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Alphabet Economics: Why the Old Rules of Recoveries May Not Apply | WSJ - YouTube
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(upbeat music)
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- [Announcer] If you watch
the news, you've probably been
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hearing about alphabet economics.
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- V shape.
- That V shape.
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- The W shape.
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- The U shape or the dreaded L shape.
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- [Announcer] This is how economists talk
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about economic recoveries.
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And it's not just jargon.
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These letters drive policy
decisions at Congress
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and the central bank, decisions
that can help determine
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how far we fall and
how quickly we rebound.
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But the Coronavirus downturn is different
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from past recessions.
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In fact, it's so different
that economists are having to
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come up with new shapes to
describe the potential recovery.
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When economists study a
rebound, they often look back at
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previous recoveries for insight.
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Here's a look at change in
the US' gross domestic product
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over the past century.
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You can see, these letters
appear in different places
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on the chart.
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Look at 1953.
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In the midst of an economic
boom, the Fed raised
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interest rates to prevent
inflation and the economy saw
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a sharp contraction followed
by a quick recovery in 1954.
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This is the V.
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- V is preferable.
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What it means is that right
after you have the downturn,
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you bounce right back.
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In a V shaped recovery, we
would get back to the previous
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high of GDP and the
previous low of unemployment
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within a matter of months
instead of a matter of years.
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- [Announcer] Experts say it's
possible that we could see
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a V shaped recovery from
the current recession.
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- The early signs that we
got in May, suggested we were
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bouncing back from a very deep hole.
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There's a chance people just come back
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and try to get back to business.
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Some of our income has been
replaced by the government,
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by government paychecks, and
so that could come right back
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but it's not a certainty.
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- [Announcer] Jump ahead to
the early 1980s when the Fed
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pushed interest rates
higher to battle inflation.
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The GDP dipped down in 1980,
spiked back up, and then
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plummeted even further before
recovering at the end of 1982.
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You can see this formed
a W shaped recovery.
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- The Fed was pushing up
interest rates to get inflation
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down but it didn't work,
they had to go back at it.
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And it wasn't really until the
end of 1982 when the Fed was
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in a position where it could
cut interest rates aggressively
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and get the economy back on track again.
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The Fed is in a different
position this time, because
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they've cut interest rates
very aggressively already.
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There's no inflation on the horizon.
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- [Announcer] If we see a W
this time, it will likely be for
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different reasons tied to the Coronavirus
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- If the second wave comes
in and people stop going out
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and factories have to shut down
again and governments start
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putting on more restrictions
that could stall the expansion
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that we started to see in May and June.
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- [Announcer] But there
are other options too.
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Look at 2009, at the period following
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the last financial crisis.
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The economy declined steeply
when the housing bubble burst
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and took nearly two years to recover.
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This is known as a U shaped recovery.
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- What could cause a U
shaped recovery this time
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is you have to come
back to the Coronavirus.
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If we continue to see high case loads
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and high hospitalization rates,
it might be that people are
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very slow to get back to business
normally and then we just
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don't climb out of this very quickly.
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- [Announcer] So those are
the traditional shapes of
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alphabet economics.
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But again, this downturn is
different and economists are
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looking at other shapes
to try to describe it.
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- Our economy got hit by an
outside shock, the Coronavirus,
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and we just shut it down.
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It was almost like a
meteorite hit the economy.
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- [Announcer] One of these
shapes is the swoosh,
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where the economy falls
quickly rebounds a little,
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but then takes months or
even years to recover fully.
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- I think what would cause a
swoosh like expansion is that
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all of the uncertainty that comes out
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of what we just experienced.
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The way people think about for instance,
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do I wanna live in a city anymore?
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The way a business about do
I want to invest in an urban
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area or someplace where it might be safer
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and not as congregated?
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That it takes years potentially
for people to get back into
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our comfort zone where
the economy is functioning
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at its full capacity.
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- [Announcer] And it may
take even longer than that.
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Some economists say this
recovery could look more like
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a reverse square root sign,
where it drops and then rebounds
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partially before flatlining
for a prolonged period of time.
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If you look at the economic
activity index from earlier
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this year, you can kind of see it.
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It dropped sharply in March
and rebounded partially
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before appearing to start to flatten out.
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But it's too soon to
say if it will flatline
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- I would say a reverse
square root sign would mean
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in the early stages of the
recovery, a quick bounce back
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and we have seen that in May and June.
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But then as it proceeds, it flattens out.
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So we don't get all the
way back to where we were
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because business isn't a
household come out of this
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less willing to spend and invest because
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the Coronavirus doesn't go away.
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- [Announcer] The path
of a recovery isn't just
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an abstract shape.
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It helps policymakers determine
how much stimulus money
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to pump into the economy.
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- If the Fed was confident
that we were gonna have
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a V shaped recovery, then
they would start raising
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interest rates sooner
than they otherwise would.
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They would stop doing
their bond buying programs
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sooner than the otherwise would.
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If they think it's gonna be
a long and slow and drawn out
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recovery that holds down
inflation, then they're gonna keep
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interest rates really low
for a longer period of time.
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It's fundamentally important
because if the Fed is
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determined to hold down interest
rates 'cause it thinks it's
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gonna be a slow recovery,
then that will hold down
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the rate that you pay on your mortgage,
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that'll hold down the rate
that you pay for a car loan.
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- [Announcer] To protect
millions of unemployed Americans,
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the Fed has signaled plans
to keep interest rates
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close to zero through 2022.
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- The worst casualty,
economically, in a recession
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is the person who loses his or her job.
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So this affects everyone who's
out of work and wants to get
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back on the factory floor,
wants to get back into the
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restaurant, wants to
get back in the office.
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- [Announcer] Congress's
decision about whether to approve
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more economic relief for these workers
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will depend on the shape of the recovery.
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And as the Coronavirus cases
rise across the country,
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that shape remains uncertain.
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