Economic Zombies and the COVID-19 Crisis | Think Realty | A Real Estate of Mind
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Economic Zombies and the COVID-19 Crisis

The COVID-19 pandemic has taken its toll. The deadly infection has spared no nation. Millions have contracted the disease and hundreds of thousands have died. However, in the United States a broad-based reopening of our economy is underway. States feared that remaining shutdown would rock the economy to its very foundation. Therefore, all have taken steps to reopen, but each step brings risk, and some warning signs show that moving too quickly risks forcing a second shut down. If that becomes necessary, the economic impact could be devastating. But not all is lost for real estate investors — during the pandemic and after.

An Optimistic Thesis

But Nobel laureate economist Paul Krugman provides reason for optimism. Earlier this year, Dr. Krugman published “Arguing with Zombies: Economics, Politics, and the Fight for a Better Future,” a study of the historic underpinnings of several debunked economic fears. He presents the case that these fears are based on zombies, or refuted ideas. One such fear is that overspending on stimuli in the face of a crisis will effectuate a cure worse than the disease. Adherents to this theory argue that the resulting increase in the national debt will fuel hyper-inflation and pass the burden of repaying the obligation to future generations.

One subscriber to this fear was Herbert Hoover, our President during the economic upheaval, which evolved into the Great Depression. Sadly, economists credit his inaction with exacerbating that national tragedy. But take heart. So far, Congress has demonstrated through its actions that it has learned from Hoover’s miscalculation.

Zombies and Irrational Fear

Dr. Krugman reports that a study of the history of economic crises has shown no instance where such a fear came to fruition. He cites several examples, including the situation Great Britain faced during the second world war. Given a need to defend the nation from a Nazi invasion, the British spent huge sums developing the military capability to repel and eventually defeat the Germans. As a result, by the time the war ended, Britain’s national debt had risen to 270% of its GDP.

However, its economy did not collapse under the weight of this debt and no governmental intervention proved necessary. Rather, natural economic growth reduced the debt to 50% of GDP over the next twenty years. Even more impressively, the government succeeded in managing this debt without repaying it. Instead, it continued to service it, while allowing its value in terms of purchasing power to spiral downward.

Further, Dr. Krugman presents proof that stimulating an economy in times of crisis is not linked to hyper-inflation. For example, you may remember that the Obama administration spent trillions to contain the subprime crisis. Many feared hyper-inflation would follow. However, inflation dropped to record lows instead and hasn’t risen significantly since.

 

Economic Impact of the Pandemic

But how does this relate to the crisis facing us today? In a recent interview, Dr. Krugman praised the assertive way Congress has approached the new threat to our economy. Despite the partisan bickering that has marked the functioning of government, legislators managed to come together and pass four acts designed to bolster the economy at this critical juncture. The third of these, the Cares Act, provided over six trillion dollars in economic stimulus. This legislation created a large cash infusion into the economy through subsidies to taxpayers and forgivable loans to small businesses. But the cash infusion into the Federal Reserve may prove most important.

Re-arming the Fed

The Fed was instrumental in rescuing our economy from the subprime debacle of 2008. However, in the process it used all the arrows in its quiver. Therefore, it needed additional resources to reinvigorate its ability to respond. The Federal Reserve is our central bank, and banks keep ten percent in reserve to maintain fiscal stability. Therefore, they are able to lend ten times the amount they set aside. Since the Cares Act provided in excess of $400 billion to the Fed, it empowered it to lend $4 trillion. This weapon is under the control of experienced economists who have demonstrated skill in protecting our economy and guiding it through crises. Since they are not encumbered by political considerations, you can expect that they will deploy the weapon to best effect.

But forces at work since Dr. Krugman’s interview have led current Fed chairman Jerome Powell to forecast that the economy will need continued government support. Therefore, he has pressed legislators to increase their efforts to stimulate the economy. While policy disagreements continue in Washington, be encouraged that signs point to Congress heeding Powell’s advice.

This Too Shall Pass

Looking forward, what can you expect of the road to recovery? With tens of millions unemployed, and many millions requesting abatement of mortgage payments, you must consider that the real estate market may face a significant downturn. Therefore, you may find that foreclosures and short sales again dominate the market for a time, creating opportunities for investors. By investing in distressed properties, you may assist the economic recovery, while simultaneously being rewarded handsomely. Therefore, stay positive and seek opportunity where others see only disaster. The American spirit cannot be defeated, and this too shall pass.

 

Andrew Kruglanski has developed and built residential and commercial projects and has managed a large portfolio of investment properties. As a Realtor and Real Estate Broker, he has sold millions of dollars of residential and commercial properties. He taught accounting at the university level and practiced as a CPA for many years. Currently, he is the broker/owner of Ocala Home Guide Realty, LLC where he writes the Ocala Lifestyle Blog, ranked the #1 real estate blog in Florida by Feedspot.