With the COVID-19 pandemic sweeping around the world, there will be huge ramifications for the globe and society more generally. I will discuss what we know and what I expect to occur.
Far too many people are short sighted and just listen to the present day news. As the virus spreads, there will be developments that will forever change how we live our lives.
On a simplistic health level, we know that COVID-19 is 10-20 times deadlier than the flu, that it disproportionately afflicts the elderly and is straining health care systems around the world. Health care capability is already severe impacted. It is expected that optimistically a vaccine may take 6-12 months given the global imperative to develop a cure on an accelerated time frame. Given that we have no cure almost three months after the virus first appeared, it is expected that virus and its broader economic and societal consequences may linger around for longer than many expect. The virus may come in waves where it subsides in the northern hemisphere during summer and then re-appears again on a larger scale in winter, akin to the Spanish flu. There are many unknowns at this stage. These include the long term impact of the virus on individual health post recovery, the time-frame for development of potential cures, and the ability to enforce lockdowns and control the virus.
One of the most overlooked points is the potentially serious implications the virus will have on the third world. Given the lack of capability among leading first world countries, there does not appear to be much hope for the developing world.
In terms of the economic impact, we know that industries at risk will be shuttered. So far we are seeing tourism, discretionary retail, entertainment, hospitality, and raw materials decimated. We know that the world economy was already weak prior to this pandemic with Europe and Japan in particular recording poor economic growth.
To counteract the economic impact, central banks have taken a bazooka to attempt to starve off economic collapse and flood the system with liquidity. The Fed recently announced it cut rates to zero, the lowest rates in history, and launch QE5. While it is a significant development, it is worth noting that the ability for the Fed to take any meaningful action is far more limited than it was prior to the GFC and government budget deficits are significantly greater than they were prior to previous slowdowns. By firing this bazooka early, there is limited conventional opportunity for the Fed to counteract any further weakness.
My expectation is that we are entering a new era of de-leveraging. This may not commence immediately provided appropriate containment of the spread of COVID-19 or if a cure is found and distributed effectively, which if effected may lead to a recovery later this year. However, I expect a prolonged downturn to start in the next few years at the latest. The last time in history we saw such low rates with a limited ability to cut rates further was in the late 1930s. During that period, stock markets and financial asset markets more broadly were stagnant for well over a decade, noting that a world war occurred in the start of this period.
It would be expected that a lengthy drawn out de-leveraging process could occur. Corporate debt is extraordinarily high and earnings will be weak. This could lead to deflation or hyperinflation, and asset sales as companies cannot meet their debt obligations. Job losses will be prevalent. Unemployment will rise. Businesses will collapse. Recession is guaranteed.
Governments will attempt to pump fiscal stimulus. Central banks may resort to buying up government debt and other financial assets in addition to printing money. The US may lose it's status as the global superpower and its dollar may lose its status of being a reserve currency as its debt explodes as it attempts to save itself.
The government cannot keep borrowing indefinitely. At some point the bond market will stop financing our debt spending, at which point we can either re-organise the debt where creditors take a large haircut on their debt with resulting asset sales, implement negative interest rates where creditors see the value of their collateral erode, cut spending significantly, raise taxes significantly, default on the debt, monetise the debt by printing money, or resort to socialism. Historically, governments react to these kinds of situations by printing money. When that happens, we will likely get hyperinflation if too much money is available or depression if too little money is available and the prices of assets used as collateral backing loans will spiral downward.
During the coronavirus crisis, we are witnessing government attempting to control the situation and taking on unprecedented power. However, this will likely result in social unrest and perhaps lead to anarchy in democratic societies as people oppose the rule of the law. As the economic situation worsens, we may see a run on banks and insurers falling over, and long queues for essential services. Masses will ask for government handouts at a time when government budgets around the world are weak. Crime will rise, although this will be offset by a sense of community and negated somewhat by a society that is relatively more responsible and engaged in social media. Governments will default. In one word, there will be 'fear' as people are running scared.
The collapse will bring a closing of the wealth gap in relative terms. Many of the rich will be decimated and while the poor will also be poorer, the gap between the wealthy and the poor will close.
The way we live in the future will change too. As society rebuilds, expect to see increased risk aversion. This will translate to people seeking stability with their jobs and a willingness to get married. Nations will look inward, with a focus on local capability and production, nationalism that may lead to war, and xenophobia. There will also be a rethinking of efficient supply chains, urbanisation, travel, education, healthcare, human impact on the environment and associated consequences as humans encroach ever further into wildlife.
Far too many people are short sighted and just listen to the present day news. As the virus spreads, there will be developments that will forever change how we live our lives.
On a simplistic health level, we know that COVID-19 is 10-20 times deadlier than the flu, that it disproportionately afflicts the elderly and is straining health care systems around the world. Health care capability is already severe impacted. It is expected that optimistically a vaccine may take 6-12 months given the global imperative to develop a cure on an accelerated time frame. Given that we have no cure almost three months after the virus first appeared, it is expected that virus and its broader economic and societal consequences may linger around for longer than many expect. The virus may come in waves where it subsides in the northern hemisphere during summer and then re-appears again on a larger scale in winter, akin to the Spanish flu. There are many unknowns at this stage. These include the long term impact of the virus on individual health post recovery, the time-frame for development of potential cures, and the ability to enforce lockdowns and control the virus.
One of the most overlooked points is the potentially serious implications the virus will have on the third world. Given the lack of capability among leading first world countries, there does not appear to be much hope for the developing world.
In terms of the economic impact, we know that industries at risk will be shuttered. So far we are seeing tourism, discretionary retail, entertainment, hospitality, and raw materials decimated. We know that the world economy was already weak prior to this pandemic with Europe and Japan in particular recording poor economic growth.
To counteract the economic impact, central banks have taken a bazooka to attempt to starve off economic collapse and flood the system with liquidity. The Fed recently announced it cut rates to zero, the lowest rates in history, and launch QE5. While it is a significant development, it is worth noting that the ability for the Fed to take any meaningful action is far more limited than it was prior to the GFC and government budget deficits are significantly greater than they were prior to previous slowdowns. By firing this bazooka early, there is limited conventional opportunity for the Fed to counteract any further weakness.
My expectation is that we are entering a new era of de-leveraging. This may not commence immediately provided appropriate containment of the spread of COVID-19 or if a cure is found and distributed effectively, which if effected may lead to a recovery later this year. However, I expect a prolonged downturn to start in the next few years at the latest. The last time in history we saw such low rates with a limited ability to cut rates further was in the late 1930s. During that period, stock markets and financial asset markets more broadly were stagnant for well over a decade, noting that a world war occurred in the start of this period.
It would be expected that a lengthy drawn out de-leveraging process could occur. Corporate debt is extraordinarily high and earnings will be weak. This could lead to deflation or hyperinflation, and asset sales as companies cannot meet their debt obligations. Job losses will be prevalent. Unemployment will rise. Businesses will collapse. Recession is guaranteed.
Governments will attempt to pump fiscal stimulus. Central banks may resort to buying up government debt and other financial assets in addition to printing money. The US may lose it's status as the global superpower and its dollar may lose its status of being a reserve currency as its debt explodes as it attempts to save itself.
The government cannot keep borrowing indefinitely. At some point the bond market will stop financing our debt spending, at which point we can either re-organise the debt where creditors take a large haircut on their debt with resulting asset sales, implement negative interest rates where creditors see the value of their collateral erode, cut spending significantly, raise taxes significantly, default on the debt, monetise the debt by printing money, or resort to socialism. Historically, governments react to these kinds of situations by printing money. When that happens, we will likely get hyperinflation if too much money is available or depression if too little money is available and the prices of assets used as collateral backing loans will spiral downward.
During the coronavirus crisis, we are witnessing government attempting to control the situation and taking on unprecedented power. However, this will likely result in social unrest and perhaps lead to anarchy in democratic societies as people oppose the rule of the law. As the economic situation worsens, we may see a run on banks and insurers falling over, and long queues for essential services. Masses will ask for government handouts at a time when government budgets around the world are weak. Crime will rise, although this will be offset by a sense of community and negated somewhat by a society that is relatively more responsible and engaged in social media. Governments will default. In one word, there will be 'fear' as people are running scared.
The collapse will bring a closing of the wealth gap in relative terms. Many of the rich will be decimated and while the poor will also be poorer, the gap between the wealthy and the poor will close.
The way we live in the future will change too. As society rebuilds, expect to see increased risk aversion. This will translate to people seeking stability with their jobs and a willingness to get married. Nations will look inward, with a focus on local capability and production, nationalism that may lead to war, and xenophobia. There will also be a rethinking of efficient supply chains, urbanisation, travel, education, healthcare, human impact on the environment and associated consequences as humans encroach ever further into wildlife.
