Discover more from Fintech Blueprint 🤖🏦🧭
Why $2 trillion is barely enough for the coming unemployment spike, expected 20%+ GDP slow-down, and small business crunch
Hi Fintech futurists --
Another heavy week. It is hard to find the right, or even the interesting, thing to say. I look at why the $2 trillion in US bailouts may not even be enough to stave off the economic damage. In particular, I am alarmed by the large and fast rise of unemployment claims (higher than 2008 peak), estimates that GDP may fall by 20-30%, and the broad impact on small business. Small businesses have 27 days of cash on hand, and power half of our economies through both employment and output. So how do we meet this challenge? What strength should we draw on in the moment of doubt to become the artists of tomorrow?
Thanks for reading and let me know your thoughts here!
Weekly Fintech & Crypto Developments
If you’ve found value over the years from my newsletter, now is the time to give back by purchasing a premium subscription.
A free "Futurist" tier includes the weekly Long Take, which you are seeing here.
A premium “Architect” tier include an additional 12 key weekly updates with graphs and analysis on Fintech bundles, Crypto and Blockchain, Artificial Intelligence, and Augmented and Virtual Reality. You can see example 1, example 2, and example 3.
Click below to subscribe.
I find myself speechless for a long time in a while.
This writing was always about the creativity of entprereneurs in the face of a monolith. That monolith was the financial incumbents. That innovation was human ingenuity across AI, blockchain, and digital experiences, working on beautiful progress in the face of rational skepticism.
Today, we just need the monolith to stand. And we need the entprereneurs to endure to come back another day.
Right now, nobody is thinking clearly. There may be plans, and math, and bailouts. We have made a global choice -- save lives, burn the bridges. Like the Russians retreating into the frozen country from Napoleon, destroying stocks and supplies alonger their way to starve the French, we are hunkering down in isolation to starve the coronovirus. As if a virus cares for this logic.
To save our lives, we have had to sacrifice our economic heart -- the one that brings food, community, employment, and other sustenance to billions. There was no choice. It is worth pausing on the strata of this impact.
First, we have the individual. Individuals produce and consume. Most produce, i.e., add to GDP, as employees of companies. They consume largely based on income and wealth levels. Let's do a quick back of the envelope. Of the 330 million people in the US, 160 million people are in the labor force. There are 8 million households with children under the age of 3, another 10 million households with children under the age of 5, 15 million under the age of 11, and another 15 under the age of 17 (source). So that's about 45 million households who are now at home with kids, and I'll just assume that 1 parent in the household is no longer able to work.
Let's simplify and say 40 million people out of 160 million people will exit the labor force for the time of contagion. In the case of a 3 month quarantine, we have just created 25% unemployment for 25% of the year, ignoring all the associated friction costs. This is consistent with the unemployment claims chart above, already higher per week than in 2008. But don't listen to me, listen to the St. Louis Fed.
US GDP is about $20 trillion per year. Cut that by 25%, and you get $4 trillion. This is why the Congressional rescue packages are in the $1-2 trillion range, and not the smaller billion sized actions that were previously considered. Even if you redirect $2 trillion into supporting consumer spending and making sure people have some type of safety net, there are existential complications. For example, where would those $2 trillion have gone instead? Likely lower priority projects, like building the best ICBM and negotiating Brexit, but jobs are on the line no matter what. If you just print the money, you de-value the purchasing power of existing money, and just re-distribute the losses politically. That may still be our best answer.
There is the longer term wealth and savings effect too. This is a dated chart (by a few days), but still a useful one. There may be limited impact on young people that lose 40% of their savings, since they can afford to lose risk capital due to earning potential in future years. But there are millions of folks in their 50s, 60s, 70s, and 80s that rely on market assets to support their retirement in a country like the US. If your pension runway has just been cut in half, the shock to a country's safety net and resources will also be immense.
Let's just say the Baby Boomers will have to work longer. But not everyone can go back to work. The Silent and Greatest Generations, the most vulnerable also to the disease itself, will have lost some large portion of their $12 trillion in investable assets -- maybe as much as $3-5 trillion. That should be considered as another liability on top of the $2 trillion GDP-driven bailout. It will adveresely impact the retirement and quality of life our elders, and it will also end any intergenerational wealth transfer that was to bail out the debt-ridden Millennials.
The last bit I want to discuss is the part that scares me the most. Once we have some semblance of normalcy and have regained control over the pandemic, there is still the question of what remains. Moscow was burned for Napoleon so that no food was left, and his armies starved and froze. Will our industry be similarly ravaged? The key quesiton in my mind is about small businesses and startups. This chart from JP Morgan suggests that the average business has 27 days of cash on hand, before it defaults and dies.
I am not going to search for the perfect math, but this report from the OECD does a thorough comparison between SMEs and large enterprises as to their contribution to the economy. We can roughly say that employment in the small business sector is somewhere between 40-70% of total global employment, defined as companies with less than 250 employees. And if you look at GDP, I would guess small business contribution is somewhere in the 30-50% range as well.
They are all dead in a month. The quarantine wipes all of them out.
Somebody has to take it on the chin instead. Somebody has to take a haircut on their wealth in order to maintain employment, small business, and retirees. The world's balance sheet needs to be written down 10%, 20%, 30%, and more. The landlord expecting rent from the coffee shop is going to extract rent until the coffee shop goes belly up (which is soon), and then the landlord itself will start to accrue losses. Why is this a problem? Because the landlord is in debt too. What looked like 35% debt to market ratios (i.e.., $35 of debt for every $100 of value) will look like 50% ratios (i.e., $35 of debt on the new $60 market value). Investors accrued lots of debt because it was cheap, and that also made market prices go up, since everything was easy to finance.
Do you think people will want to pay rent on commercial real estate or work from home on Zoom? This is why SoftBank is backing out of trying to rescue WeWork, opting instead to save the $3B+ of capital.
So naturally, the buck stops with the banks. The banks will be forced to suspend interest accruals and payments on debt, meaning narrow profitability will tank. They will have to write down the value of their collateral, and risk not holding enough regulatory capital. They will need to lower leverage and deal with the chance of banks runs, as people withdraw money to afford living their daily lives. But remember that banks are mandated by government to have certain amounts of capital, and to underwrite risks of only a certain quality, and that their liquidity and credit provision is what makes the financial world go around. If it were your money, would you lend to your neighborhood coffee shop with a fat rent check and an indefinite pandemic threat? No, you wouldn't.
By now, what you are hopefully seeing is that the entire system is closely interwoven. People, small businesses, large institutions, banks, governments -- you can't squirrel away the damage caused by the coming recession and market destruction. You can only redistribute it, and prioritize it.
To do that we need principles, vision, and strength. We need to know what is important to us and the nation, and what our people's true beliefs really are. We need to have healthy governance, trust in the elected body, and a spirit of neighborhood.
I don't see how we will get there in time. What we will get out of this crisis, however, is a new system of beliefs. I remember going through 2008, working at Lehman at the time and standing at the skyscraper window the weekend when everything fell apart -- looking at the news and my own refection. It tooks years after that moment, but my own view of the infallibility of our institutions evaporated away. That feeling, that there is nobody there doing the backstop in whom you really trust, that feeling is liberating. It means that you might as well do it yourself.
Since 2008, many fintech vectors have been working on empowering people to have this ability. We can create decentralized networks according to need. We can move money and assets without ever touching a commercial enterprise. We can exchange information, data, and technology seamlessly. This has been recently blocked by (1) the need for venture exits, creating behemoth messes of B2C companies, and (2) stubborn regulation that enforces a a world where protecting the consumer results in protecting the most conservative banks. Both of these barriers will soon shatter.
I hope that very many people will learn this lesson from the pandemic. You cannot delegate entrepreneurship, kindness, and trust to the State, the Federal Reserve, Goldman Sachs, Facebook, the European Union, or the world's governments. Yes, they have a burden to bare in saving us from calamity. They will do it with bureaucracy and power trading, saving themselves first. We have to save ourselves -- so let's do it with grace.