A Moment of Reckoning

A Moment of Reckoning:[1]

Economic Impact of The Corona Pandemic

Hassan Mansoor, Ph. D.

(Economics of OIL), Professor of Economics

1) The PANDEMIC has provided a moment of reckoning which would mark a dividing-line between the pre and the post periods. Economic Structures, Budgets, National Priorities, Politics, Diplomacy, and even the World Outlooks would undergo a considerable change. But I will only concentrate on some selected Economic repercussions of the event:

The future is in the making and it is a work-in-progress. Any speculation may only be valid for the day and the scene is unfolding day-by-day. Economist as other professionals are working on the most plausible assumptions. For the time, the working assumptions are the Pandemic running for 3 and 6 months! Other assumptions are also being considered but not in the public. The complication arises from the fact that the constraint is biological and not economic. Therefore, the interaction between the two processes are under constant review. Of course, the governments, ought to consider all options, and prepare, for the worst-case scenarios.

2) Despite all pre-warnings including two presidential speeches by G.W. Bush and Barak Obama, the governments realized how unprepared they have been in the face of a catastrophe which may have struck any time: mutations are the modus vivendi of viruses and they happen constantly. Governments were faced with insufficient infra-structure for Health and Safety; they realized, all of a sudden, that they had colossal shortages of Doctors, Nurses and Health-workers for the frontline of the fatal combat; they were short of hospital beds and vital medication. These factors are all FIXED in the short-term, which means one cannot replenish them overnight regardless of how much money one is prepared to spend, because they require investment in structures, production, teaching, training, and experience.

Strategic management was found to be lagging in many fields: The structure of economy was vulnerable to sudden shocks, the global division of labour and a reckless “out-sourcing” had created strategic dependence on rivals (if not adversaries); The governments realized a pit-fall in their globalization approach which had gone counter to their national security; Despite the teaching of the founding father of Free-Trade, ADAM SMITH, the lone quest of the cost advantage, had during the decades lifted the pharmaceutical production of a country to a “low-cost” area, like China, only to wake up to the dismal fact that 90% of American antibiotics had to be imported from an arch rival, hence the realization of Strategic Dependence on it. Erroneous allocation of the vital funds had left nations with fateful shortages. Doctors, nurses and health-workers were unprepared for the descent of a colossal pandemic: Stock of PPE (Personal Protective Equipment) were short: the infra-structure for their production was not ready in Nation-states. Academic fields such as molecular Biology, Quantum Biology and Digital Biology which needed to be at the forefront were left unattended and under-funded.

3. The nations realized that they were lured by a false certitude of security, they were not producing and storing enough buffer of the basic necessities of life to keep the nation alive in the incidence of such a calamity which may last a year or longer. The trade-off between the peril from disease and starvation became the policy objective of all governments because of this state of unpreparedness.

Even the most advanced countries with a good health-care infra-structures had to buy time, in order, to expand their hospital and equipment capacity, to cope with the numbers of the afflicted citizens. Emergency Care centres were erected. Faced with the spectre of an economic meltdown, the governments found themselves on a treadmill trying to strike a balance between the COST OF HUMAN LIFE on the one hand and the COST OF FOREGONE PRODUCTION on the other. The LOCKDOWN was forced on all advanced nations and the governments were looking for a point of balance between maintenance of health of their citizens and caring for necessities of life and structures of employment and the position of their countries in the field of competitive advantage.

4. Logistics proved to be the ACHILLES HEEL of the advance countries: Even where the supply of PPE (Personal Protective Equipment) was available, hospitals suffered because of inadequately organised logistics.

Despite a potent network of transportation within the advanced nations, the logistics proved to be an insurmountable hurdle: shortage of staff, grounding of planes and trains and other vehicles created visible bottlenecks with fatal consequences.

5. Bewilderment among national leaders wasted some critical time and made it possible for virus to make significant inroads among the population thus rendering a later combat harder and costlier: the UK government, for at least two weeks, dwelled on the fantasy of letting the virus free-reign until a “herd-immunity” was created; others slumbered in denial and turned BLIND-EYE to it until the scale of spread was widened.

In hindsight, it is obvious that some precious time was wasted with catastrophic outcomes. The vigilance required, was absent, at least for a couple of weeks. It started with China, the originating point of the Pandemic where secrecy and clampdown on vital information played havoc on the world. Followed by it, countries like Iran played bad politics with the pandemic at a cost of nation’s health while the irresponsible authorities took refuge in falsification of statistics. Since KARL POPPER wrote his “The Open-Society and Its Enemies, 1945”, it has never been clearer, as aptly put by MARIO VARGAS LLOSA, the Peruvian Nobel Prize Laureate in Literature (2010), that “ None Of This Could Have Happened In The World If Popular China Were A Free Country And Democratic Rather Than A Dictatorship”.

6. Nations were confronted with an unchartered territory: They had to succumb to the temptation of calling-in “the Big-brother” to take control of the Private Zone and thus, potentially, lose ground to the State-Control (ETATISM). Governments were called in to BAIL-OUT almost all private sector from hospitality –restaurants and bars and cafeterias- to travel, airlines and hotels; factories, manufactures and shops etc. It is not defined how “the Big-brother”, is going to be pushed back from the positions of control.

In non-democratic countries, the States have tried to curb the existing personal freedoms; tighten control on mass media, and resort to harsh measures of control, witness Iran, China, and Turkey.

Governments on the other hand were confronted with the impossible task of manging the consumption of the workforce, families, and the broader public, safeguarding the structures of employment and keeping the markets viable. The main instrument disposable to them was the control of the NOMINAL economy, the monetary easing unprecedented in history. It was Keynesianism running wild with precarious consequences. The LINK between the REAL Economy, bulk of goods and Services, on the one-hand and the MONEY-MASS on the other, was corrupted like never before: Keynesianism had gone wild: The US brought forward some $3.2 trillion to keep the structures floating until a rescue is found; EU dedicated an equal amount, i.e. 3 Trillion Euros of which 500 billion for EU nation-states, in the face of 1500 billion required by national Central Banks; IMF and The World Bank brought $60 billion for the 189 member states of which 90 nations had sought help. In the short run the effect of excess money issue would be dampened by the falling demand caused by shut down industries and activities but in the medium term, the monetary malaise would require serious treatment.

7. The supra-national fabric of EU was subjected to an increasing tension; in a Monetary Union of 19 EURO countries where the UNION BUDGET is about 2% of National Budgets and EURO lacks the “Transmission-mechanism”, inbuilt in any national money, nations like Italy, Spain and even France were tempted to push EU to its limits: Germany, Netherlands, Austria and Finland (the frugal four) resisted the idea of floating the CORONA BOND saying this would turn the EU into a TRANSFER-UNION unforeseen in MAASTRICHT TREATY. (Finance minister of Netherlands). The tension threatened to rip the fabric of EU which if allowed would constitute a WORLD THREAT.

The European Project one of the most ambitious in the history of mankind manifested its weaknesses. The 28 nation-states coming together, in an attempt, to build a supra-nation revealed its Achilles heel. First of all the old problem of unified money in the absence of unified budgets and unharmonized fiscal systems revealed the conflict of national interests among the member states: France, Italy and Spain requiring stronger monetary stimulus were confronted with Germany, Netherlands, Austria and Finland who have historic phobia for easy money. The proposal for European Corona Bond was therefore rejected. The president of European Commission had to apologize for EU turning a blind eye to the needs of countries like Italy but indeed the problem of EU was of a structural nature. The EU budget is about 2% of the total national budgets and this means the EURO lacks the transmission mechanism required by any national money. Nationalism smears in major EU countries and threatens the European project. European immigration policy has already given rise to populist movements in some leading European countries and if un-tackled, may affect the destiny of Europe.

8. The interest rate was the principal victim of Monetary Easing: it plummeted again to negative territory after some 12 years of struggle to rise a-par to inflation; again the savers would continue to lose to borrowers due to a near-zero nominal interest gained in the face of 2-3% -and higher- inflation. However, the measures taken can debauch the money. This wild play with money would not have been possible under a gold-standard but it is becoming a new-normal under the existing Central Banking.

Parallel to fall in interest rates which, in the face of running inflation rates means negative rates for money and robs the saver to pay the borrower, a serious blow is administered by pandemic on the opportunities of investment. All depends on the term of the pandemic coming under control. A period of 3 to 9 months total or partial lockdown would lead to bounce-back within one to three years, but a longer lockdown may be followed by a longer and deeper meltdown. In the face of the dramatic hike in money supply, prices may stay depressed due to the slack demand. However, for the basic everyday necessities, it may show much higher rates of inflation as their demand would not shrink.

9. The indices of development and growth have fallen back by at least 6%, so far (much bigger than year 2008) and speculations run wild.

INSEAD [2] of France estimates, that every single month of LOCKDOWN reduces the national economy by 3%; IMF predicts that the Advance Economies would shrink by 6%; The bank of England predicts the fall in production of about 30%- an amount unprecedented in 300 years; The World Bank counts on the roll-back of world POVERTY to the level of 2017 increasing some 40 to 60 million to the number of people living under the Poverty-line, thus increasing their weight in the world population from 8% in 2018 to near 9% in 2021; this would push the number of the POOR (living under $1.9/day) from 632 million to 670 million.

The UN Food & Agriculture organisation says the number of near-starvation poor has already gone up to 1000 million with new additions accounting for 120 million. The incidence rate of this calamity would be higher in Latin America, Caribbean Countries, Eastern ASIA, and Northern Africa.

Middle East would also be hard hit. Much depends on the horizon of control of the Pandemic. A majority Economic Research Organisations and Think-Tanks are working on an assumption of 3-months total lockdown plus 3-months partial lockdown. This would provide the required leeway for the governments to strike a balance between the “Cost of Lost Human Life” on the one hand and the “Cost of Lost Economic Activity”, on the other. When these estimates equate, governments will gradually release the lockdown.

In the short time, the fight of the virus takes the priority, but in the medium term, Economy preponderates because the continuation of lockdown can bring about a disintegration of the social and political fabric.

10. Already a flight of capital is underway from China to other destinations: In the last two months, more than $100 billion is reported to have been repatriated. The process is deemed to continue post pandemic by deliberate policies of states. A diplomatic war is already underway, and China’s aggressive posture only exacerbates the conflict.

Voices of protest are in the air. Theories of conspiracy abound, and the suspicions are rife. Among all this mist, one thing is clear: had the news been openly shared with the world, the pandemic would not happen. This would inevitably bring about a big change in the policies and diplomacies of others vis-à-vis China and the State would need to come clean.

11. The plunge of Oil Price into negative territory (The spot WTI [3] registered -38 Dollars on 20^th April) shaking the ground for investment, threatening the Shale sector and the banking industry, endangering the Trade and even survival of the OPEC countries, showed among others that the world is well-advised to balance its energy sources among fossil and renewables.

American Shale industry took a big hit. Behind it, the big banks like J.P. Morgan Chase & CO, Wells Fargo &Co., Bank of America Corporation and Citigroup Inc. threatened to take over the production fields of Shale producers unable to honour their debts. Some weaker OPEC countries were faced with de facto bankruptcy, Iraq for example with less than a one billion sovereign fund and more than 98% dependent on Oil income for their imports were confronted with existential problems.

If anything, in the absence of intelligent policies to preserve the earth, Ecology and CLIMATE are the sole beneficiaries of the forced impoverishment of mankind and the green movement will have a stronger say in the world policies post-pandemic.

[1] Speech given on April 22nd2020 at: Rancho Park Rotary Club, Los Angeles, California, Rahavard 130/131

[2] – « Institut Européen d’ Administration des Affaires », is a respectable Finance school in France

[3] – (WTI) West Texas Intermediate The reference oil traded most frequent and of major significance for the USA, while the most important in Asia is Dubai Fateh. Other reference oil types include Leona, Tijuana, Alaska North Slope, Zueitina or Urals. The most important trading venue for European Brent Crude Oil is the International Petroleum Exchange in London.