Archive for March, 2020

Does a Dystopian Future Await?

Monday, March 23rd, 2020

Everyone is focusing on the numbers, of course.  The number of cases.  The number of hospitalizations.  The number of deaths.

And this new world of “self isolation” and “social distancing” and suddenly-empty grocery stores certainly has everyone’s attention.  Who knew a roll of toilet paper would ever be cause for such rejoicing?

Alas.  People are staring in the wrong direction.  While angst over the lack of N95 masks and hospital ventilators is reaching epic proportions, a beast slouches towards Bethlehem.

Not to make light of Covid-19.  It will probably kill millions before it’s done.  But its lethality is modest.  And we already have a model for how this will likely go… the Spanish Flu of 1918.

Like that long ago pandemic at the end of World War I, Covid-19 will exact its pound of flesh not from a terrible lethality, but rather from its remarkable infectiousness.  Infect enough people in a population and you don’t need a high mortality rate to suddenly be in a very dark place.

But that is only the prologue.

Mention economics and finance and people’s eyes quickly glaze over.  So let me distill it all down to a single, historically inarguable premise:  human health and well-being is directly correlated to GDP.  I don’t mean there’s some kind of vague, abstract correlation.  I mean they are directly correlated.

And GDP is now headed dramatically, profoundly lower.  Probably lower than we’ve seen in decades.  And probably for a very, very long time.

When this is all over, far more people will have died because of what is coming in the economy than ever died from Covid-19.  And the survivors will inhabit a landscape littered with carnage and misery that is today unimaginable.

There will be suffering aplenty, for everyone.

I know the eyes are already growing dim, so I won’t belabor the point.  But for those wondering why I pose such a depressing vision, why – those of you already turning and waving at the talking head on television who keeps talking about the “V-shaped recovery” – why can’t that be our future?

Let me put it this way… if we human beings had collectively led economically prudent, rational lives – sober is the word that comes to mind – the financial effects of Covid-19 would still be beyond awful.  

But, no, we didn’t live that sober, wise existence.  There is hardly a society on earth which has not lived beyond its means – far beyond its means – for years and years.  Global debt-to-GDP reached 322% in the third quarter last year, with overall debt north of $250 Trillion.

Debt doesn’t matter… until the day it does.  

Debt seems innocuous when interest rates are staring at the zero bound.  And that’s the lovely fantasy we’ve all been living since… well, a very long time.

Here is what will happen:  governments around the world will soon implement epic, extraordinary “stimulus” measures.  Corporations – those selfsame companies whose officers repeatedly rewarded themselves over the last decade by ordering share buybacks, in order to juice their stock price, in order to trigger their bonuses and amplify the value of their stock options… all in lieu of building factories, hiring workers, or otherwise doing something productive – will be bailed out.  

Banks, already the beneficiaries of a rigged system, will get even more rigging.

Small and mid-size businesses will get something, albeit they will be shunned to the smallest teat on the pig.

Individual citizens will receive helicopter money.  Who won’t love those checks in the mail?

Modern Monetary Theory, the notion that a government can essentially spend as much as it wants, unconstrained by such inconveniences as tax revenues or fiscal deficits, will have its day in the sun.

Interest on debt of all kinds will be suspended.  Loan payments will be delayed.

Everything you can imagine to keep the edifice upright will be tried.  Anything to keep the illusion alive.  To keep the dancers on the floor.  Politicians from both parties will promise anything and everything.

But, then, in spite of these herculean efforts…

Layoffs will come, slowly at first, but then with shocking speed.  Unemployment will spike to levels never before seen.

Interest rates will rise, even as asset values of nearly everything else collapses.

Companies will go out of business.

Banks will fail.

What remains of commerce will turn ever more slowly.

Currencies will fail. 

Social unrest will make its appearance.  We can expect police and military crackdowns.

Citizens will demand that government “do something.”  Socialism will be embraced by those who today cannot imagine themselves on that part of the political divide.

Ultimately, there may be a financial reset… with a new currency, new national and international monetary plumbing, and perhaps a debt jubilee. 

If you were alive in the middle of November, 1929, you’d surely have breathed a sigh of relief that all that chaos up on Wall Street a few weeks ago had turned around.  You’d have no idea, none at all, of the long nightmare that actually lay in front of you.

None of this will happen quickly.  This will be a long, extraordinarly painful slog.

But it was a reckoning we had coming.  Covid-19 is simply the dagger that began the dance.