Money & Markets: Covid-19 - the good news is, nobody knows what the bad news is
The world’s economies are in for a tough time, but engineers and technologists are well placed to help the bounce-back.
When Ben Bernanke, former chair of the US Federal Reserve, uses the word ‘hysteresis’ you have to sit up. When the governor of the Bank of England uses it too, you have to start making plans for the worst.
Engineers and technologists will be familiar with the word, but perhaps not its use in economics and politics. Bernanke was using it in the Marxist sense of when a point is reached and everything changes; the Bank of England governor seemed to be using it more gently by suggesting that switching the world economy back on would take a pretty big heave.
In this instance hysteresis, where the present state of a system depends on past as well as present inputs, foreshadows what happens next with the economy: recession or depression, slump or collapse.
Predictions are difficult, especially, as the saying goes, about the future. So forgive me for predicting the future of the biggest disaster in my lifetime at a point when even the most reputed sages are throwing up their hands at the prospects – and throwing in their hands too.
While the grizzled old veterans are predicting Armageddon, the bulk of humanity seems to be less pessimistic.
There are three possible futures:
The V-shaped bottom: A sharp snap back of markets and the economy. This is what global governance is aiming for with their historic bailouts.
The W-shaped bottom: The normal outcome from a crash.
We shall get to the third future. For now, if you believe in the V-shaped bottom recovery, please stop reading now and be on your way. You’ll find many excellent features in the rest of this issue.
I will be overjoyed to be wrong; the V-shaped recovery could happen, but to me the chances are so slim as to be impossible for me to see how that would come about.
Meanwhile, the markets, having crashed, have been bailed out by enormous central bank actions from around the world, with the US bailout being the most striking. Helicopter money is now in use, with the US actually sending cheques to its citizens and dumping cash into companies just to help them bridge the gap created by the pandemic’s lockdown.
It’s an unprecedented creation of an economic safety net. Without it the global system would have fallen into a contagion of default that would have left little standing.
As I write, the governments are contemplating an end to their lockdowns, and, while the US is running ahead and tearing theirs up, European countries are poised to start bringing theirs down in earnest from the middle of May 2020.
And here is the open question: is the end of lockdowns too early to stop the pandemic and/or too late to save the world economy?
If you don’t believe the economic situation is all going to come good in the next few weeks or perhaps this year, then you will consider that the aftermath of the global economic lockdown will be extended beyond 2020 with the next least worse outcome, the W bottom. This sees the markets revisiting the lows of the recent crash and all the panic and pandemonium that goes with it, at least for a period of weeks or a few months. This would be bad, but not anywhere as bad as the 1929 scenario.
If we don’t get a W bottom, the global economy is in for a reset.
Perhaps only those who lost millions in the dotcom crash can grasp the severity of a fall in the equity markets of 82 per cent in a 1929-style crash. A three-year period of economic misery is simply not in most people’s emotional lookup table.
So what is most likely to happen next is a W-shaped crash with a nasty recession or a 1929-style collapse, something akin to the economic drama experienced by Russians in the fall of communism.
There is a schism of who believes what. I call it Aliens versus Predators. The Aliens, high-powered economists, see a deflationary recession, which by implication they feel can be dug out of by creating money. The Predators, a number of big beasts of finance and industry, see it as the end of the economic world as we know it or rather the beginning of something incalculably awful and not unlike 1929. Even somewhere in between these two positions the outlook is extremely gloomy.
The best available news is, no one actually knows.
What people do not remember is that the 1930s, while the economic headlines were terrible, weren’t actually so bad for most people. As long as you were in the right place and had a job, you would have been forgiven for not noticing its passage. If you were in the wrong place and/or without a job, it was bad. Yet it was nowhere nearly as universally bad as the decade that followed.
There will undoubtably be unemployment; as I write the Bank of England is projecting a peak of 9 per cent, a level above that of the global financial crisis. It’s a grim picture, but if there is a reset, then engineers and technologists will be in the vanguard of overcoming the hysteresis of restarting the global economy and the first to get back into employment.
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