Covid 19, Spending, and the PM's Hair

Our Prime Minister has been talking about social distancing being necessary for months to come. He’s probably right. The objective is to keep people from getting what has been called the Chinese Flu*, but it seems to me that without getting it, we will be at risk for it until a vaccine is developed. And when is that?  Maybe early next year we are told. So even when we think we have the virus beat because social distancing is preventing new cases from developing, how long before it comes around again after we start getting close to people?  Realistically, we need to maintain the distance until a vaccine is developed and distributed.

That’s a long time. My hair, unlike the PM’s and Bill Morneau’s, is still growing, and I do not like the look that is developing. I could ask a household member to do something with it, but I have to decide for what look I am aiming --- Larry, Moe, or Curly? 

Hair aside, let’s consider the economy. If this lockdown is over in 3 or 4 months, a lot of businesses will have been hurt, but mainly they will still be intact and able to resume activities. Many of them would ramp up to make up for the lost production. Their essential energy would still be alive.  But let’s say it is several months, maybe 6 or 8 months before the doors can be thrown open. A lot of businesses would no longer be around, and many who still are would find that consumption habits have changed: people have found out they really can do without a lot of stuff and still be happy, or at least no unhappier than they were with the stuff. Now let’s say that we are locked down until the elusive vaccine is actuated. It’s hard to envision anything pretty about that economy.

The longer the disruption of the economy occurs, the more likely it is that supply chains will break. Many inventories are low by design (just-in-time inventory management), so the system is easily disrupted. We all depend on vendors for something, and they make it from stuff they got from other suppliers (or they resell). And those suppliers also depend on yet other components. Purchases have ancestors. You have two parents, four grandparents, eight great-grandparents, and so on until you go back enough generations and you have descended from a very wide portion of the population.  So, to give one example, Peru, Chile, and Argentina have all shut down their silver mines. That's 25% of the world's production. And in other silver producing nations, some of the mines will be closed. What will remain open are the mines that are very remote and not easily accessible so that the companies running them can control who gets in and out. There will be severe disruption in the supply of silver, a metal essential to many processes. That is just one mineral. Others will also be in short supply. Products made with and from the missing minerals are used in the production of still others, and so on.  It's very complex.

The government knows the problem is grave. Their answer? Throw money into the system. The trouble is that money is not wealth. Real property, goods, and services constitute wealth.  When people are not working they are not producing wealth, but they are consuming it. The overall wealth reduces. The new money, which is not wealth, is a claim on wealth, and we have more and more money laying claim to the ever-shrinking wealth. So prices are bid up, and we have price inflation to match the monetary inflation. That’s what a lot of people expect.

There is a problem with the foregoing view. Money is not a claim on wealth if it is sitting idle, and it does not bid prices up. The velocity of money --- the frequency with which money changes hands --- is every bit as important as the amount of money there is. We are in a time of fear, and I expect velocity to slow down in a big way as people decide against spending. I expect prices will fall and that we will be in a deflationary depression similar to North America in the 1930s. Cash will be king as people elect not to spend, choosing instead to keep their powder dry. Eventually, they will resume spending, as they gain confidence, and then cash will be trash as money velocity increases markedly. 

Governments traditionally have lowered interest rates to urge the economy along. That won’t work this time. Interest rates are practically at zero. That bullet was fired in response to the 2008 crisis, and rates did not climb appreciably after that. Now some are urging negative interest rates, the belief being that if it costs you to hang onto your money, you will spend it to buy something of lasting value. I doubt it. I think you’ll simply stash your cash somewhere in your home. No wonder governments seem bent on outlawing banknotes. With many businesses now not accepting cash, contrary to legal tender legislation it seems to me, governments may want to keep it that way after the crisis is over. With money being only electronic, negative interest rates could be forced on you, not to mention the surveillance of your activities and spending habits that could take place as a result of watching your cashflow.

We sure are in a mess.

* It looks to me as though the Corona 19 virus is descended from a bat virus that was altered in a laboratory in Wuhan. I understand that a portion of the gene sequence is not found in nature, and that Wuhan is where the Chinese have their biological weapons lab.