working from home.

Eventually that is going to collapse, and notably it is not because the tech companies suddenly became much less productive.

Some of them stumbled a bit, but we saw 80% drawdowns on public companies that definitely didn't become 80% weaker, and they weren't built on quicksand.

No, my assertion here is that enough people finally got infected in late 2021 (i.e. Omicron hit) at an ongoing rate that they had to call in sick, so supply chains slowed, which interrupted production, which interrupted delivery, which interrupted people getting paid...

And none of it is a DISASTER. It can all be worked around. Things arrive a bit later. You have less product selection. The store closes a bit early. It's all fine, civilization continues. But... we're not making as MUCH.

That's a recession.

And that's why we see weird economic indicators like oil going down while inflation is going up.

Because if goods produced goes down and money supply stays the same (or goes up, lol), you have inflation.

While if you have flights canceled and people staying home, less oil gets used and demand goes down.

Same thing for commodities in general: actual real usage is going down (literally people being sick slows down economic output), even though they usually rise with inflation.

The Fed's actions and the Russian war are red herrings. They are big and sensational, whereas we all have covid fatigue, but that's still much, much bigger and very real.

You can reduce the liquidity and it will "cause" a recession, but is that what's really causing it?

Or is the recession actually just happening, and you simply can't "fiscally stimulate" sick people into not getting infected?

If my assertion here is true, then the following economic prediction should play out:

The recession ("malaise") will continue until the pandemic is truly over, whether via a universal T-cell vaccine (that, haha, we somehow get everyone to take) or it somehow burns itself out.

The recovery will then proceed in lockstep with the gradual recovery of all of the long-haul covid sufferers. As they each recover and re-join the workforce, productivity will return to normal.

Right now we don't know how long that last part will take. Some long-haulers are out for two or six months.

Others are on their 28th month, having been infected in March 2020. So we'll see. It could be a long, L-shaped recovery.

Either way, the denial/minimizing of the pandemic by politicians and the media will have little effect on the economy. They'll blame it on Trump or Biden or Yellen or Powell or abortion or AR15s, but millions of people being sick has GOT to have some macro effect on the economy.

I suspect the Biden administration's failure to stem the pandemic and total capitulation in vain hopes of an economic recovery to boost popularity...

... for the midterms will be.... a total failure. We may even see our BA.5 surge right before the midterms - which will be disastrous to the Democrats.

(Not that Biden was very popular anyway, or that the Republicans will do anything to fight covid)

Well, have a great summer!

And remember, large-scale native forest restoration is currently the most affordable, safest, and most immediately scalable method of carbon capture available to us today.

https://twitter.com/yishan/status/1519247198151593984