We had already warned in January about the potential devastating global impact of the coronavirus. On January 26 we tweeted on Twitter at @LBB_Research: “As the new coronavirus is contagious even in its incubation period, much more severe measures need to be implemented globally right now. But once again, global organizations and governments prove unwilling and/or incapable”. And in our blog ‘The dominos are starting to fall – Are your prepared?’ posted on January 27 we have pointed out, “how the inactivity, incompetence and misinformation of authorities has contributed to the fast proliferation of the disease and why this will have severe ramifications for the global economy.”
We are still convinced that the Wuhan virus poses a major threat to our health and prosperity. But we are equally concerned, that the actions taken by Western governments make matters even worse. At the beginning decisive action was required, but not taken. To compensate for their previous complacency, Western governments are now overreacting. Their measures are causing havoc to the economy, threaten a sustainable recovery in the future and put personal freedom at risk.
Governments were not prepared and are now overreacting
Doctors have been warning for years, that a highly contagious viral pandemic was imminent. However, politicians ignored such warnings as they had other priorities. When the current Wuhan virus struck, no Western country was really prepared. Nonetheless, a complete breakdown such as in Northern Italy and New York could have been averted, if politicians and health officials had invested enough time and efforts in January, to procure lacking medical equipment and secure enough hospital beds.
Face masks are an excellent example of how Western governments blew it. Despite insufficient stock levels, no real attempt was made to start large-scale procurement at the beginning of the year. Predictably, soon there was a severe lack of masks even among medical staff. The rest of the population was informed, that a mask provided insufficient protection and should therefore not be worn except by medical staff. This statement defied logic and was also incorrect. A normal mask will certainly not eliminate the infection risk, but it can reduce it and can also help to make an infection less severe. What is even more important, by wearing a mask one protects others. Collectivist societies in Asia, who focused on measures to protect the community from unintentional infections, relied heavily on the use of masks and were therefore able to contain the spread of the virus. Individualistic societies in the West, that emphasized the rights of the individual, were very slow to request the wearing of masks in public, and therefore suffered the consequences.
Authorities have claimed, that they could not procure enough masks, as most of the production was carried out in China. Apart from the fact that such dependence is unacceptable, face masks are no high-tech products. Basic masks can be produced at home and for the types required by hospitals, advanced industrial nations should be able to find a way to produce them. However, no attempts were made to unleash the creativity of individuals and businesses to start local production. Instead, procurement was usually carried out by government agencies, that are known for their inefficiency and lack of market knowledge. It therefore does not come as a surprise, that months after the outbreak started, masks are still unavailable in most shops and hard to buy on the internet.
Almost all Western governments initially downplayed the threat of the Wuhan virus. When infections and deaths mounted and started to overwhelm the healthcare system, politicians panicked and resorted to severe measures such as closing businesses and implementing curfews. The current lockdown of many Western countries is killing the economy. And once our economies are dying, so will our health care systems. If lockdowns continue much longer, we will certainly face severe shortages in food and basic necessities and eventually a breakdown in public order. This is not the way to go forward.
Are current measures justified in view of the threat? This question is not easy to answer as
most of the data provided is inconsistent or revised to align with political agendas. Medical research papers are still based on a limited set of data and often come to different or even contradictory conclusions. Nonetheless there seem to be three main issues, that make the coronavirus particularly dangerous. First, containment is more difficult, as many infected people show no or only minor symptoms. Such asymptomatic people might not be aware of their infection but can still infect others. Second, contrary to the flue, there is no vaccine or medicine available. Third, if the infection curve cannot be flattened by appropriate measures, the unexpected large number of people who require hospitalization or even ICU treatment, will overwhelm the healthcare system and cause many deaths that could otherwise have been avoided. This is what has happened in Wuhan, Italy, and Spain.
However, the threat should not be overstated. If the virus was as contagious as Measles and Chickenpox, or as deadly as Ebola, MERS or SARS, hundreds of millions would be infected by now and fatalities would be in the millions. Some countries in Asia such as South Korea, Taiwan, Vietnam and Hong Kong have shown, that the spread of the virus can be slowed down substantially. These countries have used intelligent containment measures, instead of just shutting down the whole economy.
Contrary to most Western nations, successful countries in Asia quickly implemented stringent contact tracking, mandatory use of face mask in shops and public transportation, and extensive temperature screening at the entrance of companies, shops, and public buildings. Some countries have also spearheaded innovative testing procedures, smartphone-based corona-applications and special protective measures for high-risk groups.
We are no virologists and don’t claim to have all the answers. But as some countries have been able to reduce infections without shutting down large parts of the economy, we are convinced, that there are smarter measures to deal with the crisis than those carried out by countries in the West. To be sure, people must accept some restrictions to their free movement. Large sports events will probably not be allowed in the near future and bars and clubs are also likely to stay close. But this is a mall price to pay, if it helps to save lives.
Economic measures reward bad behavior and hinder a sustainable recovery
LBB is an ardent proponent of free markets with as little government interference as possible, provided that the following safeguards are in place. First, adequate and fair competition and labor protection rules must be enacted and strictly enforced by impartial government agencies and courts. Second, there must be a public safety net for the poor and week in our society, who would otherwise not be able to survive a major downturn.
We also take the view that – due to human psychology – economic progress happens in cycles. A period of strong growth leads to a boom, where companies and individuals overinvest. This is followed by a downturn. Production, prices and profits plummet while unemployment rises. Some companies with high debt or unsound business models are forced to leave the market. Low prices and a change in sentiment eventually causes demand to rise and the recovery starts. This boom-bust cycle has occurred over and over again throughout human history. It is necessary to stop excesses, get rid of unsound companies and enable new entrants with superior productivity and business models to enter the market.
Over the past few decades, governments and central bankers have claimed to be able to suppress the business cycle and create perpetual growth through anticyclical fiscal and monetary policy. As the Great Financial Crisis (GFC) in 2007-09 proves, they have not succeeded. All they did was to interfere with free markets and undermine the price mechanism. Even before the coronavirus emerged, the world was drowning in debt amounting to 322% of GDP. Central banks had created bubbles in almost every asset class through reckless monetary experiments such as Quantitative Easing (QE) and Zero/Negative Interest Rate Policies (ZIRP/NIRP). The Wuhan virus did not cause the current recession, it was just the pin that popped the bubble.
To endorse free markets also means to accept business failure, otherwise profits are privatized and losses socialized. We should therefore use the current crisis to get rid of overindebted and ill-managed companies, reform our rotten financial system, strengthen anticompetition rules, eliminate unnecessary government regulations, reduce the bloated public sector, and create market friendly conditions for new businesses. This would certainly hurt badly for a year or two, but enable us to get our economies back on a sustainable growth path.
Unfortunately, we are doing the exact opposite. Lobbyists are pushing for governments and central banks to prop up the failing stock and bond markets and to provide cheap loans or direct bail-outs to large corporations. Medium and small businesses are equally asking for hand-outs and the rest of the population is also demanding financial support. Governments have therefore embarked on a spending spree, that will substantially increase public debt. Central banks are more than willing to support by creating trillions of new money ex nihilo. They have already begun with large-scale purchases of government bonds and are now even buying junk bonds issued by overindebted and poorly managed companies. Stocks are probably next on their shopping list. Due to excessive interference free capital markets are essentially dead. Asset prices have nothing to do with economic fundamentals, but only represent investor’s expectations regarding central bank buying. As one trader puts it: “We’ll just buy whatever central banks are buying”.
Many of the big corporations that are now scrambling for government support wouldn’t need it, if they had acted prudently in the past. However, they used the cheap credit available to buy back own shares, pay excessive dividends, purchase competitors at inflated prices, or invest in projects that were hardly profitable. Now they have high debt levels and can’t get through the current crisis without additional money. Would you borrow money to a friend, whose salary was just reduced by 25% and who is heavily indebted, because he lives in a big mansion, drives a Ferrari, dines only in 3-star restaurants and just lost a small fortune in a casino? Probably not. You would tell him to sell the mansion and the Ferrari, cook simple but healthy food at home, and never go to the casino again. So why should the government provide money to companies, that don’t deserve it and are likely to default anyway in the near future without radical restructuring?
In a genuine market economy, large companies with a good management and a sound business model should find a way to obtain new funding and get through the crisis. Others would have to default. According to existing regulations, bankruptcy does not necessarily mean, that a company stops doing business immediately and dismiss all of its staff. Most insolvent companies can continue to operate under creditor protection. Eventually shareholders and creditors will suffer heavy losses. But this must be acceptable in a ‘capitalist’ system. Employees will have to endure salary reductions and some might get laid off. For the latter, Western nations have well-developed unemployment schemes and welfare systems. Once restructuring is over, the company might emerge from insolvency proceedings stronger than ever before.
Small businesses are in a much weaker position than large companies, as they have no or only limited access to capital markets and also find it more difficult to obtain bank loans. Those who were languishing before the crisis should be shut down. Others should obtain state assistance in obtaining bridge loans from commercial banks. Governments should focus their attention on them. But despite many political statements to the contrary, support for small businesses is insufficient and, in some cases, not more than a marketing gimmick.
While inequality in Western nations has been rising for many years, ‘corona relief programs’ initiated by governments and central banks are about to unleash an unprecedented redistribution of wealth from the middle class to the (Super) Rich. In a first step central banks have created a true money tsunami to stop and reverse the rapid decline of security prices. They thereby bailed out the Top 10%, who in most countries own 80% – 90% of stocks and bonds. Now governments are catching up by providing billions in loans and subsidies to big corporations. To service their rapidly increasing debt, they have to slash welfare programs and increase taxes. Both will mostly affect the Bottom 90%, as the Rich usually don’t apply for welfare benefits and can avoid higher tax payments by various means.
Many companies have been forced to reduce or cancel production, due to supply chain issues, declining demand, or government shutdown orders. The amount of available goods for production and consumption is therefore certain to decline. On the other hand, central bank printing and increased government spending causes the amount of available money to soar. When a declining supply of goods meets an increasing supply of money, inflation is certain to surge. This will negatively affect the Bottom 90%, but hardly concern the Rich, who are protected by their hard assets.
Current stimulus packages are an excellent example of crony capitalism. They bail out the Rich, while further impoverishing the already declining Middle Class. They also postpone the inevitable collapse of the economy, which will become worse, the longer it is delayed. In the next blog we will propose some measures to deal with the current crisis, that are more in line with free market principles.
Personal freedom is at risk
Many Western countries have enacted lockdowns, that restrict the free movement of people and might even force them to stay at home. Such regulations deeply infringe on the private rights of individuals and are only acceptable, as long as they are reasonable and passed within a democratic framework, that’s to say subject to parliamentary and judiciary control.
Unfortunately, several governments have enacted state of emergencies, that hand almost unlimited power to the executive. This did not only happen in Third World countries, but also in the West. For instance, the government of Hungary, which is part of the European Union, just had a law passed, allowing Prime Minister Viktor Orban to sideline parliament and rule by decree indefinitely.
Apart from restricting free personal movement, prohibiting meetings of opposition parties and jailing political opponents, emergency powers are also used to curtail freedom of information. People who are accused of spreading ‘false information’ are put in jail, even if they acted on good faith or the information disseminated was correct. Looking at official statements since the outbreak of the virus it is obvious, that a major source of misinformation and ‘fake news’ are governments themselves, together with international organizations such as the WHO. On the other hand, the activities of some whistleblowers have helped to avoid the worst.
To deal with the Wuhan virus, emergency powers are not needed. A government that resorts to an emergency degree only shows, that it is incapable of dealing with the crisis or has other sinister intentions.
Apart from direct oppression there are also threats to personal freedom coming from the use of “Covid applications”, be they mandatory (as for instance in China) or voluntarily (as in most Western countries, at least so far). There are already plenty of such applications available. Some just give useful information on the virus and its spread, some show whether you have had close contact with an infected person, and some can even be used to allow you to enter a building, a train or an airplane.
We certainly welcome technological innovation, but we are concerned about privacy rights. Who collects and processes data collected by the applications? Are they anonymous or do they disclose details about a specific individual? Who ensures that the data collected is eventually deleted and not used for commercial purposes? And who takes responsibility, if you are denied boarding a bus, a train or an airplane because the data shown is incorrect?
The fact that Apple and Google just announced to be teaming up to develop compatible contact tracing applications doesn’t make us feel good. Do they do it just for altruistic purposes, to help the fight against corona? Or do they do it, because they see long-term business opportunities? We hope for the former, but would rather bet on the latter. We are just waiting for Facebook to disclose a similar initiative, to further the “development of mankind”.
It is clear that extraordinary government measures are necessary to fight the virus and that we must embrace new technologies to be successful. But we also need to ensure that personal freedom is not the final victim of the coronavirus.
Currently health concerns are dominating the news. But in the future, rapidly deteriorating economic news will dwarf other reporting. Stay safe and healthy, the worst is still to come.
Disclaimer: The above is for informational purposes only. It is not an offer or advice to buy or sell any products or services. LBB and its owner do not provide investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.
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