Many people facing the corona virus pandemic are focussing on immediate needs and requirements but some correspondents – and hopefully heads of state – are looking further.
A Moseley resident writes: “Once again, the bill will have to be paid. Expect years of austerity to pay for this virus disaster. I’m guessing that, otherwise the currency will be valueless and inflation will run riot. At the moment we’re in 1918 to be followed by 1920 and then 1930 and 1940 ….
A clear, convincing and relatively optimistic account was written on March 7th by Australian-born economist, Dr Steve Keen (right).
Dr Keen’s breadth and depth of education inspires confidence: it includes Bachelor of Arts and Bachelor of Laws degrees from the University of Sydney in the ‘70s and later a Master of Commerce and a PhD in economics in the ‘90s at the University of New South Wales in 1998. He is currently professor and Head of the School of Economics, History and Politics at Kingston University in London.
His article – A Modern Jubilee as a Cure to the Financial Ills of the Coronavirus – is summarised here. Some links and graphics added
He points out that this is the first disease to compare to the Spanish Flu in terms of both transmissibility and virulence. Europe was embroiled in World War I at the outbreak of the Spanish Flu. Its health and population impacts were huge: estimates of the death toll vary between 40 and 100 million in a global population of 1.8 to 1.9 billion.
But its financial effects were mild, disruptions to the war economy for much of the world were relatively small, with guaranteed employment and wages for military personnel, rationing for the general public and other wartime measures. Crucially, private debt was a mere 55% of US GDP when the flu outbreak began. The private sector was relatively robust.
The situation is vastly different today. Our great financial crisis, the “Great Recession” or “Global Financial Crisis”, lies in the recent past, and its primary cause is still with us: US private sector debt is just 20% of GDP lower than its peak during the crisis, three times higher than at the time of the Spanish Flu.
In addition, we now have “the gig economy” and precarious jobs in industries which are likely are likely to be hard hit by the Coronavirus: health itself, entertainment, restaurants, tourism, education. They could lose their jobs, and be unable to service their debts or pay their rents, or even buy food.
Many employers could also be unable to service their debts. Corporations in the USA have levered up during the period of Quantitative Easing, pushing the US corporate debt to GDP ratio to an all-time record. It is also twice the level that applied during the Spanish Flu. Many corporations will find their cash flows dry up and many will find these debt levels crushing.
The production system is also more vulnerable than at the time of the Spanish Flu.
The global economy today relies on long and complicated supply chains, with many goods being produced from components manufactured in dozens of countries and shipped between them on container vessels.
- If manufacturing in even one place (such as China) comes to a near standstill, production elsewhere will do the same.
- “Just in Time” manufacturing methods will run out of inputs, even if their factories are still capable of operating.
- Shipping could be affected if crews refuse to undertake trips that can take weeks with potentially asymptomatic carriers on board, or if crews are quarantined for two weeks prior to departure.
- Shares are likely to plunge in value. We have already seen a 14% fall in the S&P500 (though followed by a 5% rebound on Monday March 2nd) . . . We are clearly in the exponential phase of the pandemic. It will ultimately taper, but at present the number of cases outside China is doubling every 2-6 days, depending on the country.
- Banks will also suffer badly. The asset side of their ledgers includes corporate shares: if these fall in value, banks will find their assets plunging, while their liabilities remain constant. A bank cannot: it must have assets that exceed its liabilities, or it is bankrupt.
A private non-financial company can continue to operate with negative equity, so long as it can pay its debts as and when they fall due even if its liabilities are greater than their assets. But a bank cannot: it must have assets that exceed its liabilities, or it is bankrupt.
A credit-driven, private sector monetary system is not capable of handling a systemic crisis like this. If the rules of such a system are enforced, it will make the crisis worse:
- renters and mortgagors will be evicted, put on the streets, where they are more likely to catch and transmit the virus,
- personal hygiene and public health will suffer, when one is needed to slow the pandemic, and the other must be functional to support its current victims,
- stock markets will crash,
- banks themselves will fail as their shareholdings plunge in value, bringing the payments system to an end
- and even those unaffected by the crisis will be unable to shop.
It is, on the other hand, possible for Central Banks and financial regulators, once authorised by their governments, to take actions that prevent the medical crisis from becoming a financial one.
Other mechanisms may exist, but these are the obvious ones to prevent a financial pandemic on top of a medical one.
First: make a direct payment now, on a per-capita basis, to all residents via their primary bank accounts (most effectively, their accounts through which they pay taxes).
As Quantitative Easing has shown, this does not have to be financed by asset purchases. It is quite possible for Central Banks to put a notional asset on their balance sheets to finance. This is already done by the Bank of England to back the value of the notes issued by Scottish Banks: a bill known as a Titan with a face value of £100 million balances the value of bank notes issued by Scottish banks.
The same could be done by any Central Bank to balance a direct cash transfer to the bank accounts of all residents of its country – see People’s Quantitative Easing (Coppola 2019).
This already has been done in Hong Kong. The payment there is HK$10,000, or roughly US$2,000. It does not need to be financed by the Treasury or by taxation: neither were used by the USA to support its $1 trillion dollars per year Quantitative Easing program. There will be no “debt burden for future generations”.
Secondly: boost share prices by buying shares directly.
Quantitative Easing was intended to boost share prices. Clearly it worked—but there is no guarantee that it would work in this situation.
Instead, Central Banks should directly buy shares, as they are also quite capable of doing: Japan’s Central Bank has been doing this for several years already. This puts money in the bank accounts of shareholders, while the shares are then owned by the Central Bank. This could prevent a collapse in share prices, which in turn could prevent a collapse in the banking sector—since if shares fall substantially, many banks will find that their assets are worth less than their liabilities, and they would be forced to declare bankruptcy.
Central Banks can also cope with a share market collapse in a way that private banks and financial institutions cannot. Unlike a private bank, a Central Bank can operate with negative equity. If there was still a stock market crash, a Central Bank holding shares would still be able to operate.
Thirdly: suspend standard bankruptcy rules while the crisis exists
Banks and financial institutions in particular are vulnerable to bankruptcy in this crisis. Non-financial companies which are heavily exposed to the pandemic—health companies, airlines and other transport firms, education providers (including many public universities reliant on student fees), restaurants, sporting grounds—could see their revenues plummet, making them unable to service their debts, and therefore liable to bankruptcy.
Corporations exposed to Coronavirus-driven losses of revenues should also be able to receive direct aid from Central Banks as well. This could take the form of the sale of newly issued shares in return for cash—it should not be in the form of debt, which would simply replace one problem with another.
As Professor Keen ends his constructive and reassuring article, the words of John and Andy, from Moseley and Bournville, have been blended to give their views on a post pandemic future:
If we look coolly, perhaps rather brutally, at our situation, a complete generation may be wiped out, but in the worst scenario most humans on the planet are unlikely to die and the younger members least of all. The NHS will be saved millions by not having to treat the elderly and generally infirm. Pensions will be reduced and a younger, leaner, more focused workforce that realises how soft we had become will take up the cudgels to drive the economy onwards. Human life will go on and maybe the lessons learnt from tackling this infection will help in facing the next.