I can't be alone in thinking coronavirus is now the biggest short term problem facing our economy: stock markets in the USA and UK continued their downturns yesterday. The reality that this virus could trigger a major economic crisis is beginning to dawn on markets.
And let's state the one thing we all know in that case, which is that markets will have no available response mechanism to this crisis. Those markets might crash, but their capacity for correcting such issues is so close to being non-existent that we might as well assume it irrelevant. The whole point of supposed capital markets - and the institutions that are supposedly governed by them - is that there is claimed to be no safety net. And that will be true in this case.
As a result there will, of course, be only one agency able to handle this crisis, and that will be government.
We should not underestimate the scale of the crisis. Just imagine for a moment that UK schools were required to close for two months and as a result parents had to stay at home to look after children. The economic implications are staggering, from the deep micro to macro levels. Significant parts of the economy will grind to a halt. Businesses will fail. Households will go bankrupt. The knock on effects are at present incalculable.
Unless, that is, government intervenes with emergency funding. That is, payments to those who have to quarantine.
And how will those be funded? The answer appears to be glaringly obvious. I strongly suspect that sometime soon you will hear of something I have not yet heard mentioned. That is coronavirus QE. Call it CQE for short.
How would this work? Simply by the government issuing debt to fund a deficit used to support those unable to work due to quarantine being required for them or their families and then having the Bank of England buy it back. That will effectively cancel the debt. But new money will have been created to be injected straight into the economy. As a result money will be kept flowing into the economy. Otherwise the simple lack of money will be crippling, whatever the virus itself might do.
We can hope coronavirus can be contained before matters reach this stage. If not CQE will be essential in saving us from collapse, and in keeping households solvent.
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“Those markets might crash, but their capacity for correcting such issues is so close to being non-existent that we might as well assume it irrelevant”
Share prices ultimately correlate with earnings and earnings growth.
So the Coronavirus will clearly lead to a fall in economic activity and a fall in corporate earnings. The market is trying to reflect the fall in corporate earnings (or a rise in corporate earnings as might be the case for medical companies). The chaotic nature of markets clearly reflects the chaotic disruption and uncertainty of the coronavirus. No one really knows the end game until medical science delivers a solution.
So the “capacity for markets to correct” is the visibility on earnings and the capacity for earnings to grow or fall. Earnings is always the end game. Companies which grow their earnings grow their share price (eg Amazon) and vice versa (e.g Imperial brands). So markets do have the capacity to correct although the greater the economic uncertainty the more volatile stock markets will be. And to state the obvious this is what is happening at the moment.
I despair
If you think a market correction is what I was referring to, heave help us all
I was saying markets can’t solve the turmoil in the economy
But why worry yourself about that? After all, only the markets matter….
To be fair to Jason h – the way you framed your post gave the appearance that your subject was the stock market – and because we are all so used to hearing about stock markets, that is our first response.
My takeaway point is to perhaps reframe the argument so that it is easier for us (me..) to understand really quickly. If you were on the radio, then you would only have seconds to get that across.
If you had perhaps started from halfway through your piece: “We should not underestimate the scale of the crisis. Just imagine for a moment that UK schools were required to close for two months and as a result parents had to stay at home to look after children” and then made the case that markets are of little or no use in solving it, you would direct the thought process.
I hope this is constructive criticism..?
Funny, I had just this conversation in a Melbourne Pilates studio this morning. Therapist bemoaning how people will pay their mortgages, car payments, utilities, food bills, if they aren’t earning because their source of income dries up due to economic impacts of COVID-19 disease. I jump in with what amounts to CQE. Some other person pulls out inflation…. it wasn’t the scene to have a real discussion, but eventually reality intrudes whatever one’s preconceptions.
Is it not far more likely that governments (and the ECB) will provide QE directly to banks and corporations who’s balance sheets are threatened by Covid-19 rather than individual households?
And like the issuing of QE and the opaque decisions behind the choice not to unwind the media will barely mention it all?
They might
And that would be disastrous
I agree but I think we also have to recognise that monetary expansion can be used for reactionary purposes as well as the progressive outcomes we would like to see. The ECB already have a secret program for buying corporate bonds and QE* seems far more likely to be used to support corporations (increasing inequality) than to help ordinary people.
*I’m not comfortable calling it QE any more as it’s clear that there will be no more unwinding. It’s outright printing.
Also related to Corona virus I was dismayed reading the articles about IMF pandemic bonds today. The financialisation of disaster is horrific and I expect more of the same profiteering behaviour to exploit the climate disaster.
Your post referred to initially the stockmarkets crashing, apologies if i missed your point.
Yes i agree there will be state help. If the worst fears are realised then there will eventually a TARP like programme for Industry to prevent mass unemployment and state handouts for families affected in the way you mention. But this is what one would expect. We are ultimately governed by Government and we pay taxes to Government and we elect a political party to Government.
So you agree with what I said, after all?
This crisis isn’t an economic crisis! It is a wage crisis. “Trickle-down QE” will not act fast enough, even if I thought it would help! Looking at the wage issues and ignoring the health ones.
*Many non-essential sectors ( tourism entertainment etc) will be shut down for weeks possible months, and in some cases businesses will be shut down forever!
*Many of these businesses use Zero Hour workers, who will be signed off indefinitely with no recourse
*Many businesses will NOT pay for quarantine, many couldn’t.
*School closures will have a massive impact on staff attendance, again with no recourse to wages
*Businesses paying for ALL their staff to be in quarantine is too expensive
*Government may bail out big businesses, but let small and medium go hang
What needs to be done?
*A Citizen Guarantee of (basic) food and shelter – A citizen wage maybe.
*Limits on the supply side, to avoid exploitation, or rather that the pain is spread across the economy. E.g. House rents reduced by 50%,
Other ideas????
So, how do you pay for your citizen’s wage
CQE, I think
I am not sure what you are arguing with Peter
I’m looking at the likely immediate social issue that is UK mass pennilessness!
This is about how we ensure no one starves or gets made homeless because of the economic consequences of COVID19.
I believe only a govt hand out directly to citizens will be direct and fast enough to stabilise society. ” 9 meals from anarchy”.
I’m happy for others to come up with alternative and better ways!
How it is paid for, is a long term problem, Wagelessness will be a here and now problem
That is the issue I am suggesting be addressed
I am suggesting how to fund it
QE or rolling over QE which is the same thing in practical terms is already being used to finance some portion of government spending.
But you are hinting that some parts of government spending ( e.g. dealing with a crisis ) are more important than other parts of government spending. Would you at least accept that premise?
And government also has a pot of money set aside to deal with crises. You will have seen the doubling of foreign exchange reserves in the last 10 years. Would you at least acknowledge that has occurred and that the purpose of the reserves is to allow flexibility in times of crisis?
There are no pots of money
There are budgets
And all I am saying is that this may be unprecedented and require an emergency response
Is that so odd?
Whilst QE is not funding government spending at present
Will you at least accept that the Bank of England is maintaining its stock of gilts
https://www.bankofengland.co.uk/asset-purchase-facility/2019/2019-q4
and that this means that they are making gilt purchases to maintain the stock as assets mature?
I think that effectively means some portion of government spending ( a few % ) is being financed by QE being rolled over.
I want to live in a world where this is at least recognised by people operating at your pay grade. I also want government to have a range of funding options to finance emergency programmes.
Would you at last agree with that point?
To assert that there’s only one way to fund emergency programmes (‘glaringly obvious, ‘essential’) is surely not what you believe.
They are maintaining their stock
How does that fund new spending?
It means that there is no new QE funding
I am not saying there could not be
There just isn’t
I’ll agree people could easily find themselves starving but surely not homeless as the necessary procedures would be all but impossible to implement given the coronavirus problems would affect the judiciary too.
…lots of people stop paying their rent, is an interesting line of thought. “Can’t pay Won’t pay”
Rent strikes are a very economically disruptive action, similar to the start of lots of revolutions, I believe!
But you’ve not talked about the actions needed to protect the wageless,
…or did I miss it?
IMHO QE protects the rich, and it is paid for by asset inflation, which again benefits the rich. Making assets ever more unattainable by the general public
I have been for the last few days
This blog is a stream of conciousness
when people can’t work and earn, businesses are idle and asset values are dropping would an interest amnesty soften the impact?
it would allow a pause in repayments and the redirection of limited funds to essential expenditures?
like declaring a ‘snow day’ for finance in general,
my concern is that CQE would mostly go to servicing existing debts, why not freeze that debt servicing allowing the CQE to be much more effective at subsidising the purchase of essential goods and services during an emergency period?
it seems the only way de-growth will ever be possible is if all usurious practices were ended?
am I being hopelessly naive or thinking the unthinkable?
I suspect freeze in debt servicing would be necessary – but so too would support for banks then be required
I have no problem with broadly based thinking
All I am saying is that financing it is possible
it’s a shame we never got a UBI set up,
CQE could underpin a UBI in uncertain times such as this?
Yes, but I stress I only see UBI as an emergency solution
“Just imagine for a moment that UK schools were required to close for two months”
Why on earth would they? Has anyone, anywhere (except you) suggested such an extreme step? The World Health Organisation advice issued yesterday doesn’t even suggest closing a business for a day.
It’s almost as if you want the economic system to crash and create fantasy scenarios in which it does.
Just imagine for a moment that a giant meteorite hits Ely.
The UK government has suggested the step
Just saying….
“Just imagine for a moment that UK schools were required to close for two months”
And of course State schools are closed around 13 weeks every year, including for 6 weeks in the summer. They are called “school holidays”. I haven’t noticed the ‘staggering’ affect on the economy of this. Is QE needed during these periods?
You turn up here under various trolling guises Anna – indicating you are versed in that game
Your comments are always fatuous
This one is: in summer holidays parents plan holiday clubs, activities and of course holidays. Maybe you don’t know because you’re really a single man who does not know a parent. Who knows? But the reality is that of course these things will not be happening for exactly the same reason that schools will be closed
So the situations are utterly unalike
You could at least engage your brain
Anna
There are differences between expected and unexpected closures. I’m sure you can appreciate that.
Normal Summer Economic figures could well be skewed upwards by everybody going on holiday. However i am just speculating. Do you have any data regarding this?
As RM has already pointed out, there are often summer school activities on to pad out much of the time.
Additionally, and maybe this is below your pay grade, but there are yearly (and yearly increasing) reports of children from poorer backgrounds going hungry during the summer holidays. Maybe the U.K. government should provide some form of benefit for less well off families. Seems reasonable to me, if only to mitigate these children’s developmental hinderances.
Or are you from the school of “they get what they deserve?”
Two thoughts occur to me. Neither a fully-developed, so risk being shot down in flames.
The first is that if the situation becomes as dire as is being explored here, the food chain, among others, will be affected. Money, unless I’m very misguided, is a human construct to make exchange more convenient. There have to be goods and services available to be exchanged. The crisis would primarily be one of resources.
The second is arrived at by imagining myself (and my wife) being placed in this situation. We’re both retired. If our two daughters’ households were faced with the prospect of our grandchildren’s’ schools being closed, we would step in to help. Are we underestimating society’s resilience?
Not everyone has available grandparents
And how is that consistent with isolation?
What you are entirely right about is how any degree of meaningful isolation is also consistent with food supply chains being maintained
It isn’t…..
Richard’s ideas expressed in this particular blog are consistent with his ideas elsewhere.
Fundamentally he is asking ‘What is Government here to do: What is it for?’. Richard has always spoken of Government being here to look after its citizen’s welfare – ALL citizen’s welfare – from the rich to the poor. The current emphasis on looking after markets and giving the State less to do (by turning a blind eye to what markets do and under regulating to reducing the state’s responsibilities for say the NHS as the Tories did earlier in there tenure) is something that has actually looked after the rich – not everyone.
I for one agree with Richard – the State should look after its people – they (the people) produce the GDP from their work that the Government relies to report on its performance; supplies people to keep us safe (police, firemen) and healthy (the medical profession), to get us about (transport) and to fight for our freedom if we are attacked (the military). Without ‘the people’, there would not be a country.
This withdrawal of care by Government in the belief that the private sector could profit from it instead under the lie that we can’t afford it is just as bad a utopian idea that hard line Communists and Marxist come up with on the other side of the political fence.
To me, Government should listen to Jesus who extolled the virtues of caring for each other, particularly those who are not as well off or who are more vulnerable. I am not religious – but this chap Jesus makes a lot of sense to me. Caring for others did not start with the Labour Party, Marxism or Communism or even the Liberals. Caring about the welfare of others is human thing, not an overtly political party trait but the caring for others can have beneficial political consequences – read David Graeber’s ‘Debt – The First 5,000 Years’.
How would someone on Universal Credit or Job Seekers allowance get on if the Coronavirus meant he or she had to self-isolate? I remember being in a town called Bedworth once, walking past the job centre which was closed because someone had got angry and thrown a street bin into its window. A young man turned up and held his head in his hands. His regular interview to prove he was looking for work was cancelled and he was in panic because his money would be stopped as the interview would not now take place. I empathised and asked him if he had a mobile phone. He did. I told him to take a photo of the job centre and the sign that had been hastily put up to tell people what had gone off as evidence. He calmed down, thanked me profusely and took the photos. I wonder how he got on, even to this day, 8 years on.
This is the sort of stuff Richard is asking. So, are we ready for the Coronavirus? I think not. Let’s hope we are spared the worst.
And for those of you who are more sceptical, just think about what the heavy rain has done to many towns and cities recently because of Tory cuts from 2010. The evidence is staring you in the face really. Don’t you think?
PSR
We are on a wavelength
I appreciate that
At least we haven’t got a plague of locusts yet, although I hope we are banking on buying food from East Africa to replace the food our farmers cannot plant because of the floods.
https://www.reuters.com/article/us-africa-locusts/running-out-of-time-east-africa-faces-new-locust-threat-idUSKCN20L1TY