The possible economics of COVID-19

01 April 2020

The world-wide chaos caused by the outbreak of the coronavirus has underlined a lesson that was only partly learned in the Global Financial Crisis of 2008. In a more interconnected world the understanding of system-wide risk needs to be much better than it is.

Risk can rarely be eliminated; it is usually only moved elsewhere. The aggressive moves to deal with the coronavirus have created other dangers, including stopping other medical procedures and creating economic havoc that will itself have health implications. It is thus essential to look at the whole system to see the implications.

Two other things are critical. It is vital to act early; a principle of quality management is that problems get worse in tenfold leaps as time elapses. And there should be redundancy, or excess capacity, to manage shocks (the best explanation of this comes from the Australian pioneer Fred Emery).

Irrational behaviour, such as frenzied purchasing of toilet paper, is uncommon in the wider community but is routine in financial markets. The impact of the cratering of the world economy, which has seen entire industry sectors flattened, should be possible to outline using historical precedents. Here is a preliminary list of what could occur.

Global debt, already at unsustainable levels, will blow out even further. Before the pandemic hit, global debt was running at over 320 per cent of world GDP. With governments spending heavily, indebtedness will increase sharply. Will this lead to some form of debt forgiveness or debt redefinition?

The world’s system of money will become further removed from reality. The global financial system is dominated by the US dollar: about $US4 trillion spins around the world each day in the global capital markets (which are digital, so not subject to lock downs). That is why the American authorities could, unlike other countries, just invent $US10 trillion out of thin air to throw mainly at banks, corporations and Wall Street. America and China are both excessively printing money (China with its domestic currency, the renminbi), raising grave questions about the future of money, and monetary value.

'The COVID-19 crisis has demonstrated how the world has become far more interconnected.'

Global supply chains will be unwound, and international travel will be understood as itself constituting a risk. The crisis has underlined the risks of cross-border, interconnected supply chains. There will be more emphasis on redundancy and less emphasis on just-in-time efficiencies.

There will be re-nationalisation and changed thinking about government’s

ECONOMICS

The possible economics of COVID-19

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