Life After Covid, Part II

Feature Stories | Jun 10 2020

Central banks have now exhibited just what extent of tools they have available. Fiscal spending means deficits for a long time. Rates will not just be lower for longer, but zero. Big Tech and China are virus winners.

-Zero rates for longer
-Lingering large fiscal deficits
-Big Tech domination
-China wins

By Greg Peel

Life After Covid, Part I ( ) explored the assumption life will be very different once the pandemic risk subsides, from a household level to a global level. Such considerations will inform preferred investment choices in the years ahead.

The conclusion was that predictions of a vastly altered lifestyle are to a great extent exaggerated – an argument underpinned by evidence from past economic crises of life soon regressing toward what had been considered “normal” to that point. Certainly there will be differences, but most will reflect the acceleration of trends already underway, with online shopping a perfect example, rather than seismic shifts in consumption and industry.

While Part I focused more on our lives and on potential shifts in industry practice, Part II begins with an examination of predictions with regard post-pandemic debt and global ramifications.

Too Low For Zero

The San Francisco Federal Reserve recently published a working paper, the authors of which included a former PIMCO senior adviser. The paper explored the history of past pandemics and their economic impact.

Beginning in the fourteenth century.

From Black Death to covid, the world had experienced fifteen pandemics each costing more than 100,000 lives. The authors conclude these pandemics had long-lasting economic effects, lowering the real rate of interest for decades afterwards.

The authors speculate that the decline in the rate of return reflected depressed investment opportunities due to the higher cost of employing surviving labour, and/or a heightened desire to save due to increased precautionary saving or a rebuilding of depleted wealth. They also point out, nonetheless, two obvious caveats.

In every prior pandemic, economies were completely reliant on labour. The labour force was decimated. As sad as it may be, the victims of covid have mostly been older, hence the labour force has not been significantly impacted.

We might also note that the Spanish flu is estimated to have killed 50 million in a global population of 1.8 billion at the time. To date covid has officially killed around 400,000 in a population pushing the 8 billion mark. (Realistically that number is much larger, given most countries only count deaths in hospital, but still not a patch on 1918.)

The other caveat is the 2020 fiscal response, which the authors admit this time around is “very large”.

We can assume unemployment was not an issue following past pandemics, as it is in typical financial crises, but it will be an issue this time. However, while Edward III likely didn’t rush in to provide support for the masses after the Black Death – other than to sign them up to start a Hundred Years War with France – responses today in the likes of the US and Australia to provide labour force support are unprecedented in size and scope.

Both countries have adopted what we here call JobKeeper and JobSeeker support.

The authors don’t offer a third caveat, but I will.

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