Reading the comments there are a surprisingly high number of readers of this post that are completely overlooking what Matt is telling them at the beginning of this post in favor of <insert my pet bias about the economy here>
How (too) many people view the economy has become weirdly tied into their politics and identities in a way that blinds them to real-world data.
Matt, of all people, is no stranger to the shortage of housing in the US. As a serious concern, this reared it's head post-crisis (although it's always been a problem in some areas NYC, SF, ...).
I am worried we could be looking at a similar over-correction here. Fewer people will want to open restaurants, be in the hospitality industry, or make investments in the category of 'crowded meat-space.'
If this happens, the inflationary pressure will be overestimated (or correct, but for unfortunate reasons). On top of that, these are industries that tend to employ the lowest wage workers. This could grow the chasm in pandemic outcomes, one that is already very likely to be bad.
There is only so much the fed can do if the national mood has turned in the wrong direction.
This has been one of my favorite posts so far. Partially because I agree with so much of it (and the macro framework underlying it) but more importantly because it highlights the importance of macro and especially monetary policy which I still think is vastly under appreciated (and often ignored) in most political discussions.
Different Fed policy during the great recession would have led to a very different economic situation in the last decade which wouldn't have just spared millions of people needless economic hardship but would've also changed the narrative around inequality, losers from trade, etc. and potentially the political fallout from that.
I have to admit not to know much about Jerome Powell outside of his work as Fed chairman (and have not thought of him as a partisan figure) but have been extremely impressed with everything he's done so far so I'm hoping that he'll continue to do so under a Biden administration.
What's the counter-factual fed policy for the great recession that would have had a better outcome? What should they have done?
If I understand correctly, wasn't the target rate 25 bp without moving from 2010 -> mid 2016?
I've heard Obama-era economists and others who are more to the left say "the stimulus was too small, that was the problem", but that's the fiscal side.
I'm having a bit of a hard time quickly finding one article that explains it well. My own explanation is going to be very rushed, basic, and likely inadequate but my TLDR would be that people generally look at the target rate to judge whether money is loose or tight when they actually need to look at it in context - if the economy is continuing to slow in the face of a certain target rate that actually means that money is tight, and if it's expanding with a high target rate money is likely too loose. Leading into the great recession people thought money was loose or being loosened because the rate was low but the economy was collapsing faster than most people realized -> money was too tight. In terms of the recovery there were lots of discussions about how money was likely too tight but also enormous pressure from people who are always worried about inflation no matter what - both in the US and in the EU (where the ECB did a terrible job).
I should note that I generally believe in market monetarism which influences a lot of what I just wrote and while that is still outside of the mainstream it seems to explain a lot of economic history best and recent moves by the Feds are shifting in the direction of a similar framework.
Ah...I think my trite summary from the Voxsplainer (which isn't bad) is that they could have done "QE, but with more feeling."
I'm a little wary of "Japan devalued their currency by printing money, their exports became competitive and increased and that worked well for them" as something that would be portable to the US.
But yeah, I get that if you think the problem in 2008 was a lack of money supply, that's on the Fed, not congress. And for the 2008 recession in particular, where there was just a massive credit contraction, that strikes me as not crazy, albeit possibly very specific to the financial crisis.
Certainly the "zOMG inflation" worries do seem a little silly in hindsight. :-)
You want growth and inflation? Me too, let's include a chart of money velocity and do more than handwave how it will rise enough to counteract long-term decline.
If you're not going to do that, can you at least share the prewrite blaming Republicans for low growth?
And you can show the TIPS chart all you want to suggest inflation is coming (was in a previous post) but it's no secret that the Fed is buying over 50% of all TIPS sold on any given day.
In the restaurant discussion I'm curious how other folks are analyzing the situation.
You "own" a restaurant that was doing decently well. But business falls and you get make rent so it goes bust. The landlord inherits some worthless (in this market) restaurant equipment, service items etc. The landlord has bills to pay and it's not like he's going to find another tenant. Who would want the space? Retail? hahaahahahha
Now a few months from now the vaccine is widely available so the previous owner comes back and says to the landlord, "I'm willing to reopen here are my terms. Take them or leave them." And the restaurant starts again at 50% of the rent it had been paying.
But why did that negotiation not occur before the liquidation? And would the liquidation have occurred if monetary policy was keeping inflation expectations at 2% PCE
There will be some of this. Keep in mind that some of the equipment may have been pledged to a lender (not to the landlord). But the general furnishings will have real value too. That all said, I think expectations now have evolved to a point where most deals will be to waive the missed rent and to get back to the original rental schedule starting April or May. Your scenario would have been more common before the vaccine success got announced. Lastly, landlords may look for something other than rent in exchange for waiving the back rent. Like a lease extension.
I think this is really going to vary depending on the local situation. Recall that most of American retail is in sort of generic suburban strip malls where chains may just scoop up any spaces vacated by independent restaurants.
I was talking the other day about how much cheaper Dunkin' Donuts is out by my parents place. Presumably that's primarily a function of rent and wages. A chain that sings a lease for 30 or 50% less than normal is going to have lower prices to drive volume at the expense of competitors locked into expensive leases.
"The landlord inherits some worthless (in this market) restaurant equipment..."
Very little, if any at all. There is always a secondary market for that stuff and it would be foolish to walk away and leave it. Plus certain things like dishwashing equipment are often leased, and its owners are going to come around and get it.
i have heard that sometimes when it seems economically rational for the landlord to just lower rent and fill a vacancy, there are terms in their mortgages that make it harmful for them. like renting at the lower rent will make a number in a bank's spreadsheet go down and cause big problems for them.
i don't know enough about the real estate business to actually comment on if it's accurate but I've heard this as speculation why in places like the richest parts of Manhattan, there are a lot of vacant storefronts.
Commercial loan documents can say various things, but here's the most common and most general. 1. There will be a list of things that have to be the case, or the lender gets a say on any lease. 2. Giving rent relief requires lender approval. 3. This is probably the killer. The docs will require a minimum debt service coverage (net operating income divided by debt service), so agreeing to a change that drops you from a 1.3 to a 1.1 (which should be decent news) really upsets them. All of this Should be surmountable but you'd be surprised. 4. Anything you say to the lender to persuade them to allow the lower rent will be used against you when you ask to renew the loan at maturity. LOL. In fact, everything you say can sometimes be used to put you in default right away (though this is more of a technical point and doesn't happen often).
Regarding the lenders. Bankers are the most bureaucratic. Insurance companies are the smartest but their loans are the most conservative, so they have the fewest problems. CMBS lenders can't negotiate at all until you start missing payments.
There is a very good podcast about that (can't seem to find a link at the moment). He was scouting locations in NYC and the offers he's getting were along the lines of 10 year leases at $30k/month. Which was the pre-pandemic price. But they were offering him the first three years free. He investigated and it turns out cutting the rent triggers the loan covenants but offering "x" years free does not.
With the death of retail these locations are never going to rent for what they once did. They landlord will have to accept reality or the entity buying the property out of foreclosure will.
Are you really envisioning rents on restaurant and retail spaces in NYC returning to say Jan 2020 levels...ever?
"Restaurant prices will be up because of supply crunches."
Nah so many leases have been broken there will be a ton of new restaurants opening up and paying a fraction of what they had been in rent. That will mean much lower prices.
Rent & utilities are a pretty small fraction of restaurant operating costs. Food and labor are far more significant, though the relative amounts depend quite a lot on the type of restaurant.
I expect at least a few months (maybe a few years) of seesawing between these two effects, depending on whether new restaurants are able to start faster or slower.
In the Great Recession, continuing unemployment claims (possibly a better indicator than new claims) hit their peak in May 2009, at 6.6M. Over the next year, those continuing claims dropped by only 38,000 per week. While in the pandemic, continuing claims temporarily hit 25 million then rapidly dropped, it was at 6.8M on Oct. 31 -- roughly the same point as the Great Recession peak. From that equal point, continuing claims have been dropping at the rate of 278,000 per week, seven times as fast as in the Great Recession. (https://fred.stlouisfed.org/series/CCSA)
We have no idea what will happen over the next few months -- things may get worse with the infection spike, or improve greatly because of legislation and the early effects of the vaccine -- but all indicators point over time toward a very robust economic turnaround. This is not to say some sectors (entertainment, restaurants) won't suffer longer-term damage, but the economy as a whole will likely do very well.
My biggest concern is that the economic recovery depends on the health care system being able to actually get vaccines into arms. Right now if the pace of vaccine administration is far too slow. The U.S. has "allocated" over 11M doses and as far as I know shipped at least half of that total but only administered about 600K as of this morning. Now this may be a data reporting delay but everything that I have seen locally here in Northern California is that the health officials have no sense of urgency and are taking days and weeks to administer the doses they have received. As an example Santa Clara county has received and set-aside 6,000 doses for nursing home staff. They have also set-up a drive through vaccine administration site to give out those shots but the site is only serving about ~200 people a day! No one in authority seems to know or care to ask why they can't serve ~1000 or more of this ultra-high priority group a day. Even spacing out shots to account for shift work, workers out a day or two for side effects, etc., it seems like a reasonable pace here would be a week to 10 days to complete this group and instead they are planning to take over a month. My prediction is that the big story/scandal in early to mid-January will be that hospitals and health departments are sitting on millions of doses with no plan to administer them in a timely matter.
That sounds like a combination of government regulation, institutional inertia, and lack of creativity. It should be possible to massively scale up drive through vaccination centers very quickly, but those in charge will need to get over the idea that only a "qualified" medical professional can stick a needle in someone's arm.
We actually have enough qualified professionals. We gave out 190 million flu shots in 60-90 days this fall and I never saw a line. CVS and Walgreens etc have the staff and they are trained. Get them the product (that's the bottleneck) and the retail dispensing is the easy part.
I was replying to his comment in the sense that his hypothetical is true. I another comment below the same commenter seems to be basing his opinion on comparing apples to oranges, i.e., what has been shipped versus what has been put into people's arms.
I would be pretty surprised if the dispersed latter stages of the logistics chain were anything like as efficient as the centralized beginning stages this early in the game. It's the same "last mile" problem that consumer logistics has been struggling with for years.
I would really like to see some objective criteria for how much capacity each state/city/county should be spinning up. My rough estimate of a reasonable pace is that we should be injecting .5% of the population per day for the next 30 days. 1% per day for the 30 days after that then 2% per day going forward after that. Noting that with the two shot regime we need to inject something like 150% of the population to reach herd immunity. I live in a city of about 100,000 people so this pace for my town would need to be at 500 people a day from now to Jan. 15, 1,000 a day from Jan. 15 to Feb. 15 then 2,000 a day from Feb. 15 going forward. That certainly seems logistically doable and fairly closely matches the projected national supply. We should also make sure that we have more injection capacity than anticipated so that we can take advantage of unexpected supply (like the 6th dose per vial that folks are finding with Pfizer). Unfortunately we are well behind that pace so far (see https://covid.cdc.gov/covid-data-tracker/#vaccinations)
But isn't the polio vaccine oral? That _drastically_ reduces the complexity of getting it administered, literally anyone can hand it to the kid and make sure they take it.
"In Canada, Manitoba (and other provinces to a lesser extent) is calling on 'dentists, medical laboratory technologists, midwives, occupational therapists, pharmacists, physiotherapists, respiratory therapists, second-year students and former practitioners in these areas, paramedics, veterinarians and veterinary technologists.'"
See, when I said "lack of creativity" I meant going beyond people with medical training. Like bring in a National Guard infantry battalion and teach them how to administer shots.
In any event I would imagine the limiting factor at the moment is the logistics. That seems to have been figured out at the macro level and it'll smooth out locally eventually.
I live in California, just give people the vaccines outside! Obviously, nursing home patients need an on-site visit but that at least seems to have been planned for (though not as quickly as it could have been). If you need large sites virtually every sports stadium and arena in the country is sitting empty right now. Plenty of space, parking, etc. It just boggles my mind that no one seems to be in a rush over this. I think that it is notable that there seems to be a large and growing difference between states over how much of their allotment they have been able to use. Colorado has administered 43% of their doses, while California has only used about 12%, and Ohio is at only 4%! (tracker here - https://www.bloomberg.com/graphics/covid-vaccine-tracker-global-distribution/).
Allotted for distribution and administered are two quite different things. For example, a dose cannot be administered until it has been received, which necessarily lags distribution.
You are very right. Predicting NAIRU is not possible. Keep the economy hot until inflation is high and more widespread. Then gradually throttle back. A few years of 5% inflation won't kill anybody. And measuring CPI during 2021 will be meaningless too. Some time in 2022 or 2023 would be a great time to reset policy and expectations with 5% NGDPLT.
IMHO the aspiration of "full employment" is an outdated myth. Not meaning to disrespect the human suffering linked to unemployment, but I think one of the core problems we face is technological and sociological, and has been lurking for more than 50 years: With the introduction of agriculture, it became obvious that people had to work to eat, despite their wishes to the contrary. Over the past 10,000 years, culture has developed and internalized intense pressures to maintain this need for labor. Unfortunately, the technical reality of the present no longer corresponds to this myth, and what we need to do now (over the next 100 years, anyway) is to readjust goals and expectations so that we can be happy and fulfilled without work.
I'm skeptical. I think of work as solving problems for people (like a plumber fixing a leak). For most of human history the big problem was food production, but we've got lots of other problems to deal with, and it seems unlikely we'll ever run out of problems.
It is indicative of the Fed's inadequate macroeconomic policy that banks do not have so much low yielding liquidity that they are pushing money onto mortgage holders of the landlords of Matt's coffee shops that they would be happy to give rent forbearance so the coffee shops would NOT be closed permanently.
Also note that Matt's scenario for recovery depends on inflation being temporarily higher, which is consistent with what the Fed says its target is, but which markets do not believe.
What you wrote here sounds crazy to me, but I want to make sure I understand it and I'm not arguing against a straw man.
Are you saying that it would be good for the Fed to push the yield on liquid investments down so much that the most lucrative use of a bank's money is to give mortgage holders such low interest rates that the mortgage holders are incentivized to let the closed coffee shop keep the property for free?
No, not free. And I do not know just how far down yields would go if the Fed were hitting it's inflation target. But in that direction, yes. Some mortgage holders would not push some landlords to evict rather than renegotiate some rents. that's what I was trying to say with "indicative;" there is a relation between monetary policy and microeconomic outcomes.
1. There just isn't a level of liquidity or low interest rates or whatever that would make a difference. In the end of the day, if you have a chain of businesses who cannot zero out their costs and have no cash coming in, they have a _solvency_ issue, not a _liquidity_ one; only negative interest rates (e.g. pay the landlord a monthly stipend for his mortgage that covers his property taxes) would be enough, and even then I don't know how it transfers through rents to the poor business itself.
2. Since the money can go anywhere, when you get to really low yields, lots of _dumb_ (but not negative) investments start to look pretty good.
In other words, the Fed can't save restaurants, Congress can. When all you have is low interest rates, everything starts to look like a carry trade. :-)
I've been frustrated since October 2008 because all we hear about is "interest rates are zero. Interest rates have been cut", when another part of the story is Interest on Reserves. For 95 years, the Fed paid Zero interest on reserves, so banks minimized reserves (ie, lent to people and businesses. And to each other.). Starting in October 2008, the Fed started paying IOR. Initially at 1.00% if I recall correctly. Reserves skyrocketed. Banks stopped lending to businesses and instead put the money back at the Fed. For most of 2009 through today, the Fed paid banks more for reserves (overnight money) than the Treasury paid you or me to hold 3 month Treasury bills. This is the main reason that the Fed's balance sheet has increased. It's also the main reason that this increase has had a modest stimulatory effect (modest in both the real and nominal sense).
While I, too, find IOR curious, it is not an insuperable obstacle to the Fed buying enough of something (and even without the "Special Facilities in the March relief bill) to carry out it's mandate.
You are right. However, it does increase the amount of those somethings to attain the same effect. IOR increases the Demand for money - ie, offsetting the effects of the increases in supply at the worst moments possible.
I'm getting a little more optimistic about monetary policy as I keep my eyes on the 5-year inflation breakevens. I will be worried about the Fed until it lets the 5-year breakeven exceed 2.5% (CPI, which equates to about 2.2% in PCE). Hopefully they don't tighten in any way until the 5-year breakeven hits 3%.
Right - I think this gets at the fundamental tension of the 2008 financial crisis (and also why it's probably not comparable to any other recent recession or now). In 2008 we had the simultaneous problems of the real economy (recession, unemployment, below capacity, etc.), a contracting monetary supply but also the banks balance sheets being a mess.
The goal of getting the banks to lend to help the economy and to get their own house in order don't go together well.
Without minimizing the difference between the Great Recession and earlier ones, the current recession is the real outlier in that it is partially a supply shock.
I think you'll find Matt and his readers to be pretty keen on negative interest rates, relabeling solvency issues as liquidity issues, and merging our fiscal/monetary authorities.
I subscribed here partially because I want to figure out for myself if it's possible to disagree with Matt on these points while otherwise finding his judgement sound.
Hmmm...I'm definitely in the camp of "monetary policy is a poor substitute for fiscal policy" when the goal is to actual stimulate the economy by spending money or give money to people who will spend it (or who would otherwise cut consumption in bad ways without money).
I've sort of assumed that that's not controversial for the center-left, but maybe not?
In my terminology, I'd say the opposite; "fiscal policy is a poor substitute for monetary policy." But I also have a very specific view of "fiscal policy." Generally and especially in times of recession, I'm a fan of giving people money and "stuff" like health insurance and food, unemployment payments. I also want the Federal government to run its expenditures according to an NPV concept. In a recession the government's borrowing rate will go down and the marginal costs of many inputs into government services and outputs will drop below their market prices. Following this rule will look very much like "Keynesian" stimulus and will certainly put moony into the hand of people who will spend it and who would not have had it to spend otherwise.
I don't think what you've just said is controversial when it comes to the organizing logic of the center-left.
But in terms of the actual Democratic party... I think they expect to need both their fiscal policies and ever-increasingly accommodative monetary policy just to tread water. (IMO this was proven to be true of the GOP during the Trump admin)
Consider that in stimulus negotiations, elected Democrats went to bat for all of the emergency Fed programs that Sen. Toomey insisted must require explicit reauthorization. This includes the primary and secondary Corporate Credit Facilities. They could have only defended the Main Street Lending Program and the Municipal Credit Facility.
While I have no very strong objection to negative ST interest rates, that not what I advocate and is not implied by what I DO advocate, the Fed achieving its inflation target.
I don't know what "merging fiscal and monetary authorities means for you. In a way I'm assuming the best course is separation: the Fed runs the nominal macro economy and Congress taxes and spends looking at the real economy and distribution.
I have no very strong priors on what Matt and others already think about these issues, though like you I do hope to clarify and even change my own opinions.
"merging fiscal and monetary authorities" in this context would mean proposals like Matt has made such as: in the future, the Fed will deposit money directly into individual and business accounts as needed, and this is A Good Thing.
I do not think you are disagreeing that more aggressive monetary policy, the Fed meeting it's targets, would not help firms like Matt's coffee shop at the margin. But if not, not. It is going to help on some margins. The target is the price level trajectory, not the number of coffee shops that do not close.
Given the output gap in NGDP created by COVID, how long would Powell have to let inflation run hot at 2.5% to get back on trend? If it’s a couple quarters, I wouldn’t bet against it. But it’s probably longer than that, right?
I think that the effect on the macroeconomic numbers is the wrong way to think about the relief bill. Additional borrowing and spending is “stimulative” only if it causes the Fed to provide more monetary stimulus than it would otherwise. That was probably the case in 2009 when Bernanke was constrained in the amount of QE the Fed Board would let him do. It’s much less clear that is the case now. [Of course it SHOULD never be the case that the Fed is not carrying out it’s mandate to promote stable prices and maximum employment and needs Congress to goad it into doing its job.]
I agree that we need years of full employment, but the fault for not having achieved it is squarely with the Fed. The average inflation level has been below the Fed’s supposed target. Congress should leave macroeconomics to the Fed and focus on expenditures that raise real (distribution weighted) income.
Probably the highest priority investment would be in actually reducing prevalence of the virus. This means both vaccinations and (still, it is not too late) massive testing of the asymptomatic so those who test positive can self-isolate until they test negative
Markets do not believe the Fed is serious about its average inflation target. The TIPS expectation indicator of both 5 year and 10 year expectations are below the equivalent of the Fed’s PCE target but the 5 year expectation is below the 10 year expectation. [Have someone run the numbers/do the charts for us Slowburners; I cannot paste my chart.]
Inflation on the cover of major magazines in the last 50 years. https://twitter.com/kalebnygaard/status/1338709291902115841?s=21
Reading the comments there are a surprisingly high number of readers of this post that are completely overlooking what Matt is telling them at the beginning of this post in favor of <insert my pet bias about the economy here>
How (too) many people view the economy has become weirdly tied into their politics and identities in a way that blinds them to real-world data.
Matt, of all people, is no stranger to the shortage of housing in the US. As a serious concern, this reared it's head post-crisis (although it's always been a problem in some areas NYC, SF, ...).
I am worried we could be looking at a similar over-correction here. Fewer people will want to open restaurants, be in the hospitality industry, or make investments in the category of 'crowded meat-space.'
If this happens, the inflationary pressure will be overestimated (or correct, but for unfortunate reasons). On top of that, these are industries that tend to employ the lowest wage workers. This could grow the chasm in pandemic outcomes, one that is already very likely to be bad.
There is only so much the fed can do if the national mood has turned in the wrong direction.
This has been one of my favorite posts so far. Partially because I agree with so much of it (and the macro framework underlying it) but more importantly because it highlights the importance of macro and especially monetary policy which I still think is vastly under appreciated (and often ignored) in most political discussions.
Different Fed policy during the great recession would have led to a very different economic situation in the last decade which wouldn't have just spared millions of people needless economic hardship but would've also changed the narrative around inequality, losers from trade, etc. and potentially the political fallout from that.
I have to admit not to know much about Jerome Powell outside of his work as Fed chairman (and have not thought of him as a partisan figure) but have been extremely impressed with everything he's done so far so I'm hoping that he'll continue to do so under a Biden administration.
What's the counter-factual fed policy for the great recession that would have had a better outcome? What should they have done?
If I understand correctly, wasn't the target rate 25 bp without moving from 2010 -> mid 2016?
I've heard Obama-era economists and others who are more to the left say "the stimulus was too small, that was the problem", but that's the fiscal side.
I'm having a bit of a hard time quickly finding one article that explains it well. My own explanation is going to be very rushed, basic, and likely inadequate but my TLDR would be that people generally look at the target rate to judge whether money is loose or tight when they actually need to look at it in context - if the economy is continuing to slow in the face of a certain target rate that actually means that money is tight, and if it's expanding with a high target rate money is likely too loose. Leading into the great recession people thought money was loose or being loosened because the rate was low but the economy was collapsing faster than most people realized -> money was too tight. In terms of the recovery there were lots of discussions about how money was likely too tight but also enormous pressure from people who are always worried about inflation no matter what - both in the US and in the EU (where the ECB did a terrible job).
I should note that I generally believe in market monetarism which influences a lot of what I just wrote and while that is still outside of the mainstream it seems to explain a lot of economic history best and recent moves by the Feds are shifting in the direction of a similar framework.
I found a Voxsplainer on all of this but I haven't had a chance to more than skim it so reader beware (going to read it this evening): https://www.vox.com/2014/7/8/5866695/why-printing-more-money-could-have-stopped-the-great-recession
Ah...I think my trite summary from the Voxsplainer (which isn't bad) is that they could have done "QE, but with more feeling."
I'm a little wary of "Japan devalued their currency by printing money, their exports became competitive and increased and that worked well for them" as something that would be portable to the US.
But yeah, I get that if you think the problem in 2008 was a lack of money supply, that's on the Fed, not congress. And for the 2008 recession in particular, where there was just a massive credit contraction, that strikes me as not crazy, albeit possibly very specific to the financial crisis.
Certainly the "zOMG inflation" worries do seem a little silly in hindsight. :-)
Hi Matt, curious for your view on just how much the fed has had its wings "clipped" by the recent omnibus deal. Can't really tell from this politico article https://www.politico.com/news/2020/12/22/federal-reserve-economic-relief-republicans-449883
You want growth and inflation? Me too, let's include a chart of money velocity and do more than handwave how it will rise enough to counteract long-term decline.
If you're not going to do that, can you at least share the prewrite blaming Republicans for low growth?
And you can show the TIPS chart all you want to suggest inflation is coming (was in a previous post) but it's no secret that the Fed is buying over 50% of all TIPS sold on any given day.
In the restaurant discussion I'm curious how other folks are analyzing the situation.
You "own" a restaurant that was doing decently well. But business falls and you get make rent so it goes bust. The landlord inherits some worthless (in this market) restaurant equipment, service items etc. The landlord has bills to pay and it's not like he's going to find another tenant. Who would want the space? Retail? hahaahahahha
Now a few months from now the vaccine is widely available so the previous owner comes back and says to the landlord, "I'm willing to reopen here are my terms. Take them or leave them." And the restaurant starts again at 50% of the rent it had been paying.
But why did that negotiation not occur before the liquidation? And would the liquidation have occurred if monetary policy was keeping inflation expectations at 2% PCE
Because at the time they didn’t know when this would end.
There will be some of this. Keep in mind that some of the equipment may have been pledged to a lender (not to the landlord). But the general furnishings will have real value too. That all said, I think expectations now have evolved to a point where most deals will be to waive the missed rent and to get back to the original rental schedule starting April or May. Your scenario would have been more common before the vaccine success got announced. Lastly, landlords may look for something other than rent in exchange for waiving the back rent. Like a lease extension.
I think this is really going to vary depending on the local situation. Recall that most of American retail is in sort of generic suburban strip malls where chains may just scoop up any spaces vacated by independent restaurants.
I was talking the other day about how much cheaper Dunkin' Donuts is out by my parents place. Presumably that's primarily a function of rent and wages. A chain that sings a lease for 30 or 50% less than normal is going to have lower prices to drive volume at the expense of competitors locked into expensive leases.
Rent tends to be about 6% to 10% of costs. Labor tends to be 55% to 65% of costs.
“ Food costs, according to DLoewi Consulting, range from 26 to 36 percent of gross sales, and labor costs range from 30 to 40 percent.”
I think you may have misspoke and added food and labor together.
Good point. I over-estimated labor costs. Thanks!
"The landlord inherits some worthless (in this market) restaurant equipment..."
Very little, if any at all. There is always a secondary market for that stuff and it would be foolish to walk away and leave it. Plus certain things like dishwashing equipment are often leased, and its owners are going to come around and get it.
i have heard that sometimes when it seems economically rational for the landlord to just lower rent and fill a vacancy, there are terms in their mortgages that make it harmful for them. like renting at the lower rent will make a number in a bank's spreadsheet go down and cause big problems for them.
i don't know enough about the real estate business to actually comment on if it's accurate but I've heard this as speculation why in places like the richest parts of Manhattan, there are a lot of vacant storefronts.
I'm a landlord (and borrower, Lol), and yes, this can be true.
what actually happens if rent is lowered — like what does the clause in the contract actually say?
Commercial loan documents can say various things, but here's the most common and most general. 1. There will be a list of things that have to be the case, or the lender gets a say on any lease. 2. Giving rent relief requires lender approval. 3. This is probably the killer. The docs will require a minimum debt service coverage (net operating income divided by debt service), so agreeing to a change that drops you from a 1.3 to a 1.1 (which should be decent news) really upsets them. All of this Should be surmountable but you'd be surprised. 4. Anything you say to the lender to persuade them to allow the lower rent will be used against you when you ask to renew the loan at maturity. LOL. In fact, everything you say can sometimes be used to put you in default right away (though this is more of a technical point and doesn't happen often).
Regarding the lenders. Bankers are the most bureaucratic. Insurance companies are the smartest but their loans are the most conservative, so they have the fewest problems. CMBS lenders can't negotiate at all until you start missing payments.
There is a very good podcast about that (can't seem to find a link at the moment). He was scouting locations in NYC and the offers he's getting were along the lines of 10 year leases at $30k/month. Which was the pre-pandemic price. But they were offering him the first three years free. He investigated and it turns out cutting the rent triggers the loan covenants but offering "x" years free does not.
I see, interesting! Residential landlords in NYC play a similar game but with rent stabilization.
Why does the landlord take that deal? The landlord will be:
- Locked in at below market rent (in a rebounded economy).
- Be in the red - landlord still has a mortgage to pay, property taxes, etc.
- Can wait for another restaurant entrepreneur to come along with market rate terms.
Where does the the restaurant owner whose business went under get credit and startup capital?
With the death of retail these locations are never going to rent for what they once did. They landlord will have to accept reality or the entity buying the property out of foreclosure will.
Are you really envisioning rents on restaurant and retail spaces in NYC returning to say Jan 2020 levels...ever?
"Restaurant prices will be up because of supply crunches."
Nah so many leases have been broken there will be a ton of new restaurants opening up and paying a fraction of what they had been in rent. That will mean much lower prices.
Rent & utilities are a pretty small fraction of restaurant operating costs. Food and labor are far more significant, though the relative amounts depend quite a lot on the type of restaurant.
I expect at least a few months (maybe a few years) of seesawing between these two effects, depending on whether new restaurants are able to start faster or slower.
I find it amazing just how resilient the economy has been in the midst of the pandemic. Consider two indicators:
In Nov 2019, 81.5% of apartments made full or partial rents. In Nov 2020, that figure had dropped only to 80.4% -- a trivial decline (https://www.calculatedriskblog.com/2020/11/nmhc-rent-payment-tracker-shows.html)
In the Great Recession, continuing unemployment claims (possibly a better indicator than new claims) hit their peak in May 2009, at 6.6M. Over the next year, those continuing claims dropped by only 38,000 per week. While in the pandemic, continuing claims temporarily hit 25 million then rapidly dropped, it was at 6.8M on Oct. 31 -- roughly the same point as the Great Recession peak. From that equal point, continuing claims have been dropping at the rate of 278,000 per week, seven times as fast as in the Great Recession. (https://fred.stlouisfed.org/series/CCSA)
We have no idea what will happen over the next few months -- things may get worse with the infection spike, or improve greatly because of legislation and the early effects of the vaccine -- but all indicators point over time toward a very robust economic turnaround. This is not to say some sectors (entertainment, restaurants) won't suffer longer-term damage, but the economy as a whole will likely do very well.
Thanks for making this post public!
My biggest concern is that the economic recovery depends on the health care system being able to actually get vaccines into arms. Right now if the pace of vaccine administration is far too slow. The U.S. has "allocated" over 11M doses and as far as I know shipped at least half of that total but only administered about 600K as of this morning. Now this may be a data reporting delay but everything that I have seen locally here in Northern California is that the health officials have no sense of urgency and are taking days and weeks to administer the doses they have received. As an example Santa Clara county has received and set-aside 6,000 doses for nursing home staff. They have also set-up a drive through vaccine administration site to give out those shots but the site is only serving about ~200 people a day! No one in authority seems to know or care to ask why they can't serve ~1000 or more of this ultra-high priority group a day. Even spacing out shots to account for shift work, workers out a day or two for side effects, etc., it seems like a reasonable pace here would be a week to 10 days to complete this group and instead they are planning to take over a month. My prediction is that the big story/scandal in early to mid-January will be that hospitals and health departments are sitting on millions of doses with no plan to administer them in a timely matter.
That sounds like a combination of government regulation, institutional inertia, and lack of creativity. It should be possible to massively scale up drive through vaccination centers very quickly, but those in charge will need to get over the idea that only a "qualified" medical professional can stick a needle in someone's arm.
We actually have enough qualified professionals. We gave out 190 million flu shots in 60-90 days this fall and I never saw a line. CVS and Walgreens etc have the staff and they are trained. Get them the product (that's the bottleneck) and the retail dispensing is the easy part.
I was replying to his comment in the sense that his hypothetical is true. I another comment below the same commenter seems to be basing his opinion on comparing apples to oranges, i.e., what has been shipped versus what has been put into people's arms.
I would be pretty surprised if the dispersed latter stages of the logistics chain were anything like as efficient as the centralized beginning stages this early in the game. It's the same "last mile" problem that consumer logistics has been struggling with for years.
I would really like to see some objective criteria for how much capacity each state/city/county should be spinning up. My rough estimate of a reasonable pace is that we should be injecting .5% of the population per day for the next 30 days. 1% per day for the 30 days after that then 2% per day going forward after that. Noting that with the two shot regime we need to inject something like 150% of the population to reach herd immunity. I live in a city of about 100,000 people so this pace for my town would need to be at 500 people a day from now to Jan. 15, 1,000 a day from Jan. 15 to Feb. 15 then 2,000 a day from Feb. 15 going forward. That certainly seems logistically doable and fairly closely matches the projected national supply. We should also make sure that we have more injection capacity than anticipated so that we can take advantage of unexpected supply (like the 6th dose per vial that folks are finding with Pfizer). Unfortunately we are well behind that pace so far (see https://covid.cdc.gov/covid-data-tracker/#vaccinations)
Distributed means shipped and administered means done. There are several steps between the two.
But isn't the polio vaccine oral? That _drastically_ reduces the complexity of getting it administered, literally anyone can hand it to the kid and make sure they take it.
"In Canada, Manitoba (and other provinces to a lesser extent) is calling on 'dentists, medical laboratory technologists, midwives, occupational therapists, pharmacists, physiotherapists, respiratory therapists, second-year students and former practitioners in these areas, paramedics, veterinarians and veterinary technologists.'"
See, when I said "lack of creativity" I meant going beyond people with medical training. Like bring in a National Guard infantry battalion and teach them how to administer shots.
In any event I would imagine the limiting factor at the moment is the logistics. That seems to have been figured out at the macro level and it'll smooth out locally eventually.
I live in California, just give people the vaccines outside! Obviously, nursing home patients need an on-site visit but that at least seems to have been planned for (though not as quickly as it could have been). If you need large sites virtually every sports stadium and arena in the country is sitting empty right now. Plenty of space, parking, etc. It just boggles my mind that no one seems to be in a rush over this. I think that it is notable that there seems to be a large and growing difference between states over how much of their allotment they have been able to use. Colorado has administered 43% of their doses, while California has only used about 12%, and Ohio is at only 4%! (tracker here - https://www.bloomberg.com/graphics/covid-vaccine-tracker-global-distribution/).
Allotted for distribution and administered are two quite different things. For example, a dose cannot be administered until it has been received, which necessarily lags distribution.
You are very right. Predicting NAIRU is not possible. Keep the economy hot until inflation is high and more widespread. Then gradually throttle back. A few years of 5% inflation won't kill anybody. And measuring CPI during 2021 will be meaningless too. Some time in 2022 or 2023 would be a great time to reset policy and expectations with 5% NGDPLT.
IMHO the aspiration of "full employment" is an outdated myth. Not meaning to disrespect the human suffering linked to unemployment, but I think one of the core problems we face is technological and sociological, and has been lurking for more than 50 years: With the introduction of agriculture, it became obvious that people had to work to eat, despite their wishes to the contrary. Over the past 10,000 years, culture has developed and internalized intense pressures to maintain this need for labor. Unfortunately, the technical reality of the present no longer corresponds to this myth, and what we need to do now (over the next 100 years, anyway) is to readjust goals and expectations so that we can be happy and fulfilled without work.
I'm skeptical. I think of work as solving problems for people (like a plumber fixing a leak). For most of human history the big problem was food production, but we've got lots of other problems to deal with, and it seems unlikely we'll ever run out of problems.
"...it seems unlikely we'll ever run out of problems."
Yeah, Richard's comment seems like he's fallen hard for the Lump of Labor Fallacy.
"...we need to do now...is to readjust goals and expectations so that we can be happy and fulfilled without work."
Fine: Quit your job and leave everyone else alone.
It is indicative of the Fed's inadequate macroeconomic policy that banks do not have so much low yielding liquidity that they are pushing money onto mortgage holders of the landlords of Matt's coffee shops that they would be happy to give rent forbearance so the coffee shops would NOT be closed permanently.
Also note that Matt's scenario for recovery depends on inflation being temporarily higher, which is consistent with what the Fed says its target is, but which markets do not believe.
What you wrote here sounds crazy to me, but I want to make sure I understand it and I'm not arguing against a straw man.
Are you saying that it would be good for the Fed to push the yield on liquid investments down so much that the most lucrative use of a bank's money is to give mortgage holders such low interest rates that the mortgage holders are incentivized to let the closed coffee shop keep the property for free?
No, not free. And I do not know just how far down yields would go if the Fed were hitting it's inflation target. But in that direction, yes. Some mortgage holders would not push some landlords to evict rather than renegotiate some rents. that's what I was trying to say with "indicative;" there is a relation between monetary policy and microeconomic outcomes.
Right. So I think my counter-argument is:
1. There just isn't a level of liquidity or low interest rates or whatever that would make a difference. In the end of the day, if you have a chain of businesses who cannot zero out their costs and have no cash coming in, they have a _solvency_ issue, not a _liquidity_ one; only negative interest rates (e.g. pay the landlord a monthly stipend for his mortgage that covers his property taxes) would be enough, and even then I don't know how it transfers through rents to the poor business itself.
2. Since the money can go anywhere, when you get to really low yields, lots of _dumb_ (but not negative) investments start to look pretty good.
In other words, the Fed can't save restaurants, Congress can. When all you have is low interest rates, everything starts to look like a carry trade. :-)
I've been frustrated since October 2008 because all we hear about is "interest rates are zero. Interest rates have been cut", when another part of the story is Interest on Reserves. For 95 years, the Fed paid Zero interest on reserves, so banks minimized reserves (ie, lent to people and businesses. And to each other.). Starting in October 2008, the Fed started paying IOR. Initially at 1.00% if I recall correctly. Reserves skyrocketed. Banks stopped lending to businesses and instead put the money back at the Fed. For most of 2009 through today, the Fed paid banks more for reserves (overnight money) than the Treasury paid you or me to hold 3 month Treasury bills. This is the main reason that the Fed's balance sheet has increased. It's also the main reason that this increase has had a modest stimulatory effect (modest in both the real and nominal sense).
While I, too, find IOR curious, it is not an insuperable obstacle to the Fed buying enough of something (and even without the "Special Facilities in the March relief bill) to carry out it's mandate.
You are right. However, it does increase the amount of those somethings to attain the same effect. IOR increases the Demand for money - ie, offsetting the effects of the increases in supply at the worst moments possible.
I'm getting a little more optimistic about monetary policy as I keep my eyes on the 5-year inflation breakevens. I will be worried about the Fed until it lets the 5-year breakeven exceed 2.5% (CPI, which equates to about 2.2% in PCE). Hopefully they don't tighten in any way until the 5-year breakeven hits 3%.
Right - I think this gets at the fundamental tension of the 2008 financial crisis (and also why it's probably not comparable to any other recent recession or now). In 2008 we had the simultaneous problems of the real economy (recession, unemployment, below capacity, etc.), a contracting monetary supply but also the banks balance sheets being a mess.
The goal of getting the banks to lend to help the economy and to get their own house in order don't go together well.
Without minimizing the difference between the Great Recession and earlier ones, the current recession is the real outlier in that it is partially a supply shock.
I think you'll find Matt and his readers to be pretty keen on negative interest rates, relabeling solvency issues as liquidity issues, and merging our fiscal/monetary authorities.
I subscribed here partially because I want to figure out for myself if it's possible to disagree with Matt on these points while otherwise finding his judgement sound.
Hmmm...I'm definitely in the camp of "monetary policy is a poor substitute for fiscal policy" when the goal is to actual stimulate the economy by spending money or give money to people who will spend it (or who would otherwise cut consumption in bad ways without money).
I've sort of assumed that that's not controversial for the center-left, but maybe not?
In my terminology, I'd say the opposite; "fiscal policy is a poor substitute for monetary policy." But I also have a very specific view of "fiscal policy." Generally and especially in times of recession, I'm a fan of giving people money and "stuff" like health insurance and food, unemployment payments. I also want the Federal government to run its expenditures according to an NPV concept. In a recession the government's borrowing rate will go down and the marginal costs of many inputs into government services and outputs will drop below their market prices. Following this rule will look very much like "Keynesian" stimulus and will certainly put moony into the hand of people who will spend it and who would not have had it to spend otherwise.
I don't think what you've just said is controversial when it comes to the organizing logic of the center-left.
But in terms of the actual Democratic party... I think they expect to need both their fiscal policies and ever-increasingly accommodative monetary policy just to tread water. (IMO this was proven to be true of the GOP during the Trump admin)
Consider that in stimulus negotiations, elected Democrats went to bat for all of the emergency Fed programs that Sen. Toomey insisted must require explicit reauthorization. This includes the primary and secondary Corporate Credit Facilities. They could have only defended the Main Street Lending Program and the Municipal Credit Facility.
While I have no very strong objection to negative ST interest rates, that not what I advocate and is not implied by what I DO advocate, the Fed achieving its inflation target.
I don't know what "merging fiscal and monetary authorities means for you. In a way I'm assuming the best course is separation: the Fed runs the nominal macro economy and Congress taxes and spends looking at the real economy and distribution.
I have no very strong priors on what Matt and others already think about these issues, though like you I do hope to clarify and even change my own opinions.
"merging fiscal and monetary authorities" in this context would mean proposals like Matt has made such as: in the future, the Fed will deposit money directly into individual and business accounts as needed, and this is A Good Thing.
I do not think you are disagreeing that more aggressive monetary policy, the Fed meeting it's targets, would not help firms like Matt's coffee shop at the margin. But if not, not. It is going to help on some margins. The target is the price level trajectory, not the number of coffee shops that do not close.
Given the output gap in NGDP created by COVID, how long would Powell have to let inflation run hot at 2.5% to get back on trend? If it’s a couple quarters, I wouldn’t bet against it. But it’s probably longer than that, right?
I think that the effect on the macroeconomic numbers is the wrong way to think about the relief bill. Additional borrowing and spending is “stimulative” only if it causes the Fed to provide more monetary stimulus than it would otherwise. That was probably the case in 2009 when Bernanke was constrained in the amount of QE the Fed Board would let him do. It’s much less clear that is the case now. [Of course it SHOULD never be the case that the Fed is not carrying out it’s mandate to promote stable prices and maximum employment and needs Congress to goad it into doing its job.]
I agree that we need years of full employment, but the fault for not having achieved it is squarely with the Fed. The average inflation level has been below the Fed’s supposed target. Congress should leave macroeconomics to the Fed and focus on expenditures that raise real (distribution weighted) income.
Probably the highest priority investment would be in actually reducing prevalence of the virus. This means both vaccinations and (still, it is not too late) massive testing of the asymptomatic so those who test positive can self-isolate until they test negative
Markets do not believe the Fed is serious about its average inflation target. The TIPS expectation indicator of both 5 year and 10 year expectations are below the equivalent of the Fed’s PCE target but the 5 year expectation is below the 10 year expectation. [Have someone run the numbers/do the charts for us Slowburners; I cannot paste my chart.]