Let’s take a look at the two issues: the limitations and lockdowns of the coronavirus, and the consequences of the explosion in global government spending.
No wonder so many people applaud the lockdown strategy. It’s brilliant! At the end of the rainbow is a pot of gold!
First, COVID-19. The public assumes that the current restrictions are a necessary inconvenience as we wait for the arrival of a vaccine. The cavalry is on the way, and soon – in the form of an readily available, effective vaccine – it will save us all.
I do not believe it. An readily available vaccine, if it ever happens, is a long way off. It can take years. Much more realistically, therapeutic treatment will improve for those severely affected by COVID-19 – it has already happened.
So all this raises a very profound question, never asked by our media: how long are the current measures sustainable? How long can we keep opening and closing parts of the economy and paying subsidies and benefits to the community? How long can Australia cut itself off from the outside world? Three years, ten years? No one will answer that question. Why? They hope, like William Travis at the Alamo, that the cavalry will arrive … and soon. It didn’t.
This logically brings us to the second issue: the money. Today, global interest rates are at record lows, held by central banks that have also caused markets to be flooded with credit. At a time when all economies are in enforced recession, there are no inflationary pressures. All governments are easily able to sell bonds, and if the bond market does get a little tight, the central bank can always buy them. This is already happening in many countries.
That’s great news. We can shut down large parts of the economy, pay the losers and not worry about the costs! No wonder so many people applaud the lockdown strategy. It’s brilliant! At the end of the rainbow is a pot of gold!
Well, maybe, but there are two scenarios for the next five years to think about. The first is what we could call the Japanese scenario. Perhaps when the cavalry has arrived, economies have fully reopened, and life returns to something approaching normal, economies just won’t grow. Japan had been in persistently low demand for decades, and no matter how much debt the government built up and how much money was printed, it did not stimulate growth – or at least very little.
The second scenario is much more likely. The economies will grow again and the overcapacity will gradually be absorbed into the economy. Ultimately, the economy will reach capacity problems and prices will rise. As inflation rises, driven by massive increases in the money supply chasing the inevitably limited supply of labor and capital, so will market interest rates. That could take us back to the dark days of the 1970s, when Western economies suffered from both inflation and ultimately stagnation.
It is also worth noting that in Australia, as elsewhere, the COVID-19 recession has led to a significant increase in the household savings rate, suggesting that if and when restrictions are lifted, consumption will skyrocket – which will also lead to higher prices.
If this scenario becomes reality in three or four years, what will governments do? I suspect they will be tempted to raise taxes to dampen demand and reduce government deficits. That, in turn, will slow the economy and even invite another recession. But if they don’t, inflation can get out of hand.
So there we have it. Our government, and most others, have rightly spent a lot of money to compensate for their deliberately manipulated recessions. But it is worthwhile to think very carefully about the policy and weigh the medium-term consequences. We are all doing this to combat COVID-19. Eighty percent of people who contract the virus have mild or no symptoms. The mean age of COVID-19 related deaths is approximately equal to the mean of all deaths. And the cavalry is far away.
Mental health problems are on the rise, businesses are dying and some jobs will be lost forever.
In 20 years, when my grandchildren are at work, I wonder how they will judge today’s policymakers. After all, they will have to live with the consequences of the decisions taken worldwide this year.