After the virus: Prepare for a Rip Van Winkle economy!

By Max Herriman

Just over a week ago, the Australian Prime Minister, Scott Morrison, said that he wants small businesses in Australia suffering from the impact of COVID-19 to go to sleep, possibly for six months or longer, until the pandemic has passed. Pundits and the media immediately picked up on the term ‘hibernation’ and comparisons were made with bears in winter, of course.

Officials almost everywhere have affirmed their desire to protect employment so that the economy can swing back to normal after the pandemic is over. On Monday April 6, Singapore’s Finance Minister, Heng Swee Keat, said that their latest round of financial stimulus “would help workers keep their jobs and enable businesses to resume operations quickly after the pandemic subsides.” On Tuesday, the Japanese Prime Minister, Shinzo Abe, in unveiling almost a trillion dollars of stimulus – equal to 20 per cent of Japan’s economic output – declared, “We will protect the employment and life at all costs.” Indeed, there are almost as many expressions of this sentiment as there are countries on the planet.

With steely resolve, President Trump told Sean Hannity of Fox News on Tuesday night, “We’re looking at the concept where we open sections of the country and we’re also looking at the concept where you open up everything.” Earlier that evening, Larry Kudlow, Director of the National Economic Council, declared, “Once we can reopen this thing, I think it’s going to be very successful.”

The world can turn into a different place

However, one of the problems in going to sleep for a protracted period is that the world can be a different place when you come back down from the mountain. Remember Irving Washington’s story of poor old Rip Van Winkle? He wandered off in New York’s Catskill Mountains to escape from his nagging wife.

As an aside, this story was very likely on the minds of the Malaysian Ministry of Women and Family Development last week when they advised that in order to preserve harmony with their husband during the COVID-19 lockdown women should wear makeup, speak in a coquettish voice and avoid nagging! Perhaps unsurprisingly they later apologised to enraged Malaysian women.

Nevertheless, as one does when avoiding a termagant partner, Rip met up with some ghostly fellows and had a few too many ales. He crawled away to sleep it off for a while and woke up 20 years later. When he returned to the village, he discovered that he had completely missed the American Revolutionary War and more than a few things had changed, “everything was strange”.

A Rip Van Winkle economy is one that changes significantly, both in scale and nature, while businesses are dormant. It’s never happened before and hopefully will never again, but it is happening now all around the world.

The Australian Prime Minister elaborated, saying, “We want these businesses to effectively go into a hibernation, which means on the other side, the employees come back, the opportunities come back, the economy comes back.” Such reassurance helps to calm markets and the citizenry but is it likely to be the way this unfolds? Will everything just pick up from where we were, or should we prepare for the possibility that a revolution takes place in the economy while businesses sleep? The economist Larry Summers reminds us that, “economic time has stopped, but financial time has not been stopped.”

Fuels for change

There are fuels for revolutionary change in our economy and, as a consequence, our society. I will talk about three of them.

Firstly, it’s been a while since almost every aspect of the global economy shut down for several months and we lost more than three trillion dollars of global GDP in a matter of weeks. That hasn’t happened at this pace since, well… never. As noted in The Guardian, “Not even during the Great Depression and the second world war did the bulk of economic activity literally shut down, as it has in China, the US and Europe today.” At a recent WHO press conference, the chairwoman and managing director of the International Monetary Fund, Kristalina Georgieva, warned that, “This is a crisis like no other… Never in the history of the IMF have we witnessed the world economy coming to a standstill. It is way worse than the global financial crisis.” On April 2, Bank of America Global Research reported that it expects the COVID-19 recession in the US to be the “deepest recession on record,” nearly five times worse than the postwar average with US jobless claims already rising by 6.6 million in the last week, bringing total job losses in the last three weeks to around 16 million. Is it possible that this crash in economic activity might detrimentally affect those opportunities that are expected to be there when business wakes up again?

Secondly, this is happening when we were already in the midst of revolutionary change brought about by the Fourth Industrial Revolution. For some years, around the world, relative silence in public policy on how to respond to the disruptive impact of this particular revolution has been remarkable and eerie.

And finally, the demonstrable need for expertise, competence, resilience, capacity and strength in government and the public sector during this time of crisis will render past clarion calls for the privatisation of all social services including public health; an unfettered private financial sector; laissez faire, free-market dominance in economic management and a conception of ‘value’ determined solely by price, to all look rather silly.

At this point, I am reminded of Sir Ken Robinson quoting the comedian George Carlin who said, “Just when I found out the meaning of life, they changed it.”

Storm damage

A popular analogy for the economic impact of this pandemic is that it is like a storm. It will blow over and life for most will return to normal. This belief underpins the Australian Prime Minister’s six-month hibernation theory. On April 1, The New York Times summarised this view as, “Once the virus is contained, enabling people to return to offices and shopping malls, life will snap back to normal. Jets will fill with families going on merely deferred vacations. Factories will resume, fulfilling saved up orders.” We hope that this is correct, how wonderful that would be for so many people, but the odds are not favourable. Disconcertingly, that summary of the optimistic perspective was published on April Fools’ Day.

Let’s recall again what Rip Van Winkle experienced when he woke and returned to his village, “He found the house gone to decay – the roof fallen in, the windows shattered and the doors off the hinges… It was empty, forlorn, and apparently abandoned.” The New York Times continues, “But even after the virus is tamed – and no one really knows when that will be – the world that emerges is likely to be choked with trouble, challenging the recovery. Mass joblessness exacts societal costs. Widespread bankruptcy could leave industry in a weakened state, depleted of investment and innovation. Households may remain agitated and risk averse, making them prone to thrift. Some social distancing measures could remain indefinitely. Consumer spending amounts to roughly two-thirds of economic activity worldwide. If anxiety endures and people are reluctant to spend, expansion will be limited – especially as continued vigilance against the coronavirus may be required for years.”

Damage done

The economist Satyajit Das notes that a barber without customers for three months has lost revenue that is gone forever, it doesn’t come back. The barber’s income for that year is potentially less by around a quarter. Das also recalls that a study by the US Federal Reserve undertaken before the pandemic identified that most Americans would struggle to raise $400 in the case of an emergency. And if that sounds dire, he notes that research by the Grattan Institute reveals that ten per cent of Australian households have less than $90 to cater to an emergency and less than 50 per cent have access to $7,000. The Khazanah Research Institute has published a report on ‘The State of Households’ in Malaysia in which they note, “Findings from the latest UNDP Human Development Report for Malaysia suggest that many Malaysian households have limited savings. Their low levels of precautionary savings mean that most families would be in trouble in the event of a shock – such as a reduction in income, unemployment or other emergencies.”

So, how much damage is this storm likely to cause?

In February, the New York Federal Reserve announced that 2019 saw the largest surge in US household debt since 2007, which of course was just before the Great Financial Crisis (GFC). Total household debt balances increased by $601 billion in 2019 exceeding $14 trillion for the first time ever. Most of that growth, $433 billion, was in household mortgage debt, again the largest rise since 2007. In that context, with US unemployment now already at 16 per cent or more, there is strong likelihood of increased mortgage and other credit stress, leading to foreclosures. Exacerbating this, rising stock prices in recent years have spurred spending but this source of funds disappeared with stock markets plummeting over the past six weeks. Even in good times, such trends in the US have potentially detrimental consequences for the global economy.

And are global finances positioned well to cope with severe disruption? Although there have been some important regulatory reforms since the GFC especially to improve transparency in over-the-counter (OTC) derivative trades, in November 2019, the Bank for International Settlements reported that the notional amounts of OTC derivatives – which determine contractual payments – rose to $640 trillion in June 2019 marking continuation of an upward trend evident since the end of 2016 and taking the total higher than it was at the end of 2007. The value of global GDP at present is around $88 trillion, which means that the notional amount of OTC derivatives is 7.25 times larger than the total of all the world’s economies combined. If the downturn caused by social distancing and lockdowns extends for several months, as mooted by numerous governments, ‘working from home’ for many will become ‘being unemployed at home’. Such a trend, if continued even remotely near the scale already seen, will inevitably place strain on the financial sector. Already, on Friday April 3, the US Federal Deposit Insurance Corporation (FDIC) announced that West Virginia’s First State Bank had failed. This bank was 115 years old and although it did have long-standing financial woes, it was the first to fail in the US since outbreak of the pandemic. Nevertheless, there is high probability of a large increase in US loan defaults and these will place increased demands on the FDIC, the Treasury and the Federal Reserve to minimise bank failures.

Too little too late

Just to make sure that humanity maximises the challenge, because nobody likes to do things by half measure, last month, in response to falling global demand resulting from the coronavirus pandemic, Saudi Arabia and Russia decided not to agree on oil production cuts. On March 8, Saudi Arabia unilaterally offered price discounts of up to $8 per barrel to certain customers and announced that it would increase production to 12.3 million barrels a day in April. As demand continued to fall dramatically, the price of Brent crude oil reached its lowest level in 18 years on March 30 at $22.58 barrel and West Texas Intermediate below $20 barrel. The price bounced back somewhat in the first days of April after early signs of a cut in production but even so, markets have taken advantage of the low prices and are probably going to be oversupplied for several months at least. Recently, a Citibank research report said that any potential agreement by Saudi Arabia, Russia and America “looks like it is too little too late.”

Why? Estimates are that global daily consumption of oil in April will fall by 15 million to 20 million barrels a day against what it is was a year ago. On March 30, Goldman Sachs’ global head of commodities Jeff Currie wrote in a note to clients that “It is impossible to shut down that much demand without large and persistent ramifications to supply.” Although China is reported to be buying oil for its national reserve, this is unlikely to diminish global oversupply. Citing a forecast by the Paris-based International Energy Agency, Morgan Stanley cautions that “Oil prices failed to keep pace, with growing [coronavirus] lockdown measures and reports that this could drive global demand down 20 per cent, potentially pushing the world to run out of storage capacity.” Russia needs a Brent crude price of around $40 to balance its budget, but by April 2, Brent crude was only $26 a barrel. On March 20, Russia had $551 billion in foreign currency reserves; within one week that had fallen by $30 billion. Radio Free Europe has reported that Saudi Arabia needs a Brent crude price of $80 to balance its budget and that it has already spent $13 billion of its $480 billion of foreign currency reserves.

The petrodollar’s curse

All of this matters to every country because in the 1970s, the world abandoned the Bretton Woods gold standard. The US and Saudi Arabia agreed to standardise the price of oil in US dollar terms. Saudi Arabia pressured OPEC countries to agree to this arrangement, which created the ‘petrodollar’. The petrodollar system underpins the US dollar as the global reserve currency, with US financial markets as a source of liquidity and foreign capital inflows. Essentially, US dollars from oil exports are ‘recycled’ back to buy investments in the US, which has allowed the US to issue dollar denominated assets – including Treasury Bills – at low rates of interest and thus promote growth without inflationary pressure. In 2018, the US Energy Information Association reported that the global net export revenue from OPEC members was $710 billion.

If the flow of recycled petrodollars evaporates for sustained duration in the face of depressed prices caused by extremely low demand, coupled with the drying up of a Chinese surplus of dollars caused by depressed exports, there could be a sharp reduction of liquidity for American capital markets just when the US needs to spend in order to prop up its economy. Note that all this is potentially coming off of an already exploding US fiscal deficit that exceeded one trillion dollars in 2019, and a national debt of $23.2 trillion before any coronavirus stimulus package. Is it any wonder that President Donald Trump is tweeting up the oil price and declaring improbably that the economy will “reopen” in a matter of weeks?

Faced with insuperable economic problems and crises of unprecedented nature and scale, we can perhaps be forgiven in doubting Morrison’s plan that businesses will wake in a few months from now to discover that “the employees come back, the opportunities come back,(and) the economy comes back.”

Come the revolution

Over the next few years and accelerating into the future, the impact of artificial intelligence, machine learning, big data and analytics, the Internet-of-things, block-chain technology and our need to transition to a post-carbon economy and adapt to climate change will present both opportunities and significant challenges for all industries, especially in technologically developed economies. Even without the forced change in work practices arising from the coronavirus pandemic, over the coming decade, many service-sector skills traditionally associated with middle-income positions in engineering, banking, project management, procurement, law, health care, mathematics and accounting etc. were destined to be replaced increasingly by self-learning algorithms.

This transition has already begun, but ‘business as usual’ and societal inertia allowed us all to note the wonder of it while plodding along with an understanding that it’s probably all a bit overstated and will work itself out in the long run. Of course, there is also the dismissive mantra that technology never really destroys jobs, it just changes them. For example, we witnessed how agricultural workers in the 18th and 19th centuries all moved into manufacturing jobs in the cities, and then how manufacturing workers in the mid-20th century substantially moved into the services sector. However, this time around, technology is impacting on all these sectors at once; not just for physical work but decision-making, planning, investigating, diagnosing, arguing a legal case, communicating, entertaining and practically anything else we can think of using our slower, lower-data-empowered brain.

The importance to our society of such unprecedented change, commonly called the Fourth Industrial Revolution, is reflected in the high percentage of people in advanced economies working as professionals, clerical and administrative workers and managers, many of whom are likely to find their jobs challenged by technology. Moreover, automation of physical processes associated with trades and labour will continue to develop at an accelerating pace. For example, by 2019, over $100 billion had been invested into the autonomous vehicle industry. Volkswagen led the pack with an investment of $54.2 billion in driverless cars, followed in diminishing order by Samsung, Ford, Toyota and others.

Systemic disruption gone unnoticed

The nature of the challenges and extent of opportunities before us cut across all sectors of the economy. For this reason, the past will not be an accurate predictor of the future. And yet, remarkably, this systemic disruption to every aspect of our society and economy has hardly been talked about outside of thought-provoking books and documentaries, TED talks by Ferrari-driving Silicon Valley techno-geeks, the occasional rousing speech by an academic or politician and corporate planners in behind-closed-door board meetings.

Nevertheless, sneakily, those companies that were supposed to be asleep over the next six months might just notice whilst dozing that there could be opportunities to deploy smart technology rather than rehiring previous employees. That algorithm that was going to require several thousand redundancies can now be rolled out without all the industrial-relations angst. They might also learn how to undertake processes that used to involve moving people around the country, indeed the world, using far fewer staff working remotely with video-conferencing and supervisory control and data acquisition systems.

As early as Feb 3, as companies were closing their offices in China in response to the coronavirus outbreak in Wuhan, a smiling CEO of ‘Zoom,’ the ‘video remote work tool company,’ said that their stock price had grown 15 per cent in a day and that demand for the technology was booming, “Ultimately, almost every company, they need to have a tool like this. I think that based on IDC estimates by 2023 that’s a $43 billion market.”

Just think about it for a moment; how often does almost every company in the world, at the same time, stop, send all their employees home for at least a couple of months, step back and take a look at where they are, where they have been, what they have been doing, how they have been doing it, how best to move forward and with what technology and processes? Never before, and perhaps never again but we can be fairly confident that quite a lot of them will implement changes. And those changes will almost certainly maximise the technology now on offer through the Fourth Industrial Revolution, which has just been put on steroids.

If companies stay in hibernation for months, our Rip Van Winkle economy is most unlikely to look much like it did before the coronavirus pandemic. We might do well to explore further the conditions Rip Van Winkle discovered upon waking and returning to the village, “The very character of the people seemed changed. There was a busy, bustling, disputatious tone about it, instead of the accustomed phlegm and drowsy tranquillity.”

Rather than deluding ourselves that companies will wake up, that employees and opportunities will come back and the economy will tick along just like before, to avoid significant social disruption and continue to grow our economy, governments will need to recognise and get ahead of a process of tumultuous change that will very likely unfold in 2020.

Rediscovering value

Remember the neo-conservative, laissez faire world of austerity when ‘big government’, ‘economic stimulus’ and ‘bail outs’ were dirty words? You know, about five weeks ago.

The northern states of Europe are showing us now that this thinking has not completely faded as they resist helping southern European countries in critical economic peril, but cracks in the neo-liberal narrative are showing in domestic politics. In many countries citizens look in vain – possibly later to become anger – towards hollowed-out and weakened institutions that too often are failing to respond effectively to the coronavirus pandemic. In many places, incompetent government authorities have been overly slow to impose social-distancing restrictions, and have not anticipated and responded with adequate medical facilities, testing, critical-care equipment and personal protection equipment. Despite some statistical anomalies arising from restricted testing, these failures all too often manifest as COVID-19 case numbers and deaths.

Increasingly over the past 25 years or so, right-wing populism has argued that ‘Deep State’ elites, bureaucrats and technocrats have ‘politically correct’ agendas that hold back hard-working capitalist risk-takers, who in turn deserve to pay less tax, enjoy their riches and eventually benefit us all through trickle-down mechanisms. The problems of widening wealth inequality, environmental pollution, rising atmospheric carbon dioxide concentration, mass destruction of biodiversity, poor-quality public education, lack of access to public health services, etc. are all ‘liberal’ or ‘left-wing’ conspiracies getting in the way of a strong country.

Populism and flexible principles

The US under Republican influence, and especially during the Trump presidency, is a notable example of a country governed by such populist political ideology but it is by no means the only one. Variations of this narrative have been evident in Jair Bolsonaro’s Brazil, Viktor Orban’s Hungary, and in populist political parties throughout Western Europe and elsewhere. In spite of his dogged pursuit of Brexit, the UK under a seemingly more pragmatic – COVID-19 infected – Boris Johnson does not yet consistently fit this mould. Rachel Sylvester in Prospect magazine notes that his ideology resembles that of Groucho Marx, “These are my principles and if you don’t like them… well I have others.” 

However, according to economist Satyajit Das, “in times of crisis everyone is Keynesian”. He may well be right. In early March, the conservative Australian Government announced a A$17.6 billion stimulus programme in response to the economic impact of the COVID-19 pandemic. It followed ten days later with an increase in the package to A$189 billion, and a week after that with another A$130 billion making the total stimulus to date A$320 billion (approx. $193 billion), representing 16.4 per cent of GDP!

On March 27, the Republican President of the United States signed into law a $2 trillion stimulus package, the biggest in US history. This follows $3 trillion in loans and asset purchases by the Federal Reserve in recent weeks, which some commentators argue will still not be enough. Reuters reports that Scott Minerd, Chief Investment Officer at Guggenheim Partners, has calculated that funds allocated to bolster the Federal Reserve are insufficient , “That is just a fraction of the roughly $9.5 trillion in outstanding US corporate debt, much of which is either in the lowest-tier investment grade rating or already rated as junk, with a higher risk of default. Other areas that need support – such as the commercial paper market where borrowers go for short-term funding or the municipal market that local governments use to raise money for roads and schools – total trillions of dollars more.”

On April 6, Singapore announced a third stimulus package of $3.6 billion, taking its total stimulus to $41.7 billion, which is 12 per cent of the country’s GDP. And so we could continue through an ever expanding list of countries.

Who’s gonna pay?

Eventually, governments will need to raise taxes to pay for all of this, but will they be free to do so without considering wealth inequalities and the importance of maintaining a sound public sector? Will the memory of underperformance by hollowed-out public institutions in many countries allow future governments to again disparage bureaucrats, scientists and technical experts as unnecessary elites? Trust in the ability of laissez-faire capitalism to deliver a just, caring and equitable society is likely to be broken irreparably by images of refrigerator trucks lined up as temporary morgues in New York City.

Be that as it may, Professor Alex Millmow speaking on ABC radio in early April provided the ironic anecdote that Melbourne-based Marxists who meet every Easter for a conference to discuss the demise of laissez-faire capitalism are unable to gather this year, not because of ideological differences but because of restrictions on too many people gathering in one place during the coronavirus pandemic. With the evident discrediting of unbridled capitalism flowering all around the world in response to the pandemic, “Their moment has come! But it has been snatched away by regulations put in place by the government”.

Professor Mariana Mazzucato has long argued that we need to ask questions about the difference between value creation and value extraction, between productive and unproductive activities. We might do well to start listening to her. The economic crisis of the coronavirus pandemic is hitting every country in the world at roughly the same time; every business, every organisation, every government and every person will be impacted upon, mostly negatively. As we move forward into a world in which every government is saddled with enormous debt and technology is changing so many traditional assumptions about the use of employment as a means of wealth distribution, we cannot afford the luxury of lazy thinking and policies based on ‘business as usual’.

‘Productive’ money makers

To illustrate how the term ‘value’ has been captured in mainstream economics by consideration solely of price, Mazzucato quotes a former CEO of investment bank Goldman Sachs, Lloyd Blankfein. In 2009, just after the GFC of 2008 that was caused primarily by investment bankers – including those at Goldman Sachs –, Lloyd Blankfein, with no cheeky wink to the gallery at all, said: “The people at Goldman Sachs are among the most productive in the world.” Mazzucato questions whether the 8.8 million people in the US who lost their jobs between 2007 and 2010 and the thousands of people who lost their homes as a result of that crisis – 120,000 in the month of September 2010 alone – would agree. She also notes that Goldman Sachs had to be bailed out in the GFC with $10 billion of taxpayers’ funds.

The problem she argues is that in neo-classical economics, which emerged around the beginning of the 20th century, the equation shifted from deliberations on the nature of value, how it is determined and what the productive potential of the economy might be, giving rise to a theory of price, to the reverse, “a theory of price and exchange which reveals value.” Obviously, this can lead to perverse outcomes, such as ignoring or underappreciating value-creating activities that are not priced and, of course, recognising harmful investment banking practices as being productive even if they destroy value.

Self-serving financials

Mazzucato reminds us that up until 1970, most of the financial sector, specifically net difference in interest, was not even included in GDP. This changed by giving these earnings a name and including them in GDP calculations; however, as the calculation of their ‘value’ increased each year, people began to notice that what they were mostly doing was financing themselves, that is the financing of finance, insurance and real estate (FIRE). She notes that in the UK, only between ten to 20 per cent of finance goes to industry and the rest into FIRE. “Similarly, in the real economy, in industry itself, what was happening? This focus on prices and particularly share prices has created a huge problem of re-investment… What we have today is an ultra-financialised industrial sector where increasingly a share of the profits and net income are not actually going back into production, into human capital training, into research and development but [are] just being syphoned out in terms of buying back your own shares, which boosts stock options, which is in fact the way that many executives are paid… In the last ten years, 466 S&P 500 companies have spent over $4 trillion just on buying back their shares.”

In the heavily indebted, hesitant and uncertain world we will find ourselves in as we come out of the hibernation of social distancing and lockdowns, will we be able to afford the continued misallocation of resources that has nurtured unprecedented inequalities in wealth simply because we lazily and unquestioningly accept value as defined by price? And in a world of the Fourth Industrial Revolution, where the production of material goods will increasingly be less dependent on human labour, will we need to rethink our understanding of value?

Professor Bruno Frey, who heads up the Center for Research on Economics and Wellbeing at the University of Basel, agrees with Mazzucato that we indeed do need to rethink our understanding of value. He suggests that we do so based on the extent to which activities and resources are directed toward the creation of happiness. He identifies five determinants of societal happiness, most of which are not measured with a focus only on GDP: material wellbeing; friends, acquaintances and family life; physical health; political conditions, such as the absence of tensions and war; and a sense of equality, especially the absence of gross inequalities in wealth and opportunity. Frey eschews the notion of a national indicator of happiness on the grounds that it is too easily manipulated by governments. Instead, he argues the importance of a healthy plurality of organisations assessing and reporting on government and society’s performance against the five determinants that his research has identified are important for happiness.

So, there are good reasons to believe that we need to prepare for a Rip Van Winkle economy when we finally awake. The opportunities, employees and economy as we knew them may no longer be there but this need not be cause for despair; recall again the fate of Rip Van Winkle, “Having nothing to do at home, and being arrived at that happy age when a man can be idle with impunity, he took his place once more on the bench at the inn door, and was reverenced as one of the patriarchs of the village and a chronicle of the old times ‘before the war.’ It was some time before he could get into the regular track of gossip, or could be made to comprehend the strange events that had taken place during his torpor.”

Rip Van Winkle may not have understood fully what happened while he was asleep but he went on to live a happy life, as might we all if we prepare for the reality of what lies before us.

Max Herriman is currently business development manager for Southeast Asia at AMOG Consulting Pty Ltd, and Senior Business Strategy Advisor to Crops for the Future.

(As an Investvine contributor, Max Herriman’s opinions expressed are his own.)



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By Max Herriman Just over a week ago, the Australian Prime Minister, Scott Morrison, said that he wants small businesses in Australia suffering from the impact of COVID-19 to go to sleep, possibly for six months or longer, until the pandemic has passed. Pundits and the media immediately picked up on the term ‘hibernation’ and comparisons were made with bears in winter, of course. Rip Van Winkle asleep in the Catskill Mountains in New York State. Painting by Albert Hahn (1907) Officials almost everywhere have affirmed their desire to protect employment so that the economy can swing back to normal...

By Max Herriman

Just over a week ago, the Australian Prime Minister, Scott Morrison, said that he wants small businesses in Australia suffering from the impact of COVID-19 to go to sleep, possibly for six months or longer, until the pandemic has passed. Pundits and the media immediately picked up on the term ‘hibernation’ and comparisons were made with bears in winter, of course.

Officials almost everywhere have affirmed their desire to protect employment so that the economy can swing back to normal after the pandemic is over. On Monday April 6, Singapore’s Finance Minister, Heng Swee Keat, said that their latest round of financial stimulus “would help workers keep their jobs and enable businesses to resume operations quickly after the pandemic subsides.” On Tuesday, the Japanese Prime Minister, Shinzo Abe, in unveiling almost a trillion dollars of stimulus – equal to 20 per cent of Japan’s economic output – declared, “We will protect the employment and life at all costs.” Indeed, there are almost as many expressions of this sentiment as there are countries on the planet.

With steely resolve, President Trump told Sean Hannity of Fox News on Tuesday night, “We’re looking at the concept where we open sections of the country and we’re also looking at the concept where you open up everything.” Earlier that evening, Larry Kudlow, Director of the National Economic Council, declared, “Once we can reopen this thing, I think it’s going to be very successful.”

The world can turn into a different place

However, one of the problems in going to sleep for a protracted period is that the world can be a different place when you come back down from the mountain. Remember Irving Washington’s story of poor old Rip Van Winkle? He wandered off in New York’s Catskill Mountains to escape from his nagging wife.

As an aside, this story was very likely on the minds of the Malaysian Ministry of Women and Family Development last week when they advised that in order to preserve harmony with their husband during the COVID-19 lockdown women should wear makeup, speak in a coquettish voice and avoid nagging! Perhaps unsurprisingly they later apologised to enraged Malaysian women.

Nevertheless, as one does when avoiding a termagant partner, Rip met up with some ghostly fellows and had a few too many ales. He crawled away to sleep it off for a while and woke up 20 years later. When he returned to the village, he discovered that he had completely missed the American Revolutionary War and more than a few things had changed, “everything was strange”.

A Rip Van Winkle economy is one that changes significantly, both in scale and nature, while businesses are dormant. It’s never happened before and hopefully will never again, but it is happening now all around the world.

The Australian Prime Minister elaborated, saying, “We want these businesses to effectively go into a hibernation, which means on the other side, the employees come back, the opportunities come back, the economy comes back.” Such reassurance helps to calm markets and the citizenry but is it likely to be the way this unfolds? Will everything just pick up from where we were, or should we prepare for the possibility that a revolution takes place in the economy while businesses sleep? The economist Larry Summers reminds us that, “economic time has stopped, but financial time has not been stopped.”

Fuels for change

There are fuels for revolutionary change in our economy and, as a consequence, our society. I will talk about three of them.

Firstly, it’s been a while since almost every aspect of the global economy shut down for several months and we lost more than three trillion dollars of global GDP in a matter of weeks. That hasn’t happened at this pace since, well… never. As noted in The Guardian, “Not even during the Great Depression and the second world war did the bulk of economic activity literally shut down, as it has in China, the US and Europe today.” At a recent WHO press conference, the chairwoman and managing director of the International Monetary Fund, Kristalina Georgieva, warned that, “This is a crisis like no other… Never in the history of the IMF have we witnessed the world economy coming to a standstill. It is way worse than the global financial crisis.” On April 2, Bank of America Global Research reported that it expects the COVID-19 recession in the US to be the “deepest recession on record,” nearly five times worse than the postwar average with US jobless claims already rising by 6.6 million in the last week, bringing total job losses in the last three weeks to around 16 million. Is it possible that this crash in economic activity might detrimentally affect those opportunities that are expected to be there when business wakes up again?

Secondly, this is happening when we were already in the midst of revolutionary change brought about by the Fourth Industrial Revolution. For some years, around the world, relative silence in public policy on how to respond to the disruptive impact of this particular revolution has been remarkable and eerie.

And finally, the demonstrable need for expertise, competence, resilience, capacity and strength in government and the public sector during this time of crisis will render past clarion calls for the privatisation of all social services including public health; an unfettered private financial sector; laissez faire, free-market dominance in economic management and a conception of ‘value’ determined solely by price, to all look rather silly.

At this point, I am reminded of Sir Ken Robinson quoting the comedian George Carlin who said, “Just when I found out the meaning of life, they changed it.”

Storm damage

A popular analogy for the economic impact of this pandemic is that it is like a storm. It will blow over and life for most will return to normal. This belief underpins the Australian Prime Minister’s six-month hibernation theory. On April 1, The New York Times summarised this view as, “Once the virus is contained, enabling people to return to offices and shopping malls, life will snap back to normal. Jets will fill with families going on merely deferred vacations. Factories will resume, fulfilling saved up orders.” We hope that this is correct, how wonderful that would be for so many people, but the odds are not favourable. Disconcertingly, that summary of the optimistic perspective was published on April Fools’ Day.

Let’s recall again what Rip Van Winkle experienced when he woke and returned to his village, “He found the house gone to decay – the roof fallen in, the windows shattered and the doors off the hinges… It was empty, forlorn, and apparently abandoned.” The New York Times continues, “But even after the virus is tamed – and no one really knows when that will be – the world that emerges is likely to be choked with trouble, challenging the recovery. Mass joblessness exacts societal costs. Widespread bankruptcy could leave industry in a weakened state, depleted of investment and innovation. Households may remain agitated and risk averse, making them prone to thrift. Some social distancing measures could remain indefinitely. Consumer spending amounts to roughly two-thirds of economic activity worldwide. If anxiety endures and people are reluctant to spend, expansion will be limited – especially as continued vigilance against the coronavirus may be required for years.”

Damage done

The economist Satyajit Das notes that a barber without customers for three months has lost revenue that is gone forever, it doesn’t come back. The barber’s income for that year is potentially less by around a quarter. Das also recalls that a study by the US Federal Reserve undertaken before the pandemic identified that most Americans would struggle to raise $400 in the case of an emergency. And if that sounds dire, he notes that research by the Grattan Institute reveals that ten per cent of Australian households have less than $90 to cater to an emergency and less than 50 per cent have access to $7,000. The Khazanah Research Institute has published a report on ‘The State of Households’ in Malaysia in which they note, “Findings from the latest UNDP Human Development Report for Malaysia suggest that many Malaysian households have limited savings. Their low levels of precautionary savings mean that most families would be in trouble in the event of a shock – such as a reduction in income, unemployment or other emergencies.”

So, how much damage is this storm likely to cause?

In February, the New York Federal Reserve announced that 2019 saw the largest surge in US household debt since 2007, which of course was just before the Great Financial Crisis (GFC). Total household debt balances increased by $601 billion in 2019 exceeding $14 trillion for the first time ever. Most of that growth, $433 billion, was in household mortgage debt, again the largest rise since 2007. In that context, with US unemployment now already at 16 per cent or more, there is strong likelihood of increased mortgage and other credit stress, leading to foreclosures. Exacerbating this, rising stock prices in recent years have spurred spending but this source of funds disappeared with stock markets plummeting over the past six weeks. Even in good times, such trends in the US have potentially detrimental consequences for the global economy.

And are global finances positioned well to cope with severe disruption? Although there have been some important regulatory reforms since the GFC especially to improve transparency in over-the-counter (OTC) derivative trades, in November 2019, the Bank for International Settlements reported that the notional amounts of OTC derivatives – which determine contractual payments – rose to $640 trillion in June 2019 marking continuation of an upward trend evident since the end of 2016 and taking the total higher than it was at the end of 2007. The value of global GDP at present is around $88 trillion, which means that the notional amount of OTC derivatives is 7.25 times larger than the total of all the world’s economies combined. If the downturn caused by social distancing and lockdowns extends for several months, as mooted by numerous governments, ‘working from home’ for many will become ‘being unemployed at home’. Such a trend, if continued even remotely near the scale already seen, will inevitably place strain on the financial sector. Already, on Friday April 3, the US Federal Deposit Insurance Corporation (FDIC) announced that West Virginia’s First State Bank had failed. This bank was 115 years old and although it did have long-standing financial woes, it was the first to fail in the US since outbreak of the pandemic. Nevertheless, there is high probability of a large increase in US loan defaults and these will place increased demands on the FDIC, the Treasury and the Federal Reserve to minimise bank failures.

Too little too late

Just to make sure that humanity maximises the challenge, because nobody likes to do things by half measure, last month, in response to falling global demand resulting from the coronavirus pandemic, Saudi Arabia and Russia decided not to agree on oil production cuts. On March 8, Saudi Arabia unilaterally offered price discounts of up to $8 per barrel to certain customers and announced that it would increase production to 12.3 million barrels a day in April. As demand continued to fall dramatically, the price of Brent crude oil reached its lowest level in 18 years on March 30 at $22.58 barrel and West Texas Intermediate below $20 barrel. The price bounced back somewhat in the first days of April after early signs of a cut in production but even so, markets have taken advantage of the low prices and are probably going to be oversupplied for several months at least. Recently, a Citibank research report said that any potential agreement by Saudi Arabia, Russia and America “looks like it is too little too late.”

Why? Estimates are that global daily consumption of oil in April will fall by 15 million to 20 million barrels a day against what it is was a year ago. On March 30, Goldman Sachs’ global head of commodities Jeff Currie wrote in a note to clients that “It is impossible to shut down that much demand without large and persistent ramifications to supply.” Although China is reported to be buying oil for its national reserve, this is unlikely to diminish global oversupply. Citing a forecast by the Paris-based International Energy Agency, Morgan Stanley cautions that “Oil prices failed to keep pace, with growing [coronavirus] lockdown measures and reports that this could drive global demand down 20 per cent, potentially pushing the world to run out of storage capacity.” Russia needs a Brent crude price of around $40 to balance its budget, but by April 2, Brent crude was only $26 a barrel. On March 20, Russia had $551 billion in foreign currency reserves; within one week that had fallen by $30 billion. Radio Free Europe has reported that Saudi Arabia needs a Brent crude price of $80 to balance its budget and that it has already spent $13 billion of its $480 billion of foreign currency reserves.

The petrodollar’s curse

All of this matters to every country because in the 1970s, the world abandoned the Bretton Woods gold standard. The US and Saudi Arabia agreed to standardise the price of oil in US dollar terms. Saudi Arabia pressured OPEC countries to agree to this arrangement, which created the ‘petrodollar’. The petrodollar system underpins the US dollar as the global reserve currency, with US financial markets as a source of liquidity and foreign capital inflows. Essentially, US dollars from oil exports are ‘recycled’ back to buy investments in the US, which has allowed the US to issue dollar denominated assets – including Treasury Bills – at low rates of interest and thus promote growth without inflationary pressure. In 2018, the US Energy Information Association reported that the global net export revenue from OPEC members was $710 billion.

If the flow of recycled petrodollars evaporates for sustained duration in the face of depressed prices caused by extremely low demand, coupled with the drying up of a Chinese surplus of dollars caused by depressed exports, there could be a sharp reduction of liquidity for American capital markets just when the US needs to spend in order to prop up its economy. Note that all this is potentially coming off of an already exploding US fiscal deficit that exceeded one trillion dollars in 2019, and a national debt of $23.2 trillion before any coronavirus stimulus package. Is it any wonder that President Donald Trump is tweeting up the oil price and declaring improbably that the economy will “reopen” in a matter of weeks?

Faced with insuperable economic problems and crises of unprecedented nature and scale, we can perhaps be forgiven in doubting Morrison’s plan that businesses will wake in a few months from now to discover that “the employees come back, the opportunities come back,(and) the economy comes back.”

Come the revolution

Over the next few years and accelerating into the future, the impact of artificial intelligence, machine learning, big data and analytics, the Internet-of-things, block-chain technology and our need to transition to a post-carbon economy and adapt to climate change will present both opportunities and significant challenges for all industries, especially in technologically developed economies. Even without the forced change in work practices arising from the coronavirus pandemic, over the coming decade, many service-sector skills traditionally associated with middle-income positions in engineering, banking, project management, procurement, law, health care, mathematics and accounting etc. were destined to be replaced increasingly by self-learning algorithms.

This transition has already begun, but ‘business as usual’ and societal inertia allowed us all to note the wonder of it while plodding along with an understanding that it’s probably all a bit overstated and will work itself out in the long run. Of course, there is also the dismissive mantra that technology never really destroys jobs, it just changes them. For example, we witnessed how agricultural workers in the 18th and 19th centuries all moved into manufacturing jobs in the cities, and then how manufacturing workers in the mid-20th century substantially moved into the services sector. However, this time around, technology is impacting on all these sectors at once; not just for physical work but decision-making, planning, investigating, diagnosing, arguing a legal case, communicating, entertaining and practically anything else we can think of using our slower, lower-data-empowered brain.

The importance to our society of such unprecedented change, commonly called the Fourth Industrial Revolution, is reflected in the high percentage of people in advanced economies working as professionals, clerical and administrative workers and managers, many of whom are likely to find their jobs challenged by technology. Moreover, automation of physical processes associated with trades and labour will continue to develop at an accelerating pace. For example, by 2019, over $100 billion had been invested into the autonomous vehicle industry. Volkswagen led the pack with an investment of $54.2 billion in driverless cars, followed in diminishing order by Samsung, Ford, Toyota and others.

Systemic disruption gone unnoticed

The nature of the challenges and extent of opportunities before us cut across all sectors of the economy. For this reason, the past will not be an accurate predictor of the future. And yet, remarkably, this systemic disruption to every aspect of our society and economy has hardly been talked about outside of thought-provoking books and documentaries, TED talks by Ferrari-driving Silicon Valley techno-geeks, the occasional rousing speech by an academic or politician and corporate planners in behind-closed-door board meetings.

Nevertheless, sneakily, those companies that were supposed to be asleep over the next six months might just notice whilst dozing that there could be opportunities to deploy smart technology rather than rehiring previous employees. That algorithm that was going to require several thousand redundancies can now be rolled out without all the industrial-relations angst. They might also learn how to undertake processes that used to involve moving people around the country, indeed the world, using far fewer staff working remotely with video-conferencing and supervisory control and data acquisition systems.

As early as Feb 3, as companies were closing their offices in China in response to the coronavirus outbreak in Wuhan, a smiling CEO of ‘Zoom,’ the ‘video remote work tool company,’ said that their stock price had grown 15 per cent in a day and that demand for the technology was booming, “Ultimately, almost every company, they need to have a tool like this. I think that based on IDC estimates by 2023 that’s a $43 billion market.”

Just think about it for a moment; how often does almost every company in the world, at the same time, stop, send all their employees home for at least a couple of months, step back and take a look at where they are, where they have been, what they have been doing, how they have been doing it, how best to move forward and with what technology and processes? Never before, and perhaps never again but we can be fairly confident that quite a lot of them will implement changes. And those changes will almost certainly maximise the technology now on offer through the Fourth Industrial Revolution, which has just been put on steroids.

If companies stay in hibernation for months, our Rip Van Winkle economy is most unlikely to look much like it did before the coronavirus pandemic. We might do well to explore further the conditions Rip Van Winkle discovered upon waking and returning to the village, “The very character of the people seemed changed. There was a busy, bustling, disputatious tone about it, instead of the accustomed phlegm and drowsy tranquillity.”

Rather than deluding ourselves that companies will wake up, that employees and opportunities will come back and the economy will tick along just like before, to avoid significant social disruption and continue to grow our economy, governments will need to recognise and get ahead of a process of tumultuous change that will very likely unfold in 2020.

Rediscovering value

Remember the neo-conservative, laissez faire world of austerity when ‘big government’, ‘economic stimulus’ and ‘bail outs’ were dirty words? You know, about five weeks ago.

The northern states of Europe are showing us now that this thinking has not completely faded as they resist helping southern European countries in critical economic peril, but cracks in the neo-liberal narrative are showing in domestic politics. In many countries citizens look in vain – possibly later to become anger – towards hollowed-out and weakened institutions that too often are failing to respond effectively to the coronavirus pandemic. In many places, incompetent government authorities have been overly slow to impose social-distancing restrictions, and have not anticipated and responded with adequate medical facilities, testing, critical-care equipment and personal protection equipment. Despite some statistical anomalies arising from restricted testing, these failures all too often manifest as COVID-19 case numbers and deaths.

Increasingly over the past 25 years or so, right-wing populism has argued that ‘Deep State’ elites, bureaucrats and technocrats have ‘politically correct’ agendas that hold back hard-working capitalist risk-takers, who in turn deserve to pay less tax, enjoy their riches and eventually benefit us all through trickle-down mechanisms. The problems of widening wealth inequality, environmental pollution, rising atmospheric carbon dioxide concentration, mass destruction of biodiversity, poor-quality public education, lack of access to public health services, etc. are all ‘liberal’ or ‘left-wing’ conspiracies getting in the way of a strong country.

Populism and flexible principles

The US under Republican influence, and especially during the Trump presidency, is a notable example of a country governed by such populist political ideology but it is by no means the only one. Variations of this narrative have been evident in Jair Bolsonaro’s Brazil, Viktor Orban’s Hungary, and in populist political parties throughout Western Europe and elsewhere. In spite of his dogged pursuit of Brexit, the UK under a seemingly more pragmatic – COVID-19 infected – Boris Johnson does not yet consistently fit this mould. Rachel Sylvester in Prospect magazine notes that his ideology resembles that of Groucho Marx, “These are my principles and if you don’t like them… well I have others.” 

However, according to economist Satyajit Das, “in times of crisis everyone is Keynesian”. He may well be right. In early March, the conservative Australian Government announced a A$17.6 billion stimulus programme in response to the economic impact of the COVID-19 pandemic. It followed ten days later with an increase in the package to A$189 billion, and a week after that with another A$130 billion making the total stimulus to date A$320 billion (approx. $193 billion), representing 16.4 per cent of GDP!

On March 27, the Republican President of the United States signed into law a $2 trillion stimulus package, the biggest in US history. This follows $3 trillion in loans and asset purchases by the Federal Reserve in recent weeks, which some commentators argue will still not be enough. Reuters reports that Scott Minerd, Chief Investment Officer at Guggenheim Partners, has calculated that funds allocated to bolster the Federal Reserve are insufficient , “That is just a fraction of the roughly $9.5 trillion in outstanding US corporate debt, much of which is either in the lowest-tier investment grade rating or already rated as junk, with a higher risk of default. Other areas that need support – such as the commercial paper market where borrowers go for short-term funding or the municipal market that local governments use to raise money for roads and schools – total trillions of dollars more.”

On April 6, Singapore announced a third stimulus package of $3.6 billion, taking its total stimulus to $41.7 billion, which is 12 per cent of the country’s GDP. And so we could continue through an ever expanding list of countries.

Who’s gonna pay?

Eventually, governments will need to raise taxes to pay for all of this, but will they be free to do so without considering wealth inequalities and the importance of maintaining a sound public sector? Will the memory of underperformance by hollowed-out public institutions in many countries allow future governments to again disparage bureaucrats, scientists and technical experts as unnecessary elites? Trust in the ability of laissez-faire capitalism to deliver a just, caring and equitable society is likely to be broken irreparably by images of refrigerator trucks lined up as temporary morgues in New York City.

Be that as it may, Professor Alex Millmow speaking on ABC radio in early April provided the ironic anecdote that Melbourne-based Marxists who meet every Easter for a conference to discuss the demise of laissez-faire capitalism are unable to gather this year, not because of ideological differences but because of restrictions on too many people gathering in one place during the coronavirus pandemic. With the evident discrediting of unbridled capitalism flowering all around the world in response to the pandemic, “Their moment has come! But it has been snatched away by regulations put in place by the government”.

Professor Mariana Mazzucato has long argued that we need to ask questions about the difference between value creation and value extraction, between productive and unproductive activities. We might do well to start listening to her. The economic crisis of the coronavirus pandemic is hitting every country in the world at roughly the same time; every business, every organisation, every government and every person will be impacted upon, mostly negatively. As we move forward into a world in which every government is saddled with enormous debt and technology is changing so many traditional assumptions about the use of employment as a means of wealth distribution, we cannot afford the luxury of lazy thinking and policies based on ‘business as usual’.

‘Productive’ money makers

To illustrate how the term ‘value’ has been captured in mainstream economics by consideration solely of price, Mazzucato quotes a former CEO of investment bank Goldman Sachs, Lloyd Blankfein. In 2009, just after the GFC of 2008 that was caused primarily by investment bankers – including those at Goldman Sachs –, Lloyd Blankfein, with no cheeky wink to the gallery at all, said: “The people at Goldman Sachs are among the most productive in the world.” Mazzucato questions whether the 8.8 million people in the US who lost their jobs between 2007 and 2010 and the thousands of people who lost their homes as a result of that crisis – 120,000 in the month of September 2010 alone – would agree. She also notes that Goldman Sachs had to be bailed out in the GFC with $10 billion of taxpayers’ funds.

The problem she argues is that in neo-classical economics, which emerged around the beginning of the 20th century, the equation shifted from deliberations on the nature of value, how it is determined and what the productive potential of the economy might be, giving rise to a theory of price, to the reverse, “a theory of price and exchange which reveals value.” Obviously, this can lead to perverse outcomes, such as ignoring or underappreciating value-creating activities that are not priced and, of course, recognising harmful investment banking practices as being productive even if they destroy value.

Self-serving financials

Mazzucato reminds us that up until 1970, most of the financial sector, specifically net difference in interest, was not even included in GDP. This changed by giving these earnings a name and including them in GDP calculations; however, as the calculation of their ‘value’ increased each year, people began to notice that what they were mostly doing was financing themselves, that is the financing of finance, insurance and real estate (FIRE). She notes that in the UK, only between ten to 20 per cent of finance goes to industry and the rest into FIRE. “Similarly, in the real economy, in industry itself, what was happening? This focus on prices and particularly share prices has created a huge problem of re-investment… What we have today is an ultra-financialised industrial sector where increasingly a share of the profits and net income are not actually going back into production, into human capital training, into research and development but [are] just being syphoned out in terms of buying back your own shares, which boosts stock options, which is in fact the way that many executives are paid… In the last ten years, 466 S&P 500 companies have spent over $4 trillion just on buying back their shares.”

In the heavily indebted, hesitant and uncertain world we will find ourselves in as we come out of the hibernation of social distancing and lockdowns, will we be able to afford the continued misallocation of resources that has nurtured unprecedented inequalities in wealth simply because we lazily and unquestioningly accept value as defined by price? And in a world of the Fourth Industrial Revolution, where the production of material goods will increasingly be less dependent on human labour, will we need to rethink our understanding of value?

Professor Bruno Frey, who heads up the Center for Research on Economics and Wellbeing at the University of Basel, agrees with Mazzucato that we indeed do need to rethink our understanding of value. He suggests that we do so based on the extent to which activities and resources are directed toward the creation of happiness. He identifies five determinants of societal happiness, most of which are not measured with a focus only on GDP: material wellbeing; friends, acquaintances and family life; physical health; political conditions, such as the absence of tensions and war; and a sense of equality, especially the absence of gross inequalities in wealth and opportunity. Frey eschews the notion of a national indicator of happiness on the grounds that it is too easily manipulated by governments. Instead, he argues the importance of a healthy plurality of organisations assessing and reporting on government and society’s performance against the five determinants that his research has identified are important for happiness.

So, there are good reasons to believe that we need to prepare for a Rip Van Winkle economy when we finally awake. The opportunities, employees and economy as we knew them may no longer be there but this need not be cause for despair; recall again the fate of Rip Van Winkle, “Having nothing to do at home, and being arrived at that happy age when a man can be idle with impunity, he took his place once more on the bench at the inn door, and was reverenced as one of the patriarchs of the village and a chronicle of the old times ‘before the war.’ It was some time before he could get into the regular track of gossip, or could be made to comprehend the strange events that had taken place during his torpor.”

Rip Van Winkle may not have understood fully what happened while he was asleep but he went on to live a happy life, as might we all if we prepare for the reality of what lies before us.

Max Herriman is currently business development manager for Southeast Asia at AMOG Consulting Pty Ltd, and Senior Business Strategy Advisor to Crops for the Future.

(As an Investvine contributor, Max Herriman’s opinions expressed are his own.)



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