COVID AND THE GLOBAL ECONOMY
COVID-19, the global economy, and the need for innovative thinking
In the near future — while we will be recovering from the operational breakdown of COVID-19 — several discussions will be happening on a variety of topics including the wealth gap, the role of globalization, and the need to reform capitalism. There are plenty of uncertainties ahead, societal structures will be changing, and we’ll be adapting to new norms. With such headwinds ahead, innovation and innovative thinking will become key to thriving and winning in the global economy.
What is the situation?
COVID-19 has hit the economy like a tsunami and now we need to look at the wreckage and estimate its potential costs by looking at income and balance sheets. We know COVID-19 has been a tremendous income hit and a great population of the world has been tapping into their savings to subsidize social distancing, especially in the developing markets. With the appearance of these holes and gaps in income and balance sheets, we are now pumping money and credit into the economy. Today, with COVID-19, we are living in similar economic circumstances as in the 1930s and 1940s with monetary expansion policies, interest rates close to zero, governments borrowing large amounts of debt, and central banks pushing money to constituents in some remarkably large and imperfect manner.
However, with such expansive policies, we will be left with a great amount of debt. But ‘how’ will we deal with the bill? ‘Who’ will pay for this debt? ‘Which’ segments and sectors of the society will pay ‘what’ shares? ‘Who’ will stand to benefit and who will lose? ‘How’ will the winning and losing sides collaborate? ‘How’ will wealth be distributed now and from here on?
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The importance of large scale collaboration
Undoubtedly, we are living in important and defining times in terms of how we will collaborate with and behave towards one other. Will we come together, become more communal with commonly shared goals and incentives, or will we become ever more individualistic?
Over history, our economies have been shaped by four driving factors:
- Productivity — which is generated from people learning, inventing, and improving economic processes, gradually raising living standards. Productivity grows slowly at 2–3% and lacks volatility because knowledge acquisition is involatile
- Short-term debt cycles — are the recessions, expansions, depression, and booms that last about eight to ten years
- Long term debt cycle — occurs about once every 50 to 75 years whereby nations begin a new type of money and credit system. The last time we started one was in 1945 at the end of World War II with the Bretton Woods monetary system. The new world order that was established in 1945 wiped out pretty much the old money and began anew with America dictating the world financial transactions with 70% of it happening in the US dollar format.
- Politics — is largely about how societies deal with each other with internal and external policies. Internal politics is how we deal with the wealth gap and build common values and missions. The major question with internal politics is whether societies can converge and build commons or will they fight over wealth, leading to revolutions across history. Revolutions are sometimes peaceful and sometimes disruptive that lead to wealth shift such as the rise of Hitler due to power gaps in the society. External politics are the policies between countries and today we are living in a situation where there is a rising power challenging the existing one. In such a situation, there is competition with the risk of war, and the question is, will these powers work together for the greater good or will their tensions destroy common global value?
The COVID-19 is a global stress test that usually comes once every 75 years and when it happens, it will test how we deal with each other on a micro and macro level. There is enough wealth to go around but the question remains as to what will happen to those who are outside the ring of resource support?
Heading towards a global depression?
What we are witnessing today is very similar to what we have observed in the US between the years 1929 to 1932 — there was a steep fall in the economy with double-digit unemployment. The remedies back then were very similar to what we are employing today — printing a lot of money, the same wealth distribution programs, and zero interest rates. Looking back at the great depression, from that point on, it took the stock market a long time to recover. We’ve seen these events happen repeatedly in history and the COVID-19 is just the recent one. The only difference is that the current depression has been created by a halt or breakdown in operations. In this depression, we will likely suffer trillions of dollars of losses with our healthcare ecosystems suffering the most.
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The future ahead
Historically, there will be four tools at our disposal to recover from this ‘depression’ or breakdown of operations:
- Austerity measures, or cutting spending
- Debt restructuring, or forgiveness of debt
- Redistribution of wealth, through taxes
- Printing of money
Today, the printing of money and redistribution of wealth has started and will probably last for a couple of years until the discovery of the COVID-19 vaccine and recovery of the national GDPs. Then, we will need to reconfigure and rebuild economies through creativity, human inventiveness, and adaptability that will aim to prepare societies for such possible breakdowns in the future. Historically, our economies have broken down on many occasions but we have always managed to recover and grow via our ability to adapt and reinvent ourselves — and this will be the case with COVID-19. However, the speed of this recovery will depend largely on whether we can cooperate well together.
When this period passes, it is expected that the world will be different from what we have gotten used to. Our supply lines will become more self-sufficient. There could possibly be a new and restructured world order. The new environment will be a more healthy one in many ways because we will have passed a common stress test that has threatened the wellbeing of all of our species.
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The pressure on the global financial industry
What we are witnessing today is more complex than what happened in 2008. In 2008 we had banks with too much leverage, going bankrupt in accounting terms, and so governments were systemically bailing out important entities by printing money and making credit. The issue with COVID-19 is more complex because there are banks and then there are all of those other small and medium-sized businesses all around the world. Additionally, we have a less effective monetary policy because interest rates have declined to their limits, central banks will need to buy government debts, and governments need to be effective in getting buying and production power to those who need it. Therefore, there will be huge pressures on the central banks in the years to come.
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Innovation — the key to thriving in uncertain times
In addition to the necessary items that we are always going to need, innovative entrepreneurs and companies stand to win in the coming years. Companies that can adapt well and innovate and those that don’t have balance sheet problems will probably turn out as winners. Additionally, innovative entrepreneurs with new and creative inventions that help people adapt to the new market environments also stand to win.
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The fate of globalization — ?!
Unfortunately, and despite all of its advantages, COVID-19 is not the best of news for the idealistic proponents of globalization. If we retreat from globalizationd due to the COVID-19, there will be some hard times ahead. One of the questions that will rise in the near future is that which countries will help others, especially those outside of their national interest domains, how and by how much, probably turning into heated internal political debates. In action, a majority of nations and those in need will most likely not be helped, in turn asking and undermining the viability and role of globalization.
In such turbulent times, some countries vulnerabilities could even turn into others’ opportunities, potentially leading to destructive rivalries and even wars. We are living in an interconnected fragmented world whereby nations will start asking ‘can I depend on someone else to give me something I need or can I depend on them to not take advantage of me’ and when the answer is negative, then eventual decisions and behaviors will be hard to predict.
Additionally, deglobalization had already begun with the election of Donald Trump in the US and the empowerment of nationalist leaders in countries such as Brazil and Italy, and with the struggles in the relationships between China and the US, COVID-19 might further divide nations rather than bring them together.
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Capitalism and the wealth gap
While in the 1940s and 1950s the American dream was built on a society of equal opportunity, a society in harmony and ‘going through it together’ — but today, the top 40% spend five times — on average — as much money on their children’s education than those are in the bottom 60%, which is a self-perpetuating phenomenon as those with better education tend to become better-off and spend more on their children’s education.
Capitalism has shown that it can increase the size of the pie, and now it needs to start to divide the pie well. COVID-19 will probably force nations to talk about how to do this effectively, enforcing needed reforms that create productivity for all. This productivity does not mean giving away free money to those who need it but will insist on providing opportunities for all to increase psychological and physical productivity levels. This will potentially lead to societal and governmental restructurings.
The question here will be the state of internal politics in nations — whether these discussion will be in a civil and bipartisan manner or destructive to the economy? For example, one area that will probably be highly discussed about is education. Education is a great investment because the more educated people we have the more people will have the chance to compete with one another and raise productivity levels. But our current political systems generally view education as a budget item or an expense rather an investment.
Moreover, COVID-19 showed capitalism that at desperate times, the real heroes are those healthcare workers who put themselves in line of danger to save the lives of those affected by the virus and to contain its spread, no matter how rich or poor they may be. Therefore the importance of investing into medical and pharmaceutical industries and healthcare education and infrastructure were highly emboldened with the COVID-19, further stimulating debates over the changes that capitalism — as we know it today — will need to embark upon.
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In the short to mid-term future — i.e. the next 2 to 3 years — while we will be recovering from the operational breakdown of COVID-19 and its global economic impact, several discussions will be happening in nations, regions, and global fronts over a variety of topics including the wealth gap, the role of globalization, and the need to reform capitalism. There are uncertainties ahead, however, what we can say for sure, is that our societal structures will not look the same in years to come — we need to adapt to the new norms. With such headwinds, innovation and innovative thinking will become key to thriving and winning in the global economy.