I’m an economist and I wish I had some guidance to offer, but unfortunately I have none. I’m struggling to get a grip on this situation.
Firstly, though I have not worked there for six months or so, I am Italian (from Milan, in the north, the worst-hit area). The economy there has basically shut down. Consumer spending has collapsed, production has collapsed, and logistics are increasingly untenable.
What can we expect? Six months of this (and some people are projecting up to eighteen months) are going to shut down demand. There’s a term going around now “demand destruction” — I’m not going to pretend to know more than I do, so I’ll admit forthright that I had never heard it until a few weeks ago — that seems to meet the requirements here.
It’s uncertain whether the supply side of the economy will be similarly affected. Probably yes, as governments curb production to slow the spread at the workplace.
Even three months will be dreadful.
Now, let’s think of a few things: governments are stepping in with public support to support businesses, provide liquidity, and support workers that do not have income. That means debt. That means interest payments in future, for those businesses that are fortunate enough to survive. Taxpayers will be on the hook for decades.
The situation is so severe that German economists are proposing a 1 trillion euro Eurobond issue to help support the economies because the southern economies cannot hope to cope with this.
I guess I’ll sum it up thusly: this might turn out to be a “great pause”, but economies and demographics cannot idle without incurring enormous financial costs.
Enormous liquidity injected into the system along with lower production suggests high inflation in the future after the crisis is over. Do you think that will likely happen?
Note: Above is not a value judgement. The measure is necessary to prevent the system from completely breaking down.
To be honest, it seems that the basic tenants of inflation have been violated since the 2007/8 crisis and the subsequent massive influxes of liquidity (primarily through the various quantitative easing programmes), so I really cannot say with any certainty.
There’s an enormous amount of money already sloshing around in the systems, and it seems to be pooling at the top (hence all the inequality).
On one level, somebody could argue that all the typically ‘renter’ activities (rents, licenses, et cetera) should be suspended during the period of crisis to prevent those who “profit from standing still” to absorb more liquidity and boost their wealth whilst the scurrying masses are bled white, but I don’t think that’s practical.
A key reason why this time might be different: A call for helicopter money even among some fiscal conservatives.
Before this, such as in the 2008 crisis, much of the liquidity injection didn’t flow down the bottom part of economic hierarchy. Thus, they haven’t had much increased spending power. So, no inflation of common items. The prices of trophy and other assets preferred by the wealthy did rise up greatly in the past decade.
If the helicopter money plan actually happens in substantial quantity, then inflation of everyday items might occur this time.
I read an interesting article a while back that posited that we have seen inflation but it's been masked in the regular basket of consumer goods by cheap imports from China. Meanwhile we have seen significant inflation in housting but it's not really recognized as such.
Maybe a pause of all rent activities combined with financing only vital industries could work. The costs would be limited to a few select industries, and while huge it would be nothing compared to gouvernement trying to maintain the whole economy afloat.
Hopefully taxpayers and business wont be on the hook for the loans - it's up to negotiation now. Personally I hope the large corporations getting 'bailouts' would be required to pay back with interest and or government ownership but any company under a reasonable yearly revenue would be forgiven. I don't know but I would guess they call it a loan is so treasury can leverage an appropriation into a much larger loan amount.
One of the things being negotiated right now is a loan in the amount of current payroll to smb's that would be 100% forgiven if they retain 90% employees. They're completely fucking it up right now but that would be great - if the timelines are good (e.g. keep loaning until this is over, the 90% requirement is so long as $ is loaned).
I am hoping - slight optimistic but scared nonetheless - that passes and we could use. It would remove a lot of stress and given we have low overhead (digital services) even if the worst happened it could keep us afloat almost indefinitely.
BUT fucked up partisan delay + Republicans demanding scary terms are create huge uncertainty which will likely hit markets hard tomorrow.
As written it looks like Mnuchin would have full discretion on who gets loans. Who knows what timeframe or bureaucracy needed to get loan. Even the most optimistic estimate of the individual checks is 2-4 weeks which is not quick enough. Doing a SBA loan is a huge process that takes a long time.
For better or worse, most of the medical costs are going to be spent on the older generation. More debt will become the burden of the current taxpayers and then the next generation.
I am not an economist but by virtue of working in the fintech space for many years, particularly in credit, feel this specific point acutely-
"economies and democracies cannot idle with incurring enormous financial costs"
This is what worries me about this crisis more than the myriad other issues, like-
-the end is unknown bc we dont have an antiviral treatment or vaccine, and we dont know how long immunity lasts
-we have generally awful, sociopathic high level leadership (I am in the US) and while local leadership may be exemplary (I am in NYS) the ongoing contagion factor means there is no isolation
-so many entities have already been broken that will never return and the implications from which have not begun to be counted
-we have such an awful information availability and consumption imbalance, which will perpetuate bad decision making
Those issues above I believe CAN be dealt with over time, with study, process, mobilization, etc in the course of this pause.
But that work has to be FUNDED.
We DO NOT KNOW how to fund this without
a) creating future "costs" / "obligations" that will weigh on future flows for decades
b) destroying current asset stores in a way that increases uncertainty
I mean, this is what "assets" are for- they are there as a store to create future flows. So for instance I am in favor of a very long block on evictions and foreclosures- 2 years- because many renters have lost jobs and will not be able to find them, in order to force landlords to, where necessary, waive rent and themselves take out mortgages to pay for their own flows. That is what the "value" of their property should be used for, and in times of strife, drawing down on asset stores is sensible.
But that imposes future costs- the mortgage- and even if the mortgage is at 0% there is still principal that has to be returned. And debts are the highest priority obligation.
IOW, we dont have an economic and accounting system where we can just stop, timeout, change the rules, get back on feet, and start again. In our current model the timeout still has to be paid for in the future. And while history is full of debt foregiveness regimes, those were all local. We don't have even the beginnings of a model to institute a global forgiveness regime.
At any rate, the human side of this looks very challenging, though I have optimism that good wins out- but I worry about the accounting side. The rules have to let good come through.
A comparison I would look to here are historical economic recoveries, after near-complete destruction of physical capital, e.g. Germany and Japan in 1946.
Firstly, though I have not worked there for six months or so, I am Italian (from Milan, in the north, the worst-hit area). The economy there has basically shut down. Consumer spending has collapsed, production has collapsed, and logistics are increasingly untenable.
What can we expect? Six months of this (and some people are projecting up to eighteen months) are going to shut down demand. There’s a term going around now “demand destruction” — I’m not going to pretend to know more than I do, so I’ll admit forthright that I had never heard it until a few weeks ago — that seems to meet the requirements here.
It’s uncertain whether the supply side of the economy will be similarly affected. Probably yes, as governments curb production to slow the spread at the workplace.
Even three months will be dreadful.
Now, let’s think of a few things: governments are stepping in with public support to support businesses, provide liquidity, and support workers that do not have income. That means debt. That means interest payments in future, for those businesses that are fortunate enough to survive. Taxpayers will be on the hook for decades.
The situation is so severe that German economists are proposing a 1 trillion euro Eurobond issue to help support the economies because the southern economies cannot hope to cope with this.
I guess I’ll sum it up thusly: this might turn out to be a “great pause”, but economies and demographics cannot idle without incurring enormous financial costs.