07 May 2020
After the virus hit Wuhan, in the Chinese province of Hubei, supply chains around the world felt the repercussions of factory workers being quarantined to contain the spread of the outbreak. The demand side was also squeezed, as China locked down entire regions, stopping people going to shops, restaurants and bars – and travelling within and outside of the country.
Global economy tightened.
Businesses closed; millions of workers have had wages cut or lost their jobs, and savers and pensioners watched their money diminish as stock markets tanked. Central banks responded by printing money and cutting interest rates to record lows, while Governments delivered fiscal stimulus packages to keep some companies afloat and cash in people’s pockets.
The Office for Budget Responsibility recently forecast that ‘second quarter decline’ in the UK’s GDP, would be something in the order of 35%, which has to be the most extreme collapse in economic activity that any of us have seen in our lifetimes. The longer we are operating at reduced or indeed much reduced capacity, the more initial economic damage there will be, and the less likely we are to be able to make up for it. Some people have compared it to putting a patient into an induced coma – whereas, the economy has been put to sleep. That gives some hope to believe, that once this is all over, the economy can begin to bounce back.
Virologists had been predicting that globalisation would lead to a viral pandemic, for years. Just as trains, planes and automobiles carry workers and their wallets, so too could they carry a virus. But should this mean that our modern way of life is bound to fail too? Could we fathom a less convenient world with limited choices and less freedom? For many the arrival of covid-19 is a crisis unlike any other in modern times that could potentially change the way we live and how we run our economies.
The longer the lockdown goes on, the more chance there is of lasting damage to the economy, and is what economists call a ‘scarring. This is because many businesses will become insolvent and will likely finish off large swaths of the high street, which will have a huge knock-on effect for the property market. After all - What on earth do you do with all the shops? They can’t all be restaurants, coffee bars and pubs. People’s livelihoods, their ability to earn money and pay for basics like food and rent are all at risk. If it’s just one business, that’s not so bad – but when all businesses all over the world are shutting up shop… then it hurts everybody.
But this isn’t our first pandemic. The great plagues of history also caused economic havoc, and a decline in agriculture and trade which led to spiraling inflation. The black death killed up to two thirds of Europe’s population. The great plague of London killed a quarter of the capital’s population and cracked down on trade, but the great fire that followed it actually stimulated growth, as the city had to be re-built.
Coming out of quarantine, Governments will need to make sure that all the promises that have been made about compensation and people’s incomes that have been hit, are delivered. Ensuring the money promised gets to people’s pockets as soon as possible. The Government will need to act quickly to unwind some of the schemes created and return economies to normality. There will also need to be a ‘pure recovery’ phase where lost ground is made up. In conjunction with this, we may quickly see an advance towards much more widespread wealth taxes in particular. Governments will likely look at who is capable of paying taxes – maybe it is not the low paid or unemployed, but rather they will focus very much on wealthy individuals. Something to take notice of if you happen to fall into this category.
The universal Basic Income idea which world leaders have been ‘flirting’ with already, will play a huge part in the discussion during the months ahead. So, they’re pushing money into people’s hands, because the problem with the current situation is people are scared and they’re not spending. If they’re not spending it means businesses are not getting revenue, and that’s bad for everybody.
After WW11 ended, the UK economy emerged with excessive debt. Around 270% GDP. And the way in which they dealt with that is interesting - They whacked up inheritance tax to 80%. That is not to say inheritance tax will be whacked up due to the crisis we find ourselves in today, but it certainly looks likely that wealth taxes will be coming through as one of many solutions to be introduced for a revitalised. balanced and recovered economy. So we can see where this is taking us.
Alongside Italy and France, Spain, is one of the worst hit economies of the Western European block due to the lockdowns. In steps toward recovery, the Spanish Government suggested debts that could be taken on as a €1.5 trillion fund that would essentially be perpetual and where only interest should be paid on the loans taken and given out as grants to the countries that need it the most. It is an exercise in re-branding on how this is put to the EU leaders that have been so far reluctant to put their name to Eurobonds or ‘Coronabonds’ as some are calling them, especially the Northern ‘frugal’ countries like Germany and the Netherlands with mutualised debt across the EU. What Spain is proposing is that this fund would be anchored in what’s called the multi-annual financial framework, which is basically the EU’s budget.
The ‘printed money’ that is being injected into economies, is going to have a massive impact on inflation, and there is a lot of concern surrounding the purchasing power of the U.S dollar, especially since the dollar has lost 92% of its value in the last 100 years. As the dollar is the world reserve currency, the U.S has managed to get away with increasing their monetary supply by quantitative easing thus far. If the dollar went into hyperinflation, it would be the end of the monetary system globally. However, the odds of that happening are so slim it wouldn’t be worth calculating.
Where we are today - based on all of the data out there, we may likely see a period of deflation anywhere in the region of 0.1%-3.5% followed by a period of inflation of around 5%, if it were 10% it would be extreme – but these are unprecedented times, and anything can happen. Regardless of what country you are in, we are all in for a rough ride because of the money that has been put into circulation by the central banks. Central banks give loans, loans have to be paid back, Governments’ don’t have any money, the Government doesn’t create any money either – they get all of their money from taxes. And where do the taxes come from? They come from the ‘efforts’ that you and I produce. Human power, creativeness and work drives the economy. In the end the money is going to come from you and I even though the Government’s making you think that they are doing you a huge favor with all the money printing, in actual fact, we are the ones who will have to pay all of that back… eventually. And if they want to hike taxes – they will do it.
All of this comes at a time of unemployment and our savings being eaten away by inflation, along with wages which are also going down as a result of the economic crisis. Money doesn’t stay with the people – if that were true, the middle class wouldn’t be shrinking. The money eventually goes back to the 1%, the banks and the like. All of this ‘created’ money will eventually go into stocks and shares and also real estate. If you have a mortgage this is good for you because it inflates away the money that you borrowed initially, meaning that you are paying back that mortgage with ‘cheaper money.’ But if you are a saver, then deflation is best for you, because it means that your money isn’t being inflated away every year. But long-term, the best thing you can ever do with your money is invest it. If you are investing in short-term speculation right now… you might want to rethink your strategy, because short-term speculative type investing as many will tell you, can hit you hard on the downturn. Sadly, those same ‘many’ are a testament of that today.
Times are certainly changing! But not since WW11 has the Government had to essentially ‘directly’ manage the economy and society. Now they are really running the country rather than just ‘saying’ they are running the country. Remember - knowledge is power, and as long as you remain informed and understand the fundamentals of what is actually going on by safeguarding and navigating your finances through the rapids - eventually it will bring you to much calmer waters in the long run.