Yves here. It would be better if I were wrong, but I have doubts about this scenario. It appears to assume some orderliness in the responses to the coronavirus, both in terms of businesses and governments cooperating. I don’t see this as possible in the US. Not only is there an absence of public spiritedness, government is not trusted. And that’s not an uninformed view. The US in incapable of mounting a New Deal or war mobilization level response. It lacks the operational capacity. And too many people in power are in it for themselves. Things may be better in a lot of the rest of the world in terms of social and political cohesiveness, but few countries are as close to being an autarky as the US (Russia is probably the best candidate), and so the breakdown of global supply chains is likely to hit them even harder.
Similarly, if concerns that getting Covid-19 confers only short-term immunity (say a year or less), then investing in tracking who has contacted it for the purpose of deeming individuals to be safe from a travel/visa standpoint is a waste of effort.
I suspect Grasmsci is the best seer:
The crisis consists precisely in the fact that the old is dying and the new cannot be born; in this interregnum a great variety of morbid symptoms appear.
By Marshall Auerback, a market analyst and commentator and Jan Ritch-Frel, the executive director of the Independent Media Institute. Produced by Economy for All, a project of the Independent Media Institute
The coronavirus pandemic has upended the global economic system, and just as importantly, cast out 40 years of neoliberal orthodoxy that dominated the industrialized world.
Forget about the “new world order.” Offshoring and global supply chains are out; regional and local production is in. Market fundamentalism is passé; regulation is the norm. Public health is now more valuable than just-in-time supply systems. Stockpiling and industrial capacity suddenly make more sense, which may have future implications in the recently revived antitrust debate in the U.S.
Biodata will drive the next phase of social management and surveillance, with near-term consequences for the way countries handle immigration and customs. Health care and education will become digitally integrated the way newspapers and television were 10 years ago. Health care itself will increasingly be seen as a necessary public good, rather than a private right, until now in the U.S. predicated on age, employment or income levels. Each of these will produce political tensions within their constituencies and in the society generally as they adapt to the new normal.
This political sea change doesn’t represent a sudden conversion to full-on socialism, but simply a case of minimizing our future risks of infection by providing full-on universal coverage. Beyond that, as Professor Michael Sandel has argued, one has to query the “moral logic” of providing “coronavirus treatment for the uninsured,” while leaving “health coverage in ordinary times… to the market” (especially when our concept of what constitutes “ordinary times” has been upended).
Internationally, there will be many positive and substantial international shifts to address overdue global public health needs and accords on mitigating climate change. And it is finally dawning on Western-allied economic planners that the military price tag that made so-called cheap oil and cheap labor possible is vastly higher than investment in advanced research and next-generation manufacturing.
This also means that the old North (developed world) versus South (emerging world) division that long preoccupied scholars and policymakers in the post–World War II period will become increasingly stark again, particularly for those emerging economies that have hitherto attracted investment largely on the grounds of being repositories of low-cost labor. They will now find themselves picking sides as they seek assistance in an increasingly divided and multipolar world.
The fault lines of the next economic era have already begun to surface, creating friction with the previous international structure of banking and finance, trade and industry. There is a force beyond elites and critical industries driving this: The proletariat has literally become the “precariat.”
In the U.S. and Europe, the staggering number of service economy workers are going to be quickly politicized by the shortfalls: People have seen a collapse in income, and big failures in education, and health care. Union-busting, pension fleecing, and austerity budgets and new technologies that concentrate wealth away from labor have created a circumstance where ownership and profit models must be revisited to sustain stability. The needs are too acute to be distracted by the lies of Trump, or the inadequate responses in other parts of the industrialized world. The current crisis will likely prompt geopolitical and economic shifts and dislocations we haven’t seen since World War II.
Death of Chimerica, the Rise of New Production Blocs
One of the biggest casualties of the current order is the breakdown of “Chimerica,” the decades-old nexus between the U.S. and Chinese economies, along with other leading countries’ partnerships with Chinese manufacturing. While the geopolitics of blame for the origins of coronavirus continue to shake out, the process that saw a decrease in exports from China to the U.S. from $816 billion in 2018 to $757 billion in 2019 will accelerate and intensify over the next decade.
While a decoupling is unlikely to lead to armed conflict, a Cold War style of competition could emerge as a new global fault line. Much as the Cold War did not preclude some degree of collaboration between the U.S. and the former Soviet Union, so too today there may still be areas of cooperation between Washington and Beijing from climate to public health, advanced research to weapons proliferation.
Nor does this shift necessarily spell the sudden collapse of Chinese power or influence—it has a colossal and still-growing domestic market and is on the international leaderboard for a wide range of advanced indicators. But its status as the world’s most desirable offshore manufacturing hub is a thing of the past, along with the economic stability that steady inflows of foreign capital brought with it. It does show a susceptibility to domestic stress, with the Hong Kong protests last year providing a hint of what is in store as the party leadership can’t pivot to new realities that include slower economic growth and declining foreign investment.
As investment flows turn inward back to industrialized countries, there will likely be corresponding diminution of the global labor arbitrage emanating from the emerging world. In general, that’s a negative for the global South, but potentially a positive factor for workers elsewhere, whose wages and living standards have stagnated for decades as they lost jobs to competing overseas low-cost manufacturing centers (the increase in inequality is principally a product of 40 years of sustained attacks on unions). The jobs won’t be the same, but to be sure, manufacturing incomes exceed those of the service industry.
As each country adopts a “sauve-qui-peut” mentality, businesses and investors are drawing the necessary conclusions. Coronavirus has been a wake-up call, as countries trying to import medical goods from existing global supply chains face a shortage of air and ocean freight options to ship goods back to home markets. Already, the Japanese government has announced its plans “to spend over $2 billion to help its country’s firms move production out of China,” according to the Spectator Index. The EU leadership is publicly indicating a policy of subsidy and state investment in companies to prevent Chinese buyouts or undercutting prices.
Two billion dollars is small potatoes compared to what is likely to be spent by the U.S. and other countries going forward. And it can’t simply be done via research and development tax credits. The state can and must drive this redomiciling process in other ways: via local content requirements (LCRs), tariffs, quotas and/or government procurement local sourcing requirements. And with a $750-billion-plus budget, the U.S. military will likely play a role here, as it ponders disruptions from overseas supply sources.
Of course, if the U.S. does this, other parts of the world—China, the EU, Japan—will likely do the same, which will accelerate the regionalization trends in trade. This may mean that some U.S. firms will have to operate in foreign markets through local subsidiaries with local content preferences and local workforces (that is how it worked in the 1920s—Ford UK was a mostly local British company, different from the U.S. Ford Motor Company, but with shared profits).
An examination of U.S. planning for the post-1945 world reveals the emphasis was on free trade in raw materials mostly, not finished goods. (The U.S. only adopted one-way “free trade” with its Asian and European allies later as a Cold War measure to accelerate their development and keep them in the American orbit.)
Domestically within the U.S., as Dalia Marin writes, the coming declines in interest rates will accelerate “robot adoption” by 75.7 percent, with concentration “in the sectors that are most exposed to global value chains. In Germany, that means autos and transport equipment, electronics, and textiles—industries that import around 12 percent of their inputs from low-wage countries. … Globally, the industries where the most reshoring activity is taking place are chemicals, metal products, and electrical products and electronics.”
As the coronavirus pandemic is illustrating, a viable industrial ecosystem cannot work effectively if it is dispersed to too many geographic extremities or there are insufficient redundancies built into the transportation of goods back into the home market (rail, highway, etc.). Proximity has become a significant competitive advantage for manufacturers, and a strategic advantage for governments. But the U.S. government must play an expanded role in the planning process. The U.S. is still a leader in many high-tech areas, but is suffering the consequences of a generation-long effort to undermine the government’s natural role as an economic planner.
In the form of the regionalized blocs that are being sketched, in the Americas, Mexico is likely to be one of the leading recipients of American foreign direct investment (FDI). It already has a $17 billion medical device industry and is sure to absorb much more capacity from China. This has already started to happen as a result of the U.S.–Mexico–Canada Agreement (USMCA, or new NAFTA). Furthermore, the Washington Post reports that “[a]s demand soars for medical devices and personal protective equipment in the fight against the coronavirus, the United States has turned to the phalanx of factories south of the border that are now the outfitters of many U.S. hospitals.” This is in addition to the thousands of assembly plants already in place in Mexico since the establishment of NAFTA. Indeed, if the jobs that had moved to China move to Mexico, Central America, and South America, this likely addresses many long-standing social tensions in regard to immigration management, currency imbalances and corresponding black market industries (ironically, it also likely means the end of Trump’s wall, as the industrial ecosystem of the Americas becomes more cohesive and widespread).
Big Business Is Good Business
But this will also have significant impacts closer to home: Much as Franklin Delano Roosevelt ultimately prioritized domestic ramp-ups in wartime production over trust-busting, so too national champions are likely to feature more prominently today, as domestic scale and balance sheet strength are given precedence to accommodate the drive to revive employment quickly, and work collaboratively to halt the spread of the coronavirus. The scale of companies will not be regarded as a political problem if they can both deliver for consumers and show the capacity of following political direction for what the public’s needs are. Tech companies like Apple and Google are stepping up to fill the void left by massive federal government dysfunction. The “break up Big Tech” voices are nowhere to be heard at the moment.
We still need a more robust form of regulation for these corporate behemoths, but via a system of regulation that is “function-centric,” rather than size-centric. As co-author Marshall Auerback has written before, this kind of regulation “restricts the range of corporate activities (e.g., structural separation so as to prevent companies like Amazon and Google from owning both the platform as well as participating as a seller on that platform), or the prices such companies can charge (as regulators often do for utilities or railways). These considerations would be ‘size neutral’: they would apply independently of corporate size per se.”
Capitalism has always had its plutocrats, but scaling back America’s overly financialized model (by preventing stock buybacks, to cite one example) would represent a useful reform and prevent a lot of economic waste. Instead of going to enrich executives and shareholders beyond the dreams of Croesus, that measure might help to ensure that the profits of these companies will be directed to the workers’ wages (which also means supporting increased unionization), or plowed back into investment (e.g., increased robotics).
Biodata, Privacy, and an End to Pandemic Profiteering
And there are fault lines in the business world. The pharmaceutical and medical research industries face immense pressure from other businesses to end the pandemic so they can get back to profitability. That means temporarily setting aside profits and pooling intellectual property to encourage collaborative efforts on the part of biotech and pharmaceutical companies to find proper treatments for COVID-19, and make them freely available, especially if governments were to waive antitrust scrutiny in exchange for all of the data Big Pharma companies collectively hold. As the Guardian reports, “[t]here is a precedent. Last June, 10 of the world’s largest pharmaceutical companies—including Johnson & Johnson, AstraZeneca and GlaxoSmithKline—announced they would pool data for an AI-based search for new antibiotics, which are urgently needed as antibiotic-resistant bacteria have proliferated across the world, threatening the growth of untreatable disease.”
Privacy advocates are already expressing concerns about a growing and overweening medical surveillance state. These surveillance concerns lack historical context: From the 19th century on, serious health problems were met by hardline government policies to reduce them. Policies ranging from quarantine to vaccine were not always mandatory, but there was an understanding that personal concessions had to be made to manage a huge population and an advanced society; the Constitution was not a suicide pact. We can further alleviate those concerns today by ensuring that the information uncovered does not become a precondition or additional cost of receiving insurance coverage. In light of coronavirus, cost savings of incorporating biodata into immigration and customs are a no-brainer for governments, and are certain to cause friction with individuals who may not want to give blood or saliva to get a visa or work permit, and agribusiness leaders who know that safety measures cut into profitability. But the scales have tipped in the other direction.
North Versus South
What about the other countries in the developing world that don’t have close geographic proximity to a home market, or abundant supplies of key commodities required for 21st-century manufacturing needs, or even a well-developed manufacturing base (in other words, the countries that have hitherto been large recipients of investment solely on the grounds of cheap labor)? Many of them have faced immediate pressure with the collapse in global trade, unprecedented capital flight that is sure to grow as the coronavirus spreads, all the while coping with COVID-19 with highly inadequate health systems.
In the meantime, the multi-trillion-dollar market for emerging market debt, both sovereign bonds and commercial paper, has collapsed. Many of these countries, via their state pension funds and sovereign wealth funds, have become the ultimate endpoint for many of the newer asset-backed securities that finally revived years after the 2008 financial crisis. This has become the potential new stress point in the $52 trillion “shadow banking” market. The U.S. Federal Reserve has sought to ease the funding stresses of much of the developing economies by offering central bank swap lines. It has also broadened prime dealer collateral acceptance rules, and set up commercial paper swap facilities, all of which have eased short-term funding pressures in these economies that have incurred substantial dollar liabilities.
As the emerging world central banks then start to lend on those lines to their own banks, it should start to alleviate the shortage of dollars in the offshore dollar funding markets. We are starting to see some easing of stresses, notably in Indonesia—because it’s an exporter of resources more than a cheap labor price economy.
But whereas in previous emerging markets crises, China was able to buttress these economies via initiatives such as the “Belt and Road Initiative,” Beijing itself is likely to be buffeted by the twin shocks of declining global trade and a reversal of foreign direct investment, which declined 8.6 percent in the first two months of this year.
Longer-term, many other countries face comparable challenges to China: Capital controls, collapsing domestic currencies, and widespread debt defaults are likely to become the norm. That’s already happened to serial defaulter Argentina again. South Africa has been downgraded to junk status. Turkey remains vulnerable. The so-called “BRICS” economies—Brazil, Russia, India, China and South Africa—are all sinking like bricks. The problem is exacerbated by the fact that coronavirus and likely future pandemics will create additional stresses on developing economies that depend on their labor price advantage in the international marketplace to survive.
By contrast, countries like South Korea and Taiwan have had a “good crisis.” Both have vibrant manufacturing sectors and created successful multiparty democracies. Foreign investment in South Korea continued to grow in the first quarter of this year, as it rapidly moved to contain the spread of COVID-19 through an extensive testing regime (while keeping its economy open). Similarly in Taiwan, by activating a national emergency response system launched in 2004 (following the SARS virus), that country has mounted a thoroughly competent coronavirus intervention of unprecedented effectiveness. The results speak for themselves: as of April 15, in South Korea, a mere 225 deaths, while in Taiwan, an astonishingly low total of six deaths in a country of 24 million people—this despite far more exposure to infected Chinese visitors than Italy, Spain or the U.S.
Of course, the very success of Taiwan’s response revives another potential fault line, namely the tension underlying the “One China” policy. Before COVID-19, it is noteworthy that the WHO “even refused to publicly report Taiwan’s cases of SARS until public pressure prompted numbers to be published under the label of ‘Taiwan, province of China,’” according to Dr. Anish Koka. At the very least, Taiwan’s divergent approach and success at fighting the pandemic will bolster its pro-independence factions.
The question of foreign nations upholding Taiwan’s sovereignty with regard to China is increasingly thorny, given Beijing’s growing military capacities. This will present an ongoing diplomatic challenge to Western parties who seek to increase engagement with Taipei without heightening tensions in the region.
A Recalculation of ‘Economic Value’
We have outlined many fault lines likely to be exposed or exacerbated as a consequence of COVID-19. Happily, there is one fault line likely to be slammed shut: namely, the false dichotomy that has long existed between economic growth and environmentalism. The Global Assessment from the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services reports that “land degradation has reduced the productivity of 23 percent of the global land surface, up to US$577 billion in annual global crops are at risk from pollinator loss and 100-300 million people are at increased risk of floods and hurricanes because of loss of coastal habitats and protection.” Likewise, the study cites the fact that as of 2015, 33 percent of marine fish stocks “were being harvested at unsustainable levels,” and notes the rise of plastic pollution (which “has increased tenfold since 1980”), both of which play a key role in degrading ecosystems in a manner that ultimately destroys economic growth.
Finally, repeated pandemics over the past few decades have shown these are not blips, but recurrent features of today’s world. Hence, there is an increasing public appetite for regulation to deal with this ongoing problem. Some industries, such as agribusinesses, won’t like this, but the concerns are well-founded. According to expert Josh Balk, 75 percent of new diseases start in domestic and wild-caught animals, and 2.2 million people die each year from illnesses transferred from animals. The majority of these are transferred from poorly regulated factory farm chickens, cows and pigs; still, the “wet markets” of Asia and Africa, and the trade in potential “transfer species,” such as pangolins, a major driver of the $19 billion-a-year global trade in illegal wildlife, must also be addressed. Beijing has suggested it will ban trade in illegal wildlife and seek tighter regulation of the wet markets. The latter in particular may be easier said than done, according to Dr. Zhenzhong Si, a research associate at Canada’s University of Waterloo who specializes in Chinese food security, sustainability, and rural development. Dr. Si argued that “[b]anning wet markets is not only going to be impossible, but will also be destructive for urban food security in China as they play such a pivotal role in ensuring urban residents’ access to affordable and healthy food.”
To be fair, this isn’t the first time that the sacred tenets of the global economic framework have dealt with a crisis that seemed to usher in a new era. The same thing happened in the aftermath of the financial crisis of 2008. But that was largely seen as a financial crisis, a product of faulty global financial plumbing that nobody truly understood, as opposed to a widespread social collapse closely approximating the conditions of the Great Depression as we have today.
Not only has the current lockdown put the entire global economy into deep freeze, but it also came amidst a backdrop of widespread political and social upheaval, and a faux recovery whose fruits were largely restricted to the top tier. A collateralized debt obligation is not intuitively easy to grasp. By contrast, being forced to stay at home, deprived of vital income and isolated from loved ones, while health care workers perish from overwork and lack of protective gear, is a different order of magnitude.
Even as we re-integrate, it is hard to envisage a return to the “old normal.” Trade patterns will change. Self-sufficiency and geographic proximity will be prioritized over global integration. There will be new winners and losers, but it is worth noting that the model of capitalism we are describing—one that does not feature obscenely overcompensated CEO pay co-existing with serf labor and the widespread offshoring of manufacturing—has existed in different forms in the U.S. from 1945 into the 1980s, and still exists in parts of Europe (Germany) and East Asia (Japan, South Korea, Taiwan) to this day.
Our everyday lives will be impacted as selective quarantines and some forms of social distancing become the new normal (much as they were when we dealt with tuberculosis epidemics). All of this has implications for a multitude of industries: restaurants, leisure, travel, tourism, sporting events, entertainment, and media, as well as our evolving definition of “essential” industries. Even our concept of personal privacy will likely have to be amended, especially in regard to medical matters. Concerns about medical surveillance—stigma (STDs, alcoholism, mental illness) and denial of insurance—can be alleviated if everyone is guaranteed treatment regardless of ability to pay, which will mean greater government intrusion into the lives of citizens and activities of businesses as the public sector seeks to socialize costs.
Taken in aggregate, we are about to experience the most profound social, economic and political changes since World War II.
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Touched on, rightly, by Auerback, is going to be a complete re-evaluation of what is a business.
As we have seen demonstrated, there are (or were) a large proportion of businesses which simply could not withstand a month or two of income drying up. This was also alluded to in yesterday’s post on the UK’s Coronavirus Business Interruption Loan Scheme (CBILS), although it skirted round the issue a bit of which businesses are deserving of “helicopter money” and which should not see a bent penny because they are, for the foreseeable future, invalidated business models.
Stop and think about that for a moment. A business, which has to be signed off by the accountants as a “going concern” if they produce annual statements of account, is simply unable to cotinine in the face of a severe, but, unless the business segment is now gone and not coming back, temporary downturn? Seriously? And this is (or was) just accepted as The Way Things Are?
As Yves mentioned the other day in a context of airline bailouts, this includes business which are known — known since the dawn of time — for being highly operationally geared (in layman’s terms, they burn through large amounts of cash and while they have large incomes and often generous profit margins when times are good, they are extremely susceptible to going hideously cashflow-negative due to disruptions of any sort). And these businesses — and their investors, and their regulators, who had open access to their books, P&L accounts and forward guidance to shareholders — looked at their balance sheets and said “sure, that all looks good to me”?
Today it’s COVID-19. But it could just as easily been a an earthquake at a strategically important hub (like Kobe in Japan was), a large volcanic eruption in the “wrong” prevailing wind conditions, or my favourite, a North Sea Storm Surge (https://www.geog.cam.ac.uk/research/projects/northseastormsurges/) which will inundate, potentially, several globally-essential supply-chain-critical ports. These events are totally predictable, if not to the exact detail and timing, at least as known-unknown scenarios. So where were the retained profits (money kept in the business to absorb trading conditions volatility)?
And yet, there are tens and tens of thousands of businesses the world over comprising trillions of dollars of capital many — many, many — of which face complete collapse in a severe downturn which might only last a few months before there is some sort of patchy recovery. We, as individuals, are told to keep six months’ savings to cope with contingencies like ill-health or the loss of a job. Why did this never apply to commerce? Where was the risk assessment and the contingency planning? And if investors didn’t demand this — and that planning would include access to reserve funding and hedges — why not?
They probably will have to, from now on.
Now, Clive, I’m sure that was a rhetorical question (“Why not have contingency / reserve funding?”). :-)
I asked recently a friend about that and he sputtered, “but how would they make money?” So the question is answered by the very question. More resilient businesses are necessary. But that takes away short-term profiteering. Like my 4 year cries – I want it now and can’t wait – most business models seem predicated on the same lack of patience and long-term greediness.
I’m interested to see how this shakes out in the next 2 years. Because I certainly am not going on a flight any time soon.
Perhaps someone with more knowledge on this could comment, but I’m pretty astonished by how little hedging seems to have taken place. Most airlines have hedged against a fuel price spike – I always assumed that they would also hedge against things like geopolitical risks or a repeat of something like the Icelandic volcanic eruption a few years back. But it seems like not one company has done so – or have they, and the are just keeping quiet to see if they can benefit from bailouts while banking their insurance claims?
Wimbledon is the only business that I’ve heard was insured against a pandemic. But this wasn’t a Black Swan event. And given the historical warnings (by experts and the relevant authorities) shouldn’t the possibility of a pandemic have been high on the list of airlines and the travel industry, at the least?
If it wasn’t what does that say about the justifications for the vaunted salaries and bonuses of company boards and chief executives?
Please don’t tell me Neo-capitalism was all a fraud./s
Dissipating resources. Gail Tverberg. Even society is a dissipating organization. So hedging and writing derivatives is dissipation insurance for some inevitably dissipating resource. Money does its own derivative trick and keeps growing just like a field of corn. But we all know we can’t eat money. But for god’s sake don’t tell anybody. Is there any industry that is regenerative like agriculture? It takes care to maintain agriculture but it is very voluntary and produces enough food to feed all 8 billion of us every year. Not like we can grow our cell phones on trees, too bad. So nobody’s really talking about sustainability these days. Wonder why? Seems to me it is the most important thing to acknowledge. We cannot go back to all the post WW2 denial of our limits. This post mentions that after the war free-trade was limited to raw materials. I’d think that that loophole morphed all the way to big profits by massive exploitation of the environment. And add to that the self-licking ice cream cone of planned obsolescence – how will we replace that easy money, now that we’ve tossed all that junk straight into the oceans? And etc. This post sounds way too much like business as usual. Sounds like somebody whistling past the graveyard to me.
Are you kidding . The bigger the company the less ‘ hedging ‘ i.e. none. That’s what the whole ‘ just in time ‘ model is based on . ‘ Efficiency ‘ . My business has business interruption cover with an old established, ‘ well respected ‘ company . My broker submitted a claim several weeks ago based on the policy wording which does not exclude pandemics and was told ‘ it’s assumed ‘ that the policy doesn’t cover pandemics. Since when does an insurer ‘ assume ‘ what is and what is not covered . Never if you’re the insured. So we are using the legal expenses cover in the self-same policy to go against the insurer. Will we get anywhere ? Who knows . We are a small, niche business with forward orders two years ahead and by treating our clients as humans first and being kind have secured co-operation with them to reschedule bookings and obtain part payments. The corporate world knows no such alternative approaches. I see no evidence that the corporate world, let alone the grifters – hedge funds, private equity and the like – are going to survive this pandemic in anything like their pre-coronavirus form. And the management of those businesses are still in the same state of denial ( i.e. that everything will return to ‘ normal ‘ ) that they were in three weeks ago which seems like a lifetime ago.
I was going to say, what insurance? They make their money by denying claims.
And even if they can’t wriggle out of the claim, are they sufficiently capitalized to pay out?
Counterparty risk errywhere …
Mexico has hedged on the oil price for their oil quota in OPEC
Fat tail risk, as Taleb says!
But how do you, as a business concern, save money in a dog-eat-dog capitalistic society?
Now, we don’t really have that. TBTF is just one aspect, but the biggest tell is exactly what you talked about, the lack of retained earnings. The shareholders know that the given company isn’t likely to go under anytime soon, especially if it seems to be protected by huge start-up costs, and even if it does fail well they’ve re-distributed their dividends across the market anyway.
But in the pretend society of economists, it doesn’t work either. If I save my excess airfare, for example, somebody else will come by and do the same thing cheaper. So that’s a different race to the bottom.
Neither way guarantees you much of a future.
“but how would they make money?” How about making stock buy backs a criminal offense ‘swindle like it was unit recently. I know tough row to hoe being connected to C-level comp, but still one has to begin somewhere.
Regarding the orderliness of the progress, I just would like to add that the game is precisely there: the general perception of trustworthiness in governments. Very much eroded by the epidemic herself and also by opportunists seeing a chance to take advantage. FWIW, recent polls in Spain show little erosion of the governing party (PSOE) more pronounced in the other coalition partner (Podemos), a little gain by the conservative opposition an a clearer fall by the populist extreme right (VOX) which is good news. So the crisis, regarding voting intentions is favouring the classics. Flight to the perceived or apparent center?
It will be fascinating (and not a little worrying) to see the political implications of all of this.
In Ireland, we are facing the prospect of the two conservative parties trying to create a new government – they are engaged in an open propoganda war to try go get the Greens (the only viable partner) to either agree to coming in as a junior party, or get blamed if there is another election. I think they are gambling on the population going ‘back to nurse for fear of something worse’ if another election is held (it has to be said, its been a good pandemic for Varadkar, he has benefited from the fairly competent response by the health authorities).
Its very hard to tell with the rest of Europe – Euroscepticism has had a big boost in Italy of course – maybe fatally for the Euro. Macron must surely be damaged, but nobody seems to have benefited… its hard to say with other countries. If anything, the Tories in the UK seem to have been strenghtened, despite making such catastrophic early decisions. Labour seem incapable of offering any real leadership. The SNP in Scotland seem determimined to form a circular firing party instead of taking advantage.
In Asia, the mildly progressive Democratic Party has won a stunning victory over the various reactionary and conservative parties, thanks to Moons excellent Covid response. Likewise it seems that more ‘soft’ progressive parties will benefit significantly in Taiwan and Japan – in the former because they did a good job over Covid, in the latter because Abe has made such a mess of things.
I think we are seeing the largest ever stress-to-distruction test of national and international instututional strength in history. Its not easy to see so far who will pass and who will fail. One thing to consider is that often countries with very strong instutions are slow to react precisely because they have quite rigid inbuilt mechanisms to prevent over reaction to threats. A highly centralised autocracy can sometimes seem strong because it can react rapidly, but lack of ‘depth’ to its institutions means it cannot carry through on its initial reaction. So it is not necessarily true to say that countries which have reacted slowly are by definition those that will suffer the worst long term impacts.
An example of the ‘above’ is the EU, which has very strong institutions, but also ones notoriously difficult to co-ordinate because of the need for unanimity in so many key decisions. Covid could well tear the EU and Eurozone apart. Or it could result in long overdue reforms (especially on the fiscal side), which could make it even stronger and more relevant. There is really no way of predicting which way it will go now.
Some things are becoming clear – the US’s weaknesses have been horribly exposed to world, even though its probably less apparent from within the US. On a broader scale, the ChinAmerica trading axis is dead and buried, although I’m less clear as to what will replace it. I would not be as pessimistic as many who post here about the ability of the US to reinvent itself, but so much depends on the November elections. And the choice there is… well….
The changes in Asia are already apparent – China is heading into trouble and its descent into xenophobia is deeply worrying its neighbours. Its current triumphalism over having beaten the virus is likely to prove very premature. As the article says, South Korea and Taiwan are big winners from this – in the elections yesterday Moon won an amazing victory, completely vanquishing the conservatives. Likewise, the ‘moderate’ centre left in Taiwan is likely to be strengthened over more conservative pro-China voices. Vietnam also looks like being a winner as there will be a huge flood of manufacturers out of China into Vietnam. Possibly Indonesia too, although my guess is that countries like Indonesia and malaysia are too corrupt and badly run to really challenge. Japan looks seriously wounded from this, Abe is a dead man walking – with luck, he’ll drag his party down with it and more progressive voices in Japan will finally get the chance for real power.
All the commodity based economies are going to suffer terribly from this – its not just oil, its hard to see the value of any bulk commodity (except maybe food) doing anything but decline in the short to medium term.
Michael Hudson interview explains the intended outcome in the US
…”Ross: Ultimately, where does this end? Because if in 12 weeks time, people can’t afford to enter into the social norms, enter into the economy, live, put bread on the table, where does that logically finish?
Michael Hudson: With the American economy looking pretty much like Greece. It’ll be austerity. There will be people who don’t have jobs. They are going to be evicted from their apartments. They will have run through their savings. They will not be able to pay their credit card debt and other debts so arrears are going to rise. The banks would be squeezed, but Trump says that although we can’t save the people, we can save the banks. The Federal Reserve has enough money to keep all the banks afloat, even if they’re not getting the mortgage payments, even if they’re not able to collect on their loans. The banks can now make up for the money they’re not getting by having a huge new market: lending money to private capital and to the large companies to buy out these small businesses that are going under. It’s a bonanza.
That’s what the Republicans say will make the country rich again. Meaning the One Percent. Basically, you can look at the policy as pretending to help the sick people, the Corona virus victims. But the “bailout” is really a whole wish list that corporations and neoliberals have had on the books for a year working with lawyers and law firms. They’ve pulled this off the books and all of a sudden, packed it on to the Corona virus bill. Instead of calling it the great bank giveaway and a new power grab, they’re calling it the Corona virus law. …”
https://michael-hudson.com/2020/04/due-now/
Struggling to make sense of this statement here. An autarky is a country that is self-sufficient and doesn’t need any foreign trade to survive. The United States is definitely not that! I don’t know about Russia, but I suspect they aren’t quite an autarky either. Is this a typo?
I agree, this is confusing. Well before covid19 it had been reported that as a result of our sanctions, Russia was forced to become more self-sustaining. And doesn’t everyone know by now that the USA is not?
Perhaps as far as food, or survival level autarky, goes, the US is relatively autarky-capable.
You may not have domestic caviar, but you are capable of growing local pork.
what will stand between us, today, and food security, as the lowest bar of an autarkic/self reliance, is all those speculators and middlemen that benefit from the current regime.
I’ve told many times of my experience with the closest grocery store.
here i am with a bunch of produce…and a glowing write-up in the local paper/brochure…and yet the store(a small, regional grocery chain, servicing backwaters like mine) to take my tomatoes 350 miles to the warehouse in houston, and turn around and follow the truck back home.
this was due…near as i can tell…to the power of the Big Boys and their distibution networks…play with us, or die…but to play with us, you must be a member of the club…and to become a member, you must be gigantic and in massive debt and otherwise plugged into the whole wall street dominated ecosystem.
manager of my local store is likely rather amenable to being radicalised at this moment.
he’s run ragged, and is acutely aware of how idiotic the distribution system…to say nothing of Production….is.
when i catch him having a smoke outside on one of my brief forays into town, I talk him up…one of the few people outside wife’s familia that i’ve let into the circle of those who know what we’re doing out here, re: gardens, etc.
I reckon there’s lots of people like him out there right now, thinking well outside the prescribed boxes of BAU…and looking for alternatives.
and when the Big Boys try to force them back into that box, i’m not so sure they’ll be able to.
I envision my black/gray market farming practices becoming the new normal…in spite of what Big Ag, or any level of government, wants.
(and as for government…again, we’re lucky, here…I can easily see the one city gov and the county bending towards local production, no matter what Austin or DC says.)
I read an article some years ago that plotted major countries’ percentage of world population against their percentages of the world’s natural resources – arable land, minerals and fuels, hydropower. China ranked quite low, and the USA showed the potential to be autarchic. Like a wayward child, we are unwilling to do the necessary hard work.
Russia has made great strides out of necessity the last few years. Before the sanctions 2014 it imported lots of its food from western europe.
After the sanctions it went autark at least with basic foods inside a few years. I’m not sure how it is with specialized ones like vegetables, fruits and dairy however. Probably far from it.
Also they certainly aren’t autark with machinery, vehicles, medicines, medical products.
Russia still has various and diverse industry from soviet days and they have a very good resources sector. This is probably why Russia is the best bet for an autark country. E.g. here in Germany we can feed ourselves too, but it doesn’t matter when you must import natural gas to produce (artificial) fertilizer which is needed to sustain that food production. There the self sufficiency goes right out the window.
Still, Yves, we must recognise this pandemic as the sign that Gramsci’s interregnum is now over.
Huh? The pandemic is breaking the old order. Please tell me what if any new order has emerged.
I have to concur with Yves that I have *no idea* what you mean by this. Don’t you mean that this pandemic is the sign that the interregnum between Neoliberal Capitalism as we have understood it and whatever the hell is supposed to come after it has just begun? The neoliberal order had never been so entrenched as it was last year.
>According to expert Josh Balk, 75 percent of new diseases start in domestic and wild-caught animals,
There is a third type of animal?
On the other subject, “robots” – sigh – they are a weird mix. Nobody has found a good way to make a simple refrigerator, let alone a complex automobile, completely hands-off.
OTOH, the biggest difference between today and even 50 years ago is of course the world of electronics, where human hands must be kept as far away as possible until the full circuit board has been constructed. Then it can be plugged into and screwed down on whatever piece of thing it applies to.
A weird dichotomy.
We also can’t discount the possibility of conflicts and wars breaking out in the future from the global supply chain breaking down. The regeneration of the global economy and political order will not be orderly.
As far as businesses and governments cooperating, or not cooperating, emergency measures are available to the latter to invoke and impose.
In countries where that is the case, they can dictate to the former.
(See today’s Pandemic Power Grabs article).
“Biodata will drive the next phase of social management and surveillance”
One of the best reasons for testing everyone is to establish a global DNA database…to be used for the people’s benefit, of course…So VERY convenient to have this crisis manifest….
The crisis consists precisely in the fact that the old is dying and the new cannot yet be born; in this interregnum a great variety of morbid symptoms appear.
It is a minor point, buy I dimly remember, or mis-remember, the word “yet” being in the quote.
the image that keeps recurring as i think about this problem of late, is helping to birth a breached donkey.
rope and a lawnmower(neighbor’s idea. he has some experience,lol)
took all of 5 hours between discovering the predicament, rallying everyone including the neighbor, and watching a new donkey stagger to it’s feet and stare at us, all covered with gack.
I think it’s apt.
Why does the MSM not acknowledge this? I see occasional reports in the NYT and other media noting that PPE, test kits and materials etc are sourced outside the US but no one seems to want to admit that the real problem is the neoliberal globalization project itself, which made lots of money for Wall Street and Corporate America at the expense first of working class jobs and now working class health. The real issue in fixing this may be not so much absence of factories as loss of manufacturing infrastructure such as machinists and production experts.
Lifted from 2:00 WC:
“They had learned nothing, and forgotten nothing.” –Charles Maurice de Talleyrand-Périgord
IMO, the article & some of the comments are overly optimistic
I just drank the last of my wine. What is Marshall Auerback using and where did he get it? I want some too!!!!!!
There is so much happy talk in this post I could almost cry.
But there is one observation I cannot disagree with:
“Taken in aggregate, we are about to experience the most profound social, economic and political changes since World War II.”
Ha Ha.
Here in Singapore my sommelier (wife) has stocked up our supply. We are holding out even with the high rate of consumption (under lock-down, what else to do?).
Here’s a glass to you sir.
This is a fascinating vision of the future and quite logical. Doubtless some of it will evolve. However, it assumes what Etienne Gilson called a unity of philosophical experience. I see little evidence of that. The Trumpies still appear to be pretty much in denial, and view the pandemic as more of a business opportunity than a threat to the economic world order.
We didn’t get where we are today without the corruption of our knowledge base.
Economics has always been dangerous, too dangerous.
Everything had been going well for 5,000 years and then the classical economists turned up.
Those at the top had been living in luxury and leisure, while other people did all the work.
The European aristocracy were just the same, they lived in luxury and leisure while other people did all the work. The Classical Economists realised they were being maintained by the hard work of everyone else.
The Classical economist, Adam Smith:
“The labour and time of the poor is in civilised countries sacrificed to the maintaining of the rich in ease and luxury. The Landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his extractions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money. But every savage has the full fruits of his own labours; there are no landlords, no usurers and no tax gatherers.”
Economics was always far too dangerous to be allowed to reveal the truth about the economy.
How can we protect those powerful vested interests at the top of society?
The early neoclassical economists hid the problems of rentier activity in the economy by removing the difference between “earned” and “unearned” income and they conflated “land” with “capital”.
They took the focus off the cost of living that had been so important to the Classical Economists to hide the effects of rentier activity in the economy.
The landowners, landlords and usurers were now just productive members of society again.
William White (BIS, OECD) talks about how economics really changed over one hundred years ago as classical economics was replaced by neoclassical economics.
https://www.youtube.com/watch?v=g6iXBQ33pBo&t=2485s
He thinks we have been on the wrong path for one hundred years.
Small state, unregulated capitalism was where it all started and it’s rather different to today’s expectations.
There was another problem.
Banks create money out of nothing from bank loans and they didn’t want everyone to know that.
Our knowledge of banks has been going backwards since 1856.
Credit creation theory -> fractional reserve theory -> financial intermediation theory
“A lost century in economics: Three theories of banking and the conclusive evidence” Richard A. Werner
http://www.sciencedirect.com/science/article/pii/S1057521915001477
Milton Freidman was on the right track with monetarism, but he used the “fractional reserve theory” of banking, so it didn’t work.
Things then got worse and policymakers started using “financial intermediation theory”. Now they could convince themselves that “debt doesn’t matter” and we were really in trouble.
This is how banks really work.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
World leaders systematically crashed their economies because they thought “debt doesn’t matter”.
Japan led the way and everyone followed.
At 25.30 mins you can see the super imposed private debt-to-GDP ratios.
https://www.youtube.com/watch?v=vAStZJCKmbU&list=PLmtuEaMvhDZZQLxg24CAiFgZYldtoCR-R&index=6
What Japan does in the 1980s; the US, the UK and Euro-zone do leading up to 2008 and China has done more recently.
The PBoC saw the Minsky Moment coming unlike the BoJ, ECB, BoE and the FED, by looking at private debt-to-GDP ratio.
Steve Keen saw 2008 coming in 2005 by looking at the private debt-to-GDP ratio.
We got Ricardo’s law of comparative advantage.
This never made it into neoclassical economics.
In Ricardo’s world there were three classes, and there still are.
Ricardo was part of the new capitalist class and the old landowning class were a huge problem with their rents that had to be paid both directly and through wages.
From Ricardo:
The labourers had before 25
The landlords 25
And the capitalists 50
……….. 100
Ricardo looked at how the pie got divided between the three groups.
“The interest of the landlords is always opposed to the interest of every other class in the community” Ricardo 1815 / Classical Economist
Disposable income = wages – (taxes + the cost of living)
Employees get their money from wages and the employer pays via wages.
Employees get less disposable income after the landlords rent has gone.
Employers have to cover the landlord’s rents in wages reducing profit.
Ricardo is just talking about housing costs, employees all rented in those days.
Low housing costs and a low cost of living work best for employers and employees.
That explains it.
US firms can pay wages in other countries people can’t live on in the US.
They need to off-shore to maximise profit as the cost of living in the US is too high.
The lower the labour costs, the higher the profit.
Repatriating supply chains need skills that the US have no more. 70% of PhD in scientific subjects are not US citizens and there are 12 new engineers in China for each new one in the US. So before rebuilding supply chains a country needs to educate a new generation of skilled people. But this require enough teachers, there aren’t. So this a two generations job. Triffin had it right. Auberback may be right for Germany, or for Europe if it wasn’t the mess that politically is, but not for the US or the UK.
Together with RadicalxChange, we are developing a Community License Financing program for a project in Maine which creates the potential for new
Local businesses don’t exist in a vacuum, they emerge based on local support.
Do you remember how bad it was in the 1970s?
Keynesian, demand side economics is terrible.
Oh yeah, I remember that.
Do you remember how bad it was in the 1930s?
Neoclassical, supply side economics is terrible.
That was too long ago, I don’t remember that.
Globalisation was never going to go well.
The used neoclassical economics in the US, in the 1920s.
The economy boomed, the markets soared and nearly everyone made lots of money.
The neoclassical economists couldn’t see any problems ahead.
“Stocks have reached what looks like a permanently high plateau.” Irving Fisher 1929.
This 1920’s neoclassical economist that believed in free markets knew this was a stable equilibrium. He couldn’t see a cloud on the horizon.
Then it all fell apart.
They needed a better guide than the markets to see what was really going on in the economy.
They had placed their faith in the markets and this had proved to be a catastrophic mistake.
This is why they stopped using the markets to judge the performance of the economy and came up with the GDP measure instead.
In the 1930s, they pondered over where all that wealth had gone to in 1929 and realised inflating asset prices doesn’t create real wealth, they came up with the GDP measure to track real wealth creation in the economy.
The transfer of existing assets, like stocks and real estate, doesn’t create real wealth and therefore does not add to GDP. The real wealth creation in the economy is measured by GDP.
Inflated asset prices aren’t real wealth, and this can disappear almost over-night, as it did in 1929 and 2008.
Real wealth creation involves real work, producing new goods and services in the economy.
GDP is very good for seeing when things are going wrong with neoclassical economics as it was designed from its flaws.
When banks are lending to inflate asset prices, the debt-to-GDP ratio signals the problem.
At 25.30 mins you can see the super imposed private debt-to-GDP ratios.
https://www.youtube.com/watch?v=vAStZJCKmbU&list=PLmtuEaMvhDZZQLxg24CAiFgZYldtoCR-R&index=6
What the US did in the 1920s, got repeated globally.
The economy runs on debt, until you get a financial crisis.
The economics of globalisation has always had an Achilles’ heel.
The 1920s roared with debt based consumption and speculation until it all tipped over into the debt deflation of the Great Depression. No one realised the problems that were building up in the economy as they used an economics that doesn’t look at private debt, neoclassical economics.
Not considering debt is the Achilles’ heel of neoclassical economics.
Globalisation was never going to go well.
In 2008 the Queen visited the revered economists of the LSE and said “If these things were so large, how come everyone missed it?”
It’s that neoclassical economics they use Ma’am, it doesn’t consider debt.
Things just haven’t been the same since then have they?