What comes after COVID-19 might be worse

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by Fabius Maximus

Summary: Every week more nations get COVID-19 under control, slowing its growth rate. Next comes the hit to the world economies. Will it be a deep or shallow decline? Of long or short duration? Will we handle it well or poorly?

Man in depression looking at graph of economy crashing
By Kenishirotie. AdobeStock-104716085.

Martin van Creveld has a typically brilliant new column, “At Six after the Corona Crisis“, looking at life after the pandemic. In it, he looks at attempts…

“to divine what the world will be like once the current corona crisis is gone (for gone, and even more or less forgotten, it will be). …Having spent much of the last eighteen months or so researching the methods people use in their attempts to look into the future, I cannot say I am impressed by their efforts. Almost all of which appear to be ill-supported, superficial, and biased – very often, without the authors even being aware that they are.”

I agree with his conclusions about attempts to predict the results of the COVID-19 pandemic. This sentence caught my special attention.

“To divine what the world will be like once the current corona crisis is gone (for gone, and even more or less forgotten, it will be).”

True, it will be forgotten. Everything is forgotten, eventually. As the 1873-1879 global Long Depression has faded from the public’s memory (a longer but shallower contraction than 1930s event, horrific because there were no safety nets then). But the 2020 Covid-19 pandemic might be remembered for many generations, as the Great Depression has been.

The casualties from COVID-19 seem unlikely to be large, as pandemics and wars go (i.e., as a percent of the population). But its effect on the economy might be catastrophic, causing immense and long-lasting suffering. Many nations have put their economies into something like a coma, an induced economic depression. We do not know for how long this will continue, or how competent the process of revival will be. The programs to defend against and mitigate COVID-19 were incompetent in most of the developed nations. (See China begin to restart their economy.)

Forecasting the effects of COVID-19 is little more than guessing. There are few precedents (that is one reason for the incompetent execution so far), making reliable predictions difficult to impossible. Quantitative models are usually useless without useful precedents to model (but their results still are useful to build fame and fortune for their designers).

A global recession is commonly defined as real GDP growth slower than 2%. A global depression seems probable (i.e., deeper and longer than a recession). A severe global depression – several years long, with a big drop in GDP – is possible, in which some sectors and even nations collapse. Journalist Peter Goodman collected some predictions by economists for his NYT article “Why the Global Recession Could Last a Long Time.

“I feel like the 2008 financial crisis was just a dry run for this. This is already shaping up as the deepest dive on record for the global economy for over 100 years. Everything depends on how long it lasts, but if this goes on for a long time, it’s certainly going to be the mother of all financial crises.”
— Kenneth S. Rogoff, Harvard economist and co-author of This Time Is Different: Eight Centuries of Financial Folly.

“I am attached to the notion that this is a temporary crisis. You hit the pause button, and then you hit the start button, and the machine starts running again. …The longer this goes on, the more likely it is that there will be destruction of productive capacity. Then, the nature of the crisis morphs from temporary to something a bit more lasting.”
— Marie Owens Thomsen, global chief economist at Indosuez Wealth Management in Geneva.

For another opinion, see “The Three D’s and High-Frequency Leading Indicators” by the Economic Cycle Research Institute.

“In terms of depth, this recession is extraordinarily deep. Already, 26.5 million people have filed for jobless claims, compared with a total of 8.7 million jobs lost during the Great Recession. And it’s not over. …But on the third ‘D,’ duration, this recession could be among the shortest on record. Here’s why.”

Not mentioned in this article are the aftereffects of the massive fiscal and monetary stimulus programs employed to stabilize the economy. No matter how necessary, there are always side effects. Some obvious, like unwinding the monetary stimulus. Some subtle, such as this additional lesson that the Federal Reserve will protect gamblers in the financial markets, if they have sufficient political influence.

Bigger issues

The speed and magnitude of the recovery depend on the resilience of the global economic system. Doomsters assume, as they always do, that our systems are a house of cards and will easily collapse. Hence their confident predictions of the End Times following Y2K and the 2008 Crash. They are almost always wrong, but not always wrong.

For example, see Raul Pal’s April issue of the Global Macro Investor. The analysis is mostly intuitive plus the usual bogus technical analysis. But he is brilliant, and makes some important points. His bottom line …

“When I look ahead, all I see is the potential risk of the failure of our very system of money, or less dramatically, our current financial architecture. I doubt it will go in one big boom, but more a long drawn-out bleed. Literally every single institution on Earth will be trying to save it. I don’t think it can be saved without becoming even more of a Frankenstein’s monster. It is already a deformed beast after the last crisis and barely functions.”

I assume our systems are resilient, hence my predictions have been fairly accurate in these things. But the severity of 2008 crash is evidence that I was wrong. There was a debt-fueled housing bubble in the US (bubbles are a common and natural event in free-market economies, predating central banks, fractional reserve banking, and fiat currencies). Many people predicted that its popping would cause a recession in the US, perhaps a severe one. It should not have sent the world into a financial meltdown and near-depression, with most of the world’s major banks collapsing like dominoes. This was like slamming the door and having the ceiling collapse. I have not found anyone who predicted this (see herehere, and here). The Crash was a 1929-1932 magnitude shock, but compressed into two years. Its effects were mitigated, but only with extreme fiscal and monetary measures – whose effects (e.g., the debt) remain.

This is evidence that the US and global economic systems might be much less resilient than I and most others imagined. That would be bad news. Societies whose foundations and infrastructures are not resilient tend to die, unpleasantly.

This is yet another way that the lessons of COVID-19 can help us prepare for the probably larger challenges that await us in the 21st century.

News from economists

From NBER Working Paper No. 26989, April 2020 – a survey of small businesses. 43% have closed, hopefully temporarily. They asked owners if their businesses will survive if the crisis lasts 6 months. The answers, by industry: retail (except grocers) 33%, hotels 27%, personal services 22%, restaurants and bars 15%.

Summary by Tyler Cowen (professor, George Mason U) at Marginal Revolution.

“If we keep the economy closed at current levels, it will continue to decay, and at some point turn into irreversible, non-linear damage. No one knows when, or how to model the course of that process. …If we keep people locked up at current levels, fewer of them will be exposed to the virus, and in the meantime we can develop better treatments, and also improve test and trace capabilities. No one knows how quickly those improvements will come, or how to model the course of that process, or how much net good they will do. The relative pace of those two processes should determine our best course of action. No one knows the relative pace of either of those two processes. Yet commentators pretend to be increasingly knowledgeable, moralizing based on the pretense of knowledge they do not have.”




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