Wednesday, October 28, 2020

Q3 GDP 2020 Forecast to Grow at a Record 35.3% Annualized Rate

"The Atlanta Federal Reserve estimates that GDP will grow at an annualized rate of 35.3% in the third quarter..."

"The Economics Correspondent has access to annual GDP figures going back to 1800... ...Just one quarter after many in the media were predicting another Great Depression the economy is showing resilience with a rebound which, measured by GDP, will set a record going back to before the days of George Washington and Benjamin Franklin."

Analyzing Upcoming Q3 GDP Numbers

Click here to read the original Cautious Optimism Facebook post with comments

As CO readers may have already noticed, the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff doesn’t comment on every single monthly or quarterly jobs, unemployment, GDP, or inflation report.

But these are historic times. The arrival of Covid, government lockdowns, and then economic reopenings has generated wild swings in the economic indicators that we may not see again in our lifetimes.

Therefore it’s worth putting Thursday’s upcoming Q3 GDP report into perspective.


The Atlanta Federal Reserve estimates that GDP will grow at an annualized rate of 35.3% in the third quarter.

You’re not misreading that. It’s not 2% which was so common during the Obama years, or 3% as we typically saw during the first three years of the Trump administration.

It's +35.3%, with twenty other forecasting institutions averaging a lower estimate of about +29%.

Keep in mind +35.3% is an annualized growth rate, meaning real GDP actually grows 7.85% for the quarter (1.0785 ^ 4 = 1.353).

But whichever estimate you use—the Atlanta Fed’s or the private forecasters'—these are simply historic numbers.

The Economics Correspondent has access to annual GDP figures going back to 1800—using academic scholarly estimates up to 1944 and official government statistics afterwards. Let’s compare +35.3% annualized per quarter to past records:

Quarterly: GDP statistics by quarter are only available starting in 1947 and the record stands at 16.7% in Q1 of 1950 when the USA was coming out of a recession. 

Going back before 1947 the Economics Correspondent’s best guess for a potential rival would be the second quarter of 1933, right after the great banking Panic of 1933 (February/March). The government’s March audit of the nation’s banks and mass return of deposits by bank customers launched a strong economic comeback that was abruptly squelched that fall by Franklin Roosevelt’s National Recovery Act.

Annual: GDP by year is more interesting. Unsurprisingly the highest gains are in wartime when the government engages in large military purchases. However, wartime GDP is misleading since private GDP often suffers as government spending “crowds out” private consumption and investment spending.

Consistent with this problem is 1942, officially the highest year at +18.9% GDP growth and 1943, the next highest at +17.0%. Unsurprisingly these were the first two full years of America’s involvement in World War II, and just as predictably private sector GDP was negative in both years. So even though 3Q20 eclipses both, it’s not suitable to compare “mostly peaceful protesters” 2020 to wartime 1942 and 1943.

Thus the strongest year of private GDP growth in American history was 1946 at +18.7%. Ironically this is the same year the federal government drew down wartime spending resulting in an official GDP loss of -15.8%, but in fact it was the greatest year of private sector economic growth in American history.

Readers who are curious about the economics of the World War II spending drawdown and 1946 boom can read the Correspondent's 2019 article at:

But for now let’s compare these records to 3Q20.

An annualized gain of +35.3% is greater than double the previous quarterly record of +16.7% in 1950, and nearly double the greatest private sector annual record of +18.7% in 1946.

And it’s important to note that since +35.3% is an annualized figure, the economy would have to sustain an impressive double-digit annualized rate of growth for three more quarters to compare suitably with the entire year of 1946.

But by any measure, 35.3% annualized GDP growth in one quarter is an off the charts, unprecedented record.


So the Economics Correspondent is willing to bet his next year’s salary that when these numbers are released, the media will immediately try to spin them like wet laundry.

Fearing any good news that might reflect positively on Donald Trump and detract from their campaign's chances of victory, the Correspondent predicts any combination of these headline narratives:

1) “GDP growth lower than expected”

2) “GDP up but expected to slow”

3) “GDP up but millions still out of work”

4) “GDP growth misleading because it follows a revised -31.4% annualized loss in Q2”

5) Blackout. Or bury the story at the bottom of page B7.

Nowhere in the headlines will we see the words “record” or “historic” or “unprecedented” unless it’s in conservative leaning outlets such as Fox News or the Wall Street Journal.

But regarding the fourth and final “spin,” there is actually a lot of truth to the argument that +35.3% growth is simply digging out of the hole of the -31.4% annualized contraction of the previous quarter.

No one seriously believes the economy will be 35% larger this Christmas than it was last Christmas, so it’s true that there was a huge drop in Q2 followed by a huge bounce in Q3. An economy starting at an index of 100 that loses 9.0% for the quarter (-31.4% annualized) and then gains 7.9% the next quarter (+35.3% annualized) settles at 98.2, not 135.3.

And of course there are more quarters to come post-election which will probably raise the index further. 

Well, the index will rise assuming a giant Covid autumn/winter second wave doesn’t produce a negative enough affect on consumer behavior or worse yet a return to economic lockdowns. Most economists think the result would be a slowdown of the recovery, not a reversal, but it all depends how bad the new cases and how bad the local/state government restrictions get.

But despite the media’s likely spin that it’s only a bounce after a giant contraction, the key point is that there *is* a bounce—a gigantic, record bounce.

Just one quarter after many in the media were almost gleefully predicting another Great Depression the economy is showing resilience with a rebound which, measured by GDP, will set a record going back to before the days of George Washington and Benjamin Franklin. It’s already broken records for the pace of reduction in the unemployment rate.

Contrast the current 2020 rebound with the “recovery” under Barack Obama where the media declared him the Messiah when an isolated quarter came in at 5%, but the average over his eight years was more like 2.2% in which case it was the fault of Congressional Republicans.

Yes, yes, Obama had a real structural recession in 2009 and Trump has an economy that was artificially put to sleep and then woken back up. Yes, they are two completely different kinds of recessions, but few in the media will even try to make that distinction because it will mean first acknowledging that the economy has woken up with a vengeance in the first place.

So CO Nation will have to read it right here because you won’t get it from CNN or The New York Times. If Q3 GDP numbers are anywhere in the ballpark of the forecasts, it will be validation that the economy is rebounding from Covid-related lockdowns with a strength never before seen.

But instead we’ll probably see negative headlines about malaise, joblessness, and suffering.

And inequality. You're supposed to never, ever forget about inequality.

Saturday, October 17, 2020

Inflation and Deflation Fallacies Part 3: Why So Many Economists Get Deflation Wrong

 Click here to read the original Cautious Optimism Facebook post with comments

4/6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff continues discussing inflation and deflation fallacies by explaining why so many economists just don’t understand deflation.

As we demonstrated in the Correspondent’s previous installment on deflation, zero inflation or gently falling prices don’t cause or prolong recessions and depressions. And the USA has 138 years of history before 1914 to prove it, when prices gently fell throughout and the economy grew at breakneck speed into the world’s largest.

You can read that article at:

But in the meantime, how then could so many mainstream economists and the media (restrain laughter) get deflation so wrong?

As monetary economist George Selgin of the CATO Institute never tires of explaining, most economists don’t understand the difference between good deflation and bad deflation.


So what’s bad deflation?

Bad deflation is rapidly falling prices associated with a catastrophic shock to demand, typically the result of the many banking crises that occurred throughout the 19th century and during the Great Depression.

When banks fail in large numbers their demand deposit (ie. checkbook) balances become worthless and the money supply suffers a sudden contraction. Furthermore, during a crisis even surviving banks tighten up credit and curtail lending—a measure to conserve scarce reserves. 

As debtors pay back debts but no new loans are made, the money supply further contracts, so all other things being equal prices fall.

The most famous case of bad deflation, which virtually all mainstream economists cite, is the 1930-1933 period of the Great Depression when 10,000 U.S. banks failed, the money supply shrank by one-third, and prices fell a whopping 10% per year on average for nearly four years.

In a deflation that extreme, not only were prices falling very rapidly but the bank failures themselves and associated drying up of lending harmed the economy even more. In other words, it wasn’t so much falling prices themselves that were tanking the economy, but rather a collapsing financial system. Rapid price deflation, while certainly problematic, was as much a consequence as a cause of depression.

In such a scenario debt can also becomes a problem since debt payments are fixed in nominal terms but prices and wages quickly fall so more borrowers default, placing even more strain on the credit system.

This is pretty much all most economists think of when they consider falling prices. They're taught, and believe, that deflation of any kind must necessarily produce Great Depression conditions.


Yet as bad as the 1930’s deflation scenario is, assumptions about the extent of its malignance have to be questioned because there is historical precedent of rapid deflation that didn’t produce a Great Depression.

After the mostly-forgotten Panic of 1839, prices also fell by even more than one-third over four years in a deflation that exceeded the Great Depression’s. 

But the macroeconomic results were quite different then. As Professor Jeffrey Rogers Hummel of San Jose State University writes:

“During the Great Depression, as unemployment peaked at 25 percent of the labor force in 1933, U.S. production of goods and services collapsed by 30 percent. During the earlier nineteenth-century contraction [1839-1843], investment fell, but amazingly the economy's total output did not. Quite the opposite; it actually rose between 6 percent and 16 percent. 

"This was nearly a full-employment deflation. Nor are economists at any loss to account for this widely disparate performance. The American economy of the 1930s was characterized by prices, especially wages, that were rigid downward, whereas in the 1840s, prices could fall fast and far enough to quickly restore market equilibrium.”

-“Martin Van Buren: The American Gladstone” by Jeffrey Rogers Hummel

Even mainstream MIT former Economics Department Chair Peter Temin, himself a fairly left-leaning mainstream quasi-Keynesian cites the 1839-1843 experience:

“As some detailed estimates by economic historian Peter Temin show, the contraction in the money supply was even greater in 1839-43 than in 1929-33. The fall in the price level was substantially greater: -31 percent in 1929-33 and -42 percent in 1839-43.

"But consumption in real terms, which decreased by 19 percent in 1929 to 1933 increased 21 percent from 1839 to 1843. More dramatically still the real gross domestic product, which decreased by no less than 30 percent from 1929 to 1933, increased by 16 percent from 1839 to 1843.”

-“The Rise and Decline of Nations” by Mancur Olson

To add color to Professor Hummel’s contrast between the price and wage policies of the 1839-1843 and 1929-1933 periods, the Correspondent would like to add that during the Hoover years of the Great Depression the top federal tax rate was raised from 25% to 63%, taxes on the middle classes raised by over 100%, an international trade war was launched by the Smoot-Hawley Tariff, and federal government spending more than doubled in real terms.

So while the Economics Correspondent doesn’t want to test the theory of 10% annual deflation anytime soon, the stark contrast between the 1839-1843 and 1929-1933 periods suggests free market economies are more resilient to rapidly falling prices than mainstream economists believe. 

An over 40% fall in prices during the 19th century failed to produce a Great Depression because market prices and wages were freely floating and allowed to adjust rapidly.  And 19th century America was free from the crushing government tax and spending hikes, inflexible labor regulations, and global trade wars of the 1930's.


However there is a “good” kind of deflation too, and it dominated the 19th century with the exception of several banking panics that occurred on average every dozen years.

Good deflation occurs when the economic output is growing faster than the money supply. 

During the 19th century the United States was on a bimetallic (gold and silver) standard until 1879 when it joined the industrialized world on the monometallic classical gold standard. But in both cases, the money supply was closely linked to precious metal reserves and the pace of new mining discoveries thus limiting the rate of monetary expansion.

If, for example, the economy produced 5% more goods and services one year but the money supply, constrained by the gold standard, grew by only 4%, then assuming constant velocity the price level fell roughly 1% (104 units of new money divided by 105 new units of product = 99.05% the previous price level).

Quite the opposite from the bad deflation scenario, good inflation is associated with strong economic growth. Clearly the faster the economy grows the further prices will fall provided money growth remains restrained, or in the Equation of Exchange mv = py, rising output ( y ) results in a lower price level ( p ), all other variables being equal.

In real world practice this produced benign, gentle deflation during the Gilded Age. Annual prices fell a little slower than 1% on average from 1865 to 1914, and far from a half-century Great Depression America experienced the fastest half-century of economic growth in its history.

Unfortunately most economists are taught in school that depression is simply associated with deflation, particularly the Great Depression. They also look at the recessions and depressions of the 19th century and notice an accompanying fall in prices—a trend present throughout the entire century, not just during slumps—and conclude deflation must have caused those downturns.

Well correlation is not causation, as deflation was the norm during both economic booms and economic busts during the pre-Fed era.

And one mustn’t underestimate the impact of living in an academic and media echo chamber, where large numbers of intellectuals and reporters simply recycle the myth among themselves. 

The myth, repeated enough times, becomes the truth, although the Economics Correspondent doesn’t let academia in particular off the hook. It’s their job to thoroughly research the theory and history before opining. Too many don’t.

====OK, stop reading here unless you are an econ nerd seeking a more detailed (wonkish) analysis.====

ps. See attached visual model of good vs bad deflation.

Model 1 (“Falling AD”) is a graph of bad deflation resulting from a sudden demand shock, usually the result of a banking crisis and contracting money supply. The quantity (x-axis) of demand represented by curve AD1 shifts left to lesser demand curve AD2. Thus the intersection with long-run aggregate supply curve LRAS moves down the price or y-axis from P1 to P2 resulting in lower prices.

Model 2 (“Lower costs of production”) is a graph of good deflation resulting from capital investment and higher productivity which raises output of goods and services per unit of labor. The quantity (x-axis) of aggregate supply represented by curve SRAS1 shifts right to greater supply curve SRAS2. Thus the intersection with aggregate demand curve AD moves down the price or y-axis from P1 to P2 resulting in a lower prices.

There is absolutely nothing wrong with Model 2 as it was the real-world norm during the spectacular growth periods of the Industrial Revolution and American Gilded Age. In fact good deflation would be the norm today were it not for central banks producing new money at a rate faster than the growth of goods and services in a deliberate policy of eternal price inflation.

In the “bad deflation” environment, government intervention has historically made things much worse. If the government forces prices back to P1 (price and wage floors such as those during the Great Depression) a gap or “surplus” in quantity appears between new demand curve AD2 and supply curve LRAS. That gap—follow dotted-line P1 between AD1 and AD2—in quantity applies to both goods and services and particularly labor. 

Hence as aggregate demand fell during the Great Depression and the government forced wages up to old price level P1, the supply of labor at LRAS/P1 exceeded the demand for labor at AD2/P2, and the surplus was manifested as double-digit unemployment for a decade that peaked above 25% in 1933.

Thursday, October 8, 2020

Wuhan Institute of Virology 2015 Paper: "We Created a Chimeric Virus... ...from Chinese horseshoe bats... primary human airway cells and in vivo."

Click here to read the original Cautious Optimism Facebook post with comments 

1. Chimeric (adj): relating to or denoting a DNA molecule with sequences derived from two or more different organisms, formed by laboratory manipulation.

2. "…we built a chimeric virus encoding a novel, zoonotic CoV spike protein—from the RsSHC014-CoV sequence that was isolated from Chinese horseshoe bats... ...Using this approach, we characterized CoV infection mediated by the SHC014 spike protein in primary human airway cells and in vivo."

-Dr. Shi Zhengli, et al. (2015 research paper on Wuhan Institute of Virology bat coronavirus research)

Wuhan Institute of Virology bat coronavirus expert Shi Zhengli

4 MIN READ - The Cautious Optimism Correspondent for Left Coast Affairs and Other Inexplicable Phenomena thanks CO Nation regulars Don Deere, Ticiba Upe, and others for sending him down the investigatory road that led to the discovery of this 2015 scientific paper detailing bat coronavirus re-engineering experiments at the Wuhan Institute of Virology.

The Correspondent has extracted key passages from this open 2015 scientific paper (link and excerpts at end of column). The text reads somewhat technically, but with a little persistence one can clearly see what the joint Chinese-western team was trying to accomplish, including “batwoman” Shi Zhengli, China's top authority on bat coronaviruses.

In layman terms, they were concerned that one day a bat coronavirus might jump naturally to humans and create another 2003 SARS-like outbreak.

So to head off such an eventuality they decided to genetically alter a natural coronavirus from the horseshoe bat to enhance its ability to infect mammals via the ACE2 receptor and then test various antibody therapies on it to stockpile effective treatments in case such a future outbreak might occur.

They also tested the genetically altered coronaviruses on human lung tissue and were pleased with the results. The artificial coronavirus proved quite adept at penetrating lung tissue and replicating.

However some western scientists expressed concern that the risks of such experiments far outweighed any potential benefits should the chimeric virus “escape.” In other words, their risky research to head off a future outbreak might create the outbreak itself.

The Left Coast Correspondent is no fan of paranoid conspiracy theories that instantly circulate at the first onset of every crisis, but over time more and more circumstantial evidence has emerged providing a growing list of implausible coincidences.

Each single coincidence was already somewhat dubious on its own, but as more and more are added to the long chain of coincidences the shrinking probabilities relentlessly build a circumstantial case that Covid-19 was artificially conceived at the Wuhan Institute of Virology as a superefficient human infector for benign albeit unwise reasons.

In other words, once in a while a conspiracy theory turns out to have merit.

The unlikely chain of coincidences includes:

-The outbreak started in Wuhan, the same city where the experiments were conducted.

-The original Covid-19 coronavirus originates in a species of bat that lives 500 miles away from Wuhan.

-All cell phone voice and data traffic dropped to zero at the Wuhan Institute of Virology from October 7-24 of 2019, consistent with a shutdown if Chinese authorities suspected a leak.

-The Covid virus is superefficient at infecting humans, something unusual for viruses that have just made their first natural jump. Natural viruses typically need years/decades of mutations to perfect the process, but Covid-19 hit the ground blazing through the planet's human population effortlessly. By contrast the SARS and MERS coronaviruses quickly burned out because they couldn’t infect more humans easily enough.

-A Chinese virologist has defected to the United States claiming the Covid-19 coronavirus is chimeric and was engineered at the Wuhan Institute of Virology.

-Scientific papers still exist online confirming the reengineering of bat coronaviruses was taking place at the Wuhan Institute of Virology for the expressed purpose of making them highly infectious to mammals and human lung tissue.

-China’s “batwoman” Shi Zhengli has made public statements denying the Covid-19 virus is related to the viruses her team was working on at the WIV, her words and mouth movements obviously connected to puppet strings tugged by her ventriloquist: the Chinese Communist Party. Communist precedent exists with Soviet scientists we now know were ordered to lie to the world about the 1979 Sverdlovsk laboratory anthrax outbreak. 

-The Chinese government prohibited any WIV access to outside experts until finally providing NBC News a sanitized tour and controlled interview in August of 2020, more than eight months after the initial outbreak at Wuhan's Huanan Seafood Market.

-The Chinese government has hidden away WIV scientists and technicians, putting them out of reach from international experts and journalists. Only a few prepared statements and controlled interviews with state run Chinese media have been allowed, and what few western scientific inquiries are answered have been funneled through WIV Director General Wang Yanyi, an immunologist who has ascended to the Director General post through a combination of her scientific credentials, loyalty to the Communist Party, and political shrewdness adhering to official CCP narratives.

Yet the Chinese Communist government insists these are all coincidences and that the Covid outbreak is completely natural in origin.

Links to the paper and article about scientific dissent are included below as well as the key passages including multiple instances of the words “chimeric virus.”


“The emergence of severe acute respiratory syndrome coronavirus (SARS-CoV) and Middle East respiratory syndrome (MERS)-CoV underscores the threat of cross-species transmission events leading to outbreaks in humans. Here we examine the disease potential of a SARS-like virus, SHC014-CoV, which is currently circulating in Chinese horseshoe bat populations1. Using the SARS-CoV reverse genetics system2, we generated and characterized a chimeric virus expressing the spike of bat coronavirus SHC014 in a mouse-adapted SARS-CoV backbone. The results indicate that group 2b viruses encoding the SHC014 spike in a wild-type backbone can efficiently use multiple orthologs of the SARS receptor human angiotensin converting enzyme II (ACE2), replicate efficiently in primary human airway cells and achieve in vitro titers equivalent to epidemic strains of SARS-CoV.”

“Evaluation of available SARS-based immune-therapeutic and prophylactic modalities revealed poor efficacy; both monoclonal antibody and vaccine approaches failed to neutralize and protect from infection with CoVs using the novel spike protein.”

"However, sequence data alone provides minimal insights to identify and prepare for future prepandemic viruses. Therefore, to examine the emergence potential (that is, the potential to infect humans) of circulating bat CoVs, we built a chimeric virus encoding a novel, zoonotic CoV spike protein—from the RsSHC014-CoV sequence that was isolated from Chinese horseshoe bats1—in the context of the SARS-CoV mouse-adapted backbone. The hybrid virus allowed us to evaluate the ability of the novel spike protein to cause disease independently of other necessary adaptive mutations in its natural backbone. Using this approach, we characterized CoV infection mediated by the SHC014 spike protein in primary human airway cells and in vivo, and tested the efficacy of available immune therapeutics against SHC014-CoV."

"...bat Ace2 sequence was based on that from Rhinolophus leschenaulti, and DBT cells expressing bat Ace2 were established as described previously8. Pseudotyping experiments were similar to those using an HIV-based pseudovirus, prepared as previously described10, and examined on HeLa cells (Wuhan Institute of Virology) that expressed ACE2 orthologs. HeLa cells were grown in minimal essential medium (MEM) (Gibco, CA) supplemented with 10% FCS (Gibco, CA) as previously described24. Growth curves in Vero E6, DBT, Calu-3 2B4 and primary human airway epithelial cells were performed as previously described."

"other virologists question whether the information gleaned from the experiment justifies the potential risk. Although the extent of any risk is difficult to assess, Simon Wain-Hobson, a virologist at the Pasteur Institute in Paris, points out that the researchers have created a novel virus that “grows remarkably well” in human cells. “If the virus escaped, nobody could predict the trajectory,” he says."

""The only impact of this work is the creation, in a lab, of a new, non-natural risk,” agrees Richard Ebright, a molecular biologist and biodefence expert at Rutgers University in Piscataway, New Jersey. Both Ebright and Wain-Hobson are long-standing critics of gain-of-function research."