Its hard to get a good handle of the economic disaster that has befallen the world since the Coronavirus struck. However, the numbers are coming in steadily now.
I’ve been asked about this tragedy and it is hard to say what could have made a difference. If you look at Brazil or Belarus which have taken an old school ‘hands off’ approach to the virus, or at the more consensual tack like Sweden or the standard draconian lock down of more of Europe, its hard to see that the economic impact would be much different because collectively the world has taken the decision to sacrifice their economies to protect their populations from the pandemic. No economy can be an island against a global economic depression. A country that was miraculously immune from the virus would still have its economy crushed by the knock-on effects of the rest of the globe putting their economies into a protective coma.
The only hope for the future is that once people have been set free, they will be able to work like crazy to patch up the Global network of commerce. It is hard to underestimate people’s creativity and ingenuity when it comes to responding to emergencies and this and perhaps more will be needed if system failure is to be avoided.
A country like Britain and even more so parts of Europe have complex and highly leveraged societies. Economically and socially they are like race cars. Their very nature is different from the less developed societies where the individual has far less safety net provided by their states. Huge proportions of GDP are devoured by the social systems of first world countries. It is fair to say, some countries consume all of private sector GDP in tax and spend and some then borrow on top of that to fund themselves.
So when a country like the UK has a 20% drop in GDP, it looks bad, but it is worse. In generalities, Public sector GDP won’t have dropped at all. That 20% fall is almost solely from the private sector. When a large chunk of GDP comes from the public sector (anywhere from 20-40%,) that means there is a multiplier effect that follows on from a private sector GDP drop, because the public sector GDP came from taxes from private sector GDP, so the pipeline of public spending money just got cut by a lot more than the 20% headline figure. So a 20% drop can mean as much greater drop of funding in countries where tax is 50%, some times more, of GDP.
The multiplier effect can be gauged by looking at the tax take of GDP by country. The UK’s is quite ‘reasonable’ at 34% tax to GDP, but France is close on 50% and you can be forgiven to judge that the French take all of private sector GDP in tax and spend it to conjure the other 50%, its not quite that but you see the chain of causality.
This is where systemic state failure becomes a worry. If countries economies do not spring back with lightning speed, budget deficits are going to be unsupportable.
If millions of people aren’t occupied by the distractions of employment and left agitated by an anger spewing media, a collapse in social spending could be catastrophic.
So we are right back with the obvious, even with a collapse in tax revenue the spending must continue.
So we are back at the Hyperinflation wiki.
“Hyperinflation is often associated with some stress to the government budget, such as wars or their aftermath, sociopolitical upheavals, a collapse in aggregate supply or one in export prices, or other crises that make it difficult for the government to collect tax revenue. A sharp decrease in real tax revenue coupled with a strong need to maintain government spending, together with an inability or unwillingness to borrow, can lead a country into hyperinflation.”
Europe simply can not exist for long as it is currently constructed with its vast streams of taxation strangled off and unless not only it, but also the rest of the world can reconnect and resurrect their economies at an incredible pace. If this does not happen, then the EU and globally, country after country, will be forced into restructuring. This restructuring will not be via austerity, that on such a huge scale will simply not be politically deliverable, it will only be possible by inflationary stimulus, It is after all, the oldest political-economic move in the playbook.
To avoid this destiny, the miracle has to start now and has to be material before the autumn is over. If that happens there will be pain but it will be survivable, if it doesn’t then it will be the end of an era and it will be a lucky and very old boomer that will see a resolution to a stability in the next epoch.