Part 2: How the Global Economy Can Recover.

Understand COVID-19

The world and global economies are going through a transformation now. COVID-19 is almost everywhere on Earth. The trajectory of the COVID-19 virus is still exponential. As a result the models suggest a global pandemic will infect almost all humans in the next few months without a major global shutdown.

And we should recognize we are currently losing the battle to the virus, even though global equity markets had a pretty good week. But we can fight to prevent collapse of our global healthcare system to avoid unnecessary suffering and death, which is the only important goal. Also, our immediate goal should not be to prop up the equity markets, but to fight the virus. We need to endure its impact, and prepare for the future post-COVID-19.

We should avoid large expensive efforts to fight the fall of the markets (such as injecting capital into the equity markets or buying ETFs as the Fed has started). We should regroup and conserve capital, or to allocate for government programs to build new industries, economies and infrastructure projects, like FDR did in the Depression. The real battle is against the virus, not against a recession. The drop in the global equity market is likely inevitable as more historically negative economic data will come in the coming month. The US posted the worst drop in unemployment ever this week, with 3.2 million workers filing for unemployment. Ironically, this number is low for what is about to come. Even some Federal Reserve staff have estimated 30% unemployment in the coming months.

Accordingly, we may not want to use all our ammunition to fight this losing battle, only to find out we need it in the years to come. But we should manage the expansion of the virus and try to mitigate the damage. There is no vaccine, medication or effective treatment for COVID-19, so let’s wait to counter-attack, and to allocate our capital and resources wisely. Placing healthcare workers (doctors, nurses, physiotherapists, social works, aides and orderlies) into dangerous conditions for no reason (when there is no treatment or vaccine) is foolish. Also, we should pull back and recognize this will be a long process and we should expect the system to be overwhelmed, and jobs to be impacted. But our task is to endure and make smarter decisions in the future.

Bloomberg.com March 24, 2020

There will be both monetary and fiscal stimulus. The Federal Reserve has initiated a massive buying scheme to stabilize the markets with almost no limit. These Herculean efforts have not stopped the stock market crash, and its impacts have been fleeting.

Source: Bloomberg.com March 24, 2020.

As Federal Reserve Chairman Powell the asset purchases will be “as much as necessary”. Similar to the Global Financial Crisis this crisis has spread to many different areas. This crisis is different as it impacts all areas and all industries at the same time. In the GFC, the only thing that stopped mass liquidation was government intervention to stop the failure of systemically important financial firms, investment banks, banks, insurance companies, and others. The immediate solution to the current crisis seems similar, but it is foolish to do so. We do not know where or what to prop up so economic power is diluted by so many firms needing support at the same time. The policy seems to be if we cannot drop rates further, then we should just buy everything. As the buyer of last resort, the governments will need to think about how to prop up the system, or if they are actually blowing air into a punctured balloon. This decision will be the most important for the future of global economies. Right now, they appear to be wasting huge capital resources to prop up falling equities markets without a lasting impact.

The 2 Trillion dollar US federal stimulus is historically large. It is also very probably inadequate. New York is an epicenter of the outbreak in the US. The allocation to New York with fall tragically short to address the problems.

It is an inefficient allocation of capital and will not address many of the hardest hit geographies, industries or businesses.

Whether we are for or against current governments, whatever our political leanings, we should all be hopeful that people, communities, cities, states and nations make good choices rather than squandering this opportunity. Fiscal stimulus needs to coordinate with monetary policy but also to consider larger policy objectives.

Policy Objectives

We should embrace government financing to assist with basic human needs view a view to the future:

1. Consumers need food, water, shelter and healthcare for their families.
2. Companies need to pay interest on loans and debts.
3. People will need capital to rebuild.
4. New businesses will need investments and financing.
5. Innovation needs to be fostered and developed.
6. Research needs to be supported.
7. Education must continue.

Identify the problems that are important

So what should we be investing in now? We should be recognizing a few truths. We do not know where or when this crisis will end. And we do not know what life will be like in the future. It is likely that many activities in the past will be changed.

Will we take long flights for vacations or cruises to tropical destinations? Probably not anytime soon or as often. So government should be allocating capital in a very limited way right now. The with a view to financing our immediate human and health needs and investments in developing a better world in the future.

Invest in the Future

Areas to Increase investment:

1. Artificial Intelligence
2. Alternative energy
3. Green technology
4. Sustainable finance
5. Agriculture
6. Infrastructure (railways, ports, telecommunications)
7. Healthcare (technology, research, human resource development)
8. Fintech
9. Edutech

From a Darwinian perspective, economics has often been seen as the law of the jungle, or survival of the fittest. When one company goes bankrupt another more efficient one takes its place. This creates more efficient companies and better products and services.

We are now in an extinction event. But not all industries have social utility or should be saved. In fact, some are money losing ventures that destroy the environment. Some are naturally dying, unsustainable or unhealthy industries. This epidemic shows that some industries and nations are vulnerable and have an unstable foundation.

I am not suggesting a definitive answer here. I am suggesting that we think deeply about our goals. We want to avoid “throwing out the baby with the bathwater”, but we should exclude rotten apples, and focus our support important areas for the future. Remember the words of President John F. Kennedy:

When written in Chinese, the word ‘crisis’ is composed of two characters. One represents danger and the other represents opportunity.

We have a dangerous crisis to manage. We also have great opportunities to think and act differently, to change the global economy for the better.

Ultimate Objectives of Global Economies

This is a time for rethinking the foundations of our economies and hopefully to correct the errors of the past. Maybe some traditional industries should be changed. And this is an opportunity to allow failing companies to slide into the past, and focus on better economies with more reasonable goals and objectives. One of the most important lessens may be to consider what is “success” for a nation? GDP has been seen as the ultimate goal by economists.

“What Is GDP?

Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of the country’s economic health.”

Source: https://www.investopedia.com/terms/g/gdp.asp

The traditional equation for Gross Domestic Product (GDP) is GDP=C+I+G+(X-M). This means a nation’s GDP is a composite of consumption, investments, government spending, and trade balance. One fundamental problem is that pollution, garbage, and emissions are not captured in this equation. So a large GDP, which mostly over-consumption and leaves a trail of pollution, is better than a reasonable, sustainable GDP that does not over-pollute? We may want to change our economic goals to include pollution as a negative input to GDP, and include things as positives which help the environment. So a new measure (let’s call it an enlightened GDP or “EGDP”) is needed, where EGDP = C + I + G + (X-M)- P. And we need not consider P in an absolute way, but we can create a modern basket to adjust it, and we do this all the time with the basket of goods.

There are many worthy economic, innovation and environmental goals to consider and support. They would require lots of capital and lots of labor and investment to get it done. These would be ideal infrastructure projects with long-term positive impacts.

Take the Ocean for example, we have gigantic plastic islands of pollution floating all over the world.

Source: Getty Images

This tragedy is not a negative on anyone’s GDP. It sits in international waters, because of legal and economic loopholes that have allowed nations to treat the Oceans as a free garbage dump for decades. Garbage production should be considered a negative.

We also have mangroves, seagrasses and salt marshes all over the world that have a huge beneficial effect on the environment and tragically we value them at $0. We should give economic credit for protecting these important areas. We can preserve and clean up the planet to solve our immediate financial problem, and work on solving our larger problems today and in the future (such as Climate Change).

So the question is what is essential for the future and how should we approach this problem. In terms of how we approach this crisis we need to:

1. Invest quickly and wisely (short-term) in people and good businesses rather than propping up markets and all failing firms.
2. Invest in innovation, science and technology (long-term), especially to smaller innovative firms who need capital;
3. Finance the right opportunities for the future.
4. Make this world and global economy better and more sustainable after this crisis.

Source: Istockphoto, 2020

The Future of Global Economics

Over 99% of us will survive COVID-19. The kind of world we will live in depends upon how we allocate our resources and our ultimate economic goals. If we do the same thing as the GFC, we should expect that we will revisit another global collapse in the future from some other vector, and again we will not have addressed the causes of the crisis. Remember, many other looming catastrophic risks are waiting for us (Climate change, Artificial general intelligence, Biotechnology risk, Ecological collapse, etc.) when we recover from COVID-19.

A wise doctor taught me that “humans can be greedy, cruel and foolish… and they can also be kind, generous, and wise”. Why not tackle the global COVID-19 crisis by enduring its worst with caring, kindness and humanity? Why don’t we use this time to think deeply about economic incentives and make a collective plan to solve important common issues for the future?