I was involved in discussion with academic colleagues yesterday on the economic consequences of the coronavirus crisis. One of the issues discussed was whether or not we will suffer a significant downturn as a result of this pandemic. We had no doubt that this would be the case.
Firstly, there are already indications that maybe 20% of UK employees (and employees in other countries as well) might now be effectively unemployed.
Second, as I have warned, with which warning others seem to agree, there is a significant chance that we have not seen anything like the true number of redundancies that will flow from this crisis as yet.
Third, there are already warnings that Germany will lose 10% of GDP as a result. I think that may well be optimistic.
Fourth, global trade is already forecast to be down a third because of the crisis.
For all these reasons both demand and supply are going to fall off cliffs as a result of this crisis.
But matters may be worse than that. Financial capital is haemorrhaging out of UK businesses, both large and small at present. That is what inevitably happens when companies suffer major losses and continuing cash flow pressure at the same time, which is precisely what is happening at present because almost none of the promised UK government support to business has yet to arrive with the vast majority of them. What this means is that many businesses will fail, and very soon. And they will not, then, be able to participate in any upturn: their capacity is going to be lost.
That would be worrying if there was to be a massive increase in demand immediately after the lockdown ends: that could give rise to inflation if that were to be the case. However, the number of unemployed people, and the number of people earning vastly less than usual at that time removes any risk of that.
That is, though, another factor to consider. This is the fact that there is an almost inevitable, and entirely human, reaction to crisis, which is that people begin to save quite significantly during and in the aftermath of crises. This is what Keynes called the 'paradox of thrift'. Once we have survived the initial onslaught of a crisis, which the end of lockdown will represent to many people, we then, quite rationally move to a position of trying to protect ourselves from the next attack. Economically this means that we save. Many of those who found themselves exposed to considerable financial risk as a consequence of what has happened, and have a continuing income, will not suddenly begin to spend again: instead they will build reserves to ensure that their chance of surviving another downturn is improved.
I am not in any way condemning anybody who saves in this way: it is an entirely personally logical thing to do. But, as Keynes pointed out, whatever might be logical individually does not necessarily represent the best course of action for society as a whole. And savings always withdraw money from the economy. The consequence is that the money in question is not used to purchase new goods and services. This, then, exacerbates any downtown that we will suffer as a result of unemployment and the loss of capacity within the economy, and produce an increasing downward spiral potential economic difficulty.
Keynes great contribution to economics was to suggest that the only way in which such a downward spiral can be broken is by government intervention. By necessity, government has to spend to stimulate demand in such a situation. Nothing else can begin to reflate the economy when this happens, excepting war.
Five logical conclusions follow.
The first is that any stimulus must be planned to occur over a very long period if we are to recover from the coronavirus crisis. We are talking in terms of years, and not months, and of massive amount, and not a little additional help, when considering this issue.
Second, unless this happens the scale of the crisis that will hit the UK economy is of unimaginable proportions.
Third, in such a situation the chance of inflation rising is close to zero: indeed, the risk is of deflation, which only exacerbates economic downturns.
Fourth, the only way in which this sort of stimulus can be provided is bydirect monetary funding (DMF) of government spending by the Bank of England.
And fifth, that does not create a risk for the UK, or its exchange rate, or its economy, because every other major economy in the world is going to be facing the same problem at the same time, and will react in the same way.
None of which provides much comfort, but we need to face the truth, and the sooner the better.
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The Tories – just what are they waiting for?
I think that this is a case of the wrong people being around at the wrong time.
At least this crisis reifies all the lies and deceit that the Neo-lib Tory party have been peddling for many a year.
The Tories are hard wired to hollow out the State I’m afraid – and as a consequence they sow the seeds of discontent and lack of faith in it in the public.
The issue is that people see it as ‘Government failure’ not Tory failure. It is the concept of Government that suffers and will affect the attempts of any courageous political movement to offer an alternative.
You can offer any alternative but people will not believe you. Job done as far as the worshippers of Charles Buchanan, Ayn Rand, Milton Friedman and von Hayek are concerned.
This is the ‘cunning of unreason’ at work.
This is interesting commentary
And fifth, that does not create a risk for the UK, or its exchange rate, or its economy, because every other major economy in the world is going to be facing the same problem at the same time, and will react in the same way.
and I’ll leave out your earlier posts from this month showing that there are differences between how other major economies are all reacting.
Let’s imagine that this CV-19 was occurring only in the UK, and that all other countries stamped it out straight away with technology at their borders. This programme of government spending you advocate would indeed create a risk for the exchange rate, not just in terms of import costs, but in what UK wages are worth to migrants and whether they would like to come.
The truth will fall in between, with some exchange rates and economies weaker than others depending on how much the State sector spends, and whether it spends it well or badly, such as subsidising programmes that make us less productive.
First, you require a fantasy to make your case. So neoliberal of you.
Second, your fantasy is not going to happen.
Third, it’s not true if the UK government boosted its economic activity and so strength as a result: that would improve our exchange rate.
The truth is that the state is the creator of value when we are at less than full employment, and that will be the case for a very, very long time to come
I suggest you stop wasting our time and go back to the ministry of paper clips where I suspect you are employed
It’s ok, we can relax, the adults are still in charge:
https://www.theguardian.com/business/2020/apr/09/bank-of-england-to-finance-uk-government-covid-19-crisis-spending
If Germany loses 10% of GDP would it then be in the territory where lockdown starts to be worse health-wise in the round than deaths from the virus?
Not sure what to do about it but at 20% unemployed I don’t think that it is theoretical.
what you may call a recession I’m inclined to recognise as de-growth,
surely de-growth is the simplest answer to the ever escalating consumption which has been driving the ecological disaster that everyone was panicking about last year?
before corona it was impossible for a single country to initiate de-growth because it could be perceived as ‘losing out’ relative to other countries,
surely before us stands a unique, once in a lifetime opportunity to reinvent the supposedly scary monster of recession into the benevolent saviour of de-growth?
should we really be winding ourselves up into a frenzy at the horror of clear skies, cleaner air, quieter roads, twittering birds and wild life appearing in our parks and streets?
obviously where ever humans exist there will be an economy, so has our economy really shut down now or is it just heavily subdued and reduced to the bare essentials?
how drastically should we restart the economy after corona?
will it be an economy of enough is enough or will it be an economy of ever more until the end of the earth?
I do not believe in de-growth
I believe in consuming less
But I do not think we need to stop working with and for each other which is quite different
And a recession means we will do less caring – and that’s disastrous
Be careful what you wish for – a recession is very, very and for people and for much of the environment when the backlash comes in and there is no support for the process of change we know is desperately needed
Recession is coming, I agree, and I hope that they don’t pick the wrong policies again!
Extract from
The Age of Austerity is Coming to An End
Part 3.3
The age of austerity has left economists miffed
As less coinage in austerity ignores the paradox of thrift.
The age of austerity was, “We are running out of cash”
But the mirage of austerity: the quantitative easing stash.
K.A.Murdoch 2019
Since supply has also been shocked it seams wreckless to assume no inflation. There certainly has been inflation in the price of PPE and ventilators. And with large sections of the economy shut down there is definitely the possibility of supply shortages triggering inflation even with suppressed demand. I suspect to see inflation in some sectors and products and deflation in others. Deflation probably wins out in net but there will still be inflation.
There will, undoubtedly be inflation in the price of some items: that is indisputable. That is, however, very different from there being overall inflation, which is measured over a very wide range of goods and services.
Yeah, but nobody is going to care if overall inflation is down if the important stuff like food is through the roof.
https://www.hindustantimes.com/india-news/food-prices-surge-3-times-as-supply-chain-takes-a-hit/story-QRqfvQpEnlJOdbwWzsCl4N.html
But the reality is UK supply chains are at present back to normal
I accept that this is for now, and there are risks
But food is also a small part of most household’s spending (and I know there are exceptions)