27 May, 2020

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Deciphering The Corona Depression

By Kumar David

Prof. Kumar David

The ‘Corona Depression’ will be unlike the previous Long and Great Depressions: Deciphering the Corona Depression

The world is too much with us; late and soon,

Getting and spending, we lay waste our powers.

Little do we see in nature that is ours;

We have given our hearts away, a sordid boon!

William Wordsworth

A sordid boon indeed. Man has laid waste to the wilderness and pressed nature and her wild creatures ever closer to extinction. Outraged, nature has as if in anger but actually for reasons well understood by science, jumped species and clobbered us with corona.In all things we are out of tune. Sonia Shah puts it like this: 

“It could have been a pangolin or a bat. The race to finger the animal source is on. Speculation about which wild creature originally harboured the virus obscures a more fundamental truth, the accelerating pace of habitat loss. Hundreds of microbial pathogens have emerged into new territory where they’ve never been seen before – HIV, Ebola, Zika and a bevy of novel coronaviruses. The majority, more than two-thirds, originate in wildlife which are not infested with deadly pathogens poised to infect us; these microbes live harmlessly in animal bodies. Cutting down forests, expanding cities, towns and industrial activity creates pathways for animal microbes to adapt to the human body”.

The US now has 250,000 cases and 5300 deaths. China has fallen to fourth place behind USA, Italy and Spain and will soon be overtaken by Germany, Francs, Iran and the UK. Liberal-democracy can’t cope with this scale of problem. I don’t have knowledge of epidemiology and genetics to make expert comments but am warmed by the call to preserve the world’s wild and splendid places. Wordsworth’s cry of anguish resonates in an age which has discarded the spiritual. Success now means acquiring money; wisdom, nobility of ideals, discipline or, as paramount to Confucius, duty, matter anymore. Un-Buddhistic thanha is the compass that all inculcate in their children when they exhort the young to go forth and succeed. Money, property and accumulation is deemed normal and right. I am no ascetic, sackcloth and ashes do not suit me, but to deem financial success the primary barometer of morality is unrighteous.  

How capitalism transformed the world

Two grumpy chaps wrote something about how the world has changed. I am putting it in quotes though this is not verbatim. “Capitalism put an end to old idyllic relations, pitilessly tore asunder the ties that bound man to man and left no nexus but self-interest – cash payment. The heavenly ecstasies of religious fervour, chivalry and philistine sentimentalism were drowned in the icy water of egotistical calculation. Moral worth became exchange value. Exploitation, veiled by religion and illusion, was replaced by direct exploitation in the market. Every occupation hitherto honoured with reverent awe has been stripped of its halo; physician, lawyer, priest, poet and man of science are now paid labourers. The family stripped, of its sentimental veil, is a money relation”.

“Nevertheless capitalism has accomplished wonders surpassing Egyptian pyramids, Roman aqueducts, and Gothic cathedrals; it has conducted expeditions that put in the shade all former Exoduses. It constantly revolutionises production and society, advances technology, uninterruptedly disturbs society and creates everlasting uncertainty. All fixed, fast-frozen relations, with their train of venerable prejudices are swept away, all new ones become antiquated before they ossify. All that is solid melts into air, all that is holy is profaned, and man is at last compelled to face with sober senses his real conditions of life and his relations to his kind”.

Just a bit more: “Expanding markets chase the surface of the globe; nestle everywhere, settle everywhere, establish connexions everywhere. The world market gives a cosmopolitan character to every country. National industries are destroyed; dislodged by products consumed in every quarter of the globe. In place of the old wants new wants require the products of distant lands. Intercourse is in every direction cementing the universal inter-dependence of nations. And as in material, so in the spiritual, the intellectual creations of individual nations become common property. National one-sidedness is gone; from numerous national cultures arises a world culture”. 

This is the world that is facing its third great economic and moral depression now. The Long Depression was from 1873 to1896 and the better-known Great Depression lasted all of the 1930s. This time the imbecility of a finance-capital restructured world (imbecile in capitalist terms) and a horrendous pandemic, have come together to ensure that the world after the Corona Depression of the 2020s will be a world utterly transformed and stood on its head.

“None are safe till all are safe” (Ponnambalam Arunachalam: April 1917)

N.G. Wickremeratne (Tanky)

I have been in a free ranging dialogue with two others; others on the blog kept silent. One of the two was CEO and Chairman of one of Lanka’s biggest and best companies – N.G. Wickremeratne better known as Tanky. The other, HRS is a lowly academic like me who foresaw approaching recession/depression quite early; I the sole godforsaken Marxist in the triumvirate. The point is that there was consensus among people with diverse philosophical predilections.

I avoid a he-said-this, someone-said-that style and summarise the important points of consensus. Here goes: This crisis is bigger than anything that the capitalism has faced before. The previous biggest, the Great Depression, seems less severe because it hardly mattered in outposts like Lanka. Is the bubonic plague a better reference? But GD did wreak havoc in the US. And fascism in Europe, the forerunner of apocalyptic WW2. Still, this Corona Depression (my copyrighted term!)  could be quite earth shaking. A new world order with China at the helm may emerge. Get out your Edward Gibbon down from the bookshelf and dust off the cover.

Professor Harsha Sirisena (HRS)

We have a ‘globalised’-world (sic!) hence no one will escape. It’s not only a virus, an unstable global financial-economic system is also collapsing. The world is set to suffer devastating impacts in the months ahead, apart from health and death. Jobs are disappearing, except fortunately in food production, but even this requires processing, packaging and distribution which has been interrupted

In Lanka’s case imports and exports may be down over 50% at the time of writing. Garment factories have closed down, the tourism/travel/hotel sector has dried up, 3-wheeler buggers can no longer feed their families, daily paid labourers are up shit’s-creek. Say by magic corona disappears in a few weeks, then how much longer for the SL economy to recover in the context of a collapse of the US and European (and Indian?) economies. That’s frightening. 

The global economy was fretting about a 2-3% downturn, but it will be worse by an order of magnitude. Could the solution be to reform, or go further and reformat capitalism; slash returns to capital (finance-capital, real-estate, asset-price inflation and fixed capital)? Nope, I say too little too late, and worst of all the wrong remedy. A wag remarked: “This will be music to your Marxist ears”. Well how nice to be proved dead right! Some 100+ of my extended family and close friends live in America, UK, Australia and NZ. They face income reduction, savings evaporation, job losses in some cases and in a worst-case scenario, bankruptcy. Not nice if I become known among family and friends as Mr Marxist-Dead-Right!

Helicopter-money

Washington, the FED and European central banks, completely lost at sea can think on nothing but more of the same; flush the capitalist toilet with $2.4 trillion electronic money and keep real interest rates negative. But the US is 100% in debt and has a 5% budget deficit. Then, this helicopter-money is Modern Monetary Theory (MMT) in action.  Where is the catch?  It will blow-up at some point: money circulation without a corresponding supply of goods will lead to inflation and then the bond market will crash, i.e. no private buyers of US debt, only the Fed a la Zimbabwe. But before that something else will happen. The question becomes: a) Why work? b) Why compete? c) Why strive for efficiency and productivity? d) Why capitalism at all? The economy is in a Lotus Eater syndrome. This degeneration will precede galloping inflation if $2 trillion-like stimulus packages are habitual. A one-of $2 trillion package the US economy may be able to absorb with limited damage.

The global response of capitalist economies to the 2008 financial crisis showed what happens when central banks and governments flood the economy with liquidity, rather than allowing rotten firms and banks to fall, laying a New Deal type foundation for a sustainable recovery. A business sector hegemonized by finance-capital has mediated the siphoning out of profits from the economy through stock-buyback schemes to achieve asset-price inflation, rather than long-run growth by investing in new plant, R&D and employee skills upgrading. Boeing for example put only 4% of profits into investment and R&D while using 96% to buy-back stocks and pay top-management bonuses. The capitalist system is rotten to the core in relation to the aims of capitalism itself.

Note on Modern Monetary Theory (MMT)

MMT is not well known so this short note. It says any government can fearlessly issues its own fiat-money (money declared by a government to be legal tender). What’s the problem the theory says, it can print more any time. Governments cannot be made to default on debt denominated in their own currency. MMT argues that currency limits restrict finance needed to lubricate growth and calls upon governments to use the printing press to encourage investment, achieve full employment, pay for its own purchases and settle debts. Hence the current US plan to issue $2.4 trillion in helicopter-money, mainly to capitalist enterprises, falls into line with MMT. Advocates say inflation can be controlled by raising taxes and reducing the velocity of money. The problem of demand-pull inflation MMT types say can be controlled by taxation. Ha there’s the catch. If money pumped in by super-QE is removed by taxation the objectives of the exercise are aborted. The economy will not be lubricated, employment will not improve and consumers will remain stranded. On the other hand, if tax is not spiked up spiralling inflation is unavoidable. The devil or the deep blue sea? 

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Latest comments

  • 2
    0

    Every thing has to go through an uphill and down hill. In human history, out of all isms, only capitalism brought more prosperity for more people, and the rest brought more poverty and misery. That’s the only reason why China embraced capitalism for the economy, but kept communism to rule the nation, and it worked well for them. Now, fellow communists, Vietnam too on the same path, and well reaping the rewards of it.

  • 0
    0

    Dr. KD,

    Ben Bernanke was known as ‘helicopter Bernanke’ since he was a student of the Great Depression, researched it for his PhD thesis and as faculty at Princeton, and argued using all means of increasing money supply, even dropping money from the helicopter, would be the right response to a depression. He has been a Republican, a disciple of Milton Friedman, not someone who supported MMT. The current Fed Chair, Jerome Powell, is following the consensus from mainstream economists like Bernanke, not MMT.

    And Bernanke now says the current crisis is more like a severe hurricane, but won’t be anything as lasting as the great depression. I am skeptical; after all, as Fed Chair, just before the great recession hit, he denied there was a real estate bubble, even as the bubble was growing bigger and bigger and then exploding in his face.

    Whether it is religions or economic systems, it has all been founded on falsehoods and deceptions., especially in the West. But people never accept it or change their ways on their own. Only massive external shocks can bring about change. Whether the current crisis–the resulting depression–is sufficient enough of a shock to bring fundamental changes remains to be seen. If there is no such change, another external shock from climate change is waiting in the wings

  • 0
    0

    “The problem of demand-pull inflation MMT types say can be controlled by taxation. Ha there’s the catch. If money pumped in by super-QE is removed by taxation the objectives of the exercise are aborted “

    There is lot of problems in many part of the explanation Prof. Kumar is giving. One has to think of pressing the gas pedal on a vehicle. The vehicle starts to accelerate because it has more power than to just roll. Forget about friction. So once the car started to accelerate it will continue to accelerate without limit until end of the gas, with the new accelerator position is feeding. Result is “Inflation”. But there is something called governor make sure the car not speed further up once you take the leg. But the governor does not bring the car to stop, but try to maintain where you left. Without governor, to stop the acceleration you need to apply break. Let’s think the stimulated demand by public sector’s printed money projects is the accelerator pedal, and it is balanced by governor, taxation. Governor (Not cruise control) is expected to stabilize the speed at the desired level. Demand full inflation is the result of the gas pedal that changed the gas consumption level and put the engine at higher gas consumption & in acceleration mode. If the governor is perfectly calculated & constructed for the engine size, that would not decelerate or accelerate the car. If the tax calculation is good, economy will not overheat or go into slump immediately after pumping some money to activate the economy. Anyway Keynesians, technology that the government investment & the governor wheel Taxation are outdated now; because it doesn’t perfectly deliver the desired speed. So now computerized cruise control system has come. Obama did not use Keynes’ theories or Milton Friedman’s theories. Obama’s technique was based on Keynesian theories but differed, called “quantitative Easing”, which Prof. Kumar has dealt in his earlier essays (but messed up that too).

  • 1
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    This is not a time to think about budget deficits or the debt to GDP ratio or the position in your balance of payments account or worry about the current account deficit. Flood the markets with free cash, lower the interest rates to zero and inject the stimulus into the system.

    The current generation in school and the current youth will pay for the current economic stimulus with higher taxes over the next 30-40 years when all of us are happily resting six feet underground!!

    • 2
      0

      Right on, this current doddering generation of baby boomers are living longer because of improvements in health and nutrition, consuming more of the earth’s resources, and destroying nature and are more corrupt than any other generation in human history.

      This is Kumar Davids generation and many of those who pontificate on CT – making sure that their safety is secured. The Panicdemic has both a generational and class dynamic, as much as a geopolitical project.
      In Sri Lanka where FAKE Experts from WHO run the show with a military dictatorship looming, this is the Rajapaksa brothers, along with Ranil and Charndrika generation that are hanging on to power and crafting the narrative that has mortgaged the future . Check this link – can we trust WHO?
      https://www.globalresearch.ca/can-we-trust-who/5708576

      Majority of the corrupt politicians who make policy, locally and globally are over 70 and more vulnerable than youth to the Panic-demic and continue to protect themselves and their wealth and power by locking down the country while following the fake experts of the big Drug companies funded GMOA and WHO, while continuing to mortgage and debt trap the economy. There is no trade off between lives and livelihoods – both must be protected. Right now in India more people are dying of starvation due to lock downs than the Covid virus which does NOT spread easily in South Asia because of climate and the BCG vaccine immunity confirmed in countries that continue to use it.

    • 0
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      But Mr Nimal Perera doing what you recommend presupposes an agent of state power who is not the so-called capitalist system. If you try to do as you suggest under the known market economic system both profit and investment will crash; it is alien to normal profit and competition oriented capitalism. You will need a one party state or a government-controlled economic system which decides what to do. That would be the end of capitalism as we know it. I think the author’s idiom between “The devil or the deep blue sea?” is right.

  • 1
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    Don’t stress Dr Kumar.

    America may have debts up to even 150% of the GDP..
    And an extra 3 Trillion QE money.
    Still the Capitalists , Socialists and even the Communists all want a piece of the American Pie.
    Being a frequent flyer to the Apple Island I can understand why they all want it..

    GFC brought the Dow down to 7000 from a high of from 15.000 .
    In 10 years it came back with a vengeance to top 30,000 of which 10,000 in just the last two years.
    That was with the help of quarterly Quantitative Easing for nearly 7 years .
    And I am not sure how much they printed in that period.

    Although the Dow crashed big time after the China sent the Corona. it is still at the level where it was just two years ago.

    Once the Peak become a Plateau, and the Aussies send the Vaccines , NYC will be back in business.
    And there won’t be even a recession let alone a Depression .

    Also Americans will be planning to make some items by themselves after the Corona experience., without paying too much attention to that old Capitalist adage of cheaper is better for Capitalists..

    That is what I learned from two eminent economists Dr Ken Henry from Down Under and Dr Mervyn King from London, both of whom have real time hands on experience guiding their Nations through the GFC..

    • 0
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      You are right Sumane.

      Many time I wonder what the Wall Street numbers are reflecting; do they really reflecting the wealth of a nation or the whimsies of the crowd lives on credits? One day we all may understand the atomic physics, but it is hard to parse the Wall Street thoughts and comprehend.
      As long as the mass are ready to borrow and buy things for life, recession will be like the mist in front the Sun.

      • 1
        0

        You are the only one among the anti Rajapakasa Family here who seems to know a bit about Dow Jones..
        But I always look at the S&P 500 for the same reasons which you have mentioned.

        Mally this is the best time to get to the Elite Club in Wall Street in a small way at least to say we also are players there..
        If you have a few Bob there just keep adding to the Quality Stocks which tanked.

        I feel sorry for the pensioners who were in Growth and even Balance Funds .

        BTW,What do you reckon Mally ..
        Do these Experts here have a Wager in S&P or FTsee , or ASX or Kandian Stock Exchange with all thatmoney earned in the West during the last three Decades?.

  • 0
    0

    Dear Kumar,

    Thanks for the article.
    Here is another view from UBS Group AG

    COVID-19 could lead to the deepest but also shortest recessions on record – provided the lockdowns do not extend beyond Q2
    The GFC was a hit from Wall St to Main St, this is the reverse, it is a very large exogenous shock, not a balance sheet recession.
    2020 growth will be worse than 2009 growth BUT the recovery will be much quicker.
    Earnings path will drive Equities and the hit could be large S&P earnings decline of 40% to 45% if lockdowns extend beyond Q2.

    • 0
      1

      It is sure it is no longer Wall Street recession or simple financial instruments price fall. For more the long the factories are shut down to create shortage of good. Stocks have run out and factories are not turning the need in back. The JIT’s (Just in Time) disadvantage is no longer extra-large inventories kept at hand. In US the GM , Ford, 3M all facing wartime production act.

      Let us think that the factories and other economic activity centers are intact, so as soon as the governments relax the Social Isolation, economy may return. The problem here is when the bandits entered into the business, they broke the till and robbed the money the owner is going to face cash shortage to replenish his business. But when he find a lender and ready buy material, employees still at the hospital because when bandits were getting out of his place, they stabbed all employees.

      Employee health is going to be an issue for economy to return back normal. Medical field will have lost a good number, not just by Covid-19, but by tiredness of the profession, who would like to retire or quit.

  • 0
    1

    “The problem of demand-pull inflation MMT types say can be controlled by taxation. Ha there’s the catch. If money pumped in by super-QE is removed by taxation the objectives of the exercise are aborted “

    There is lot of problems in many part of the explanation Prof. Kumar is giving. One has to think of pressing the gas pedal on a vehicle. The vehicle starts to accelerate because it has more power than to just roll. Forget about friction. So once the car started to accelerate it will continue to accelerate without limit until end of the gas, with the new accelerator position is feeding. Result is “Inflation”. But there is something called governor make sure the car not speed further up once you take the leg. But the governor does not bring the car to stop, but try to maintain where you left. Without governor, to stop the acceleration you need to apply break. Let’s think the stimulated demand by public sector’s printed money projects is the accelerator pedal, and it is balanced by governor, taxation. Governor (Not cruise control) is expected to stabilize the speed at the desired level. Demand full inflation is the result of the gas pedal that changed the gas consumption level and put the engine at higher gas consumption & in acceleration mode. If the governor is perfectly calculated & constructed for the engine size, that would not decelerate or accelerate the car. If the tax calculation is good, economy will not overheat or go into slump immediately after pumping some money to activate the economy. Anyway Keynesians, technology that the government investment & the governor wheel Taxation are outdated now; because it doesn’t perfectly deliver the desired speed. So now computerized cruise control system has come. Obama did not use Keynes’ theories or Milton Friedman’s theories. Obama’s technique was based on Keynesian theories but differed, called “quantitative Easing”, which Prof. Kumar has dealt on his earlier essays (but messed up that too).

  • 0
    1

    Sad part further is now using the emergency and curfew, Royal Aanduwa passed a new law that anybody can send any money to Lankawe. Don’t blame Central Bank Ex Cabal for this pus tripping damaged brain idea. This precedent of this was conceived by Mangala, Ranil & Nagananda’s case arguments, to save Old Royals.
    Lankawe Rupeyal started to fall when Mangala introduced the Foreign Exchange Fraud Amnesty Act 2017. The main purpose of that Act was to allow Old Royals to transfer the $18B back country to make it black to white. Because of Lankawe was listed as one the safe haven to money launderers by FIFA. This is one of the reasons Rupee lost market as a legal tender of a UN accepted nation. In that circumstance, none of the money market investors would like to buy and keep Rupee for investment purpose. Otherwise, it would sound like somebody accepting Escobar’s own currency for international trading.

    Moda Cabal said in the press interview” Let us have the power we will manage the Exchange rate” . There is limit how much you can depends on foreign savings of the thieves and crooks to manage the country’s currency. This is mere expression of the inability of the country’s financial managers and the indebt expression of the weakness of the rupee. International money managers who are aided with calculus and other advanced statistical methods on computers are not going put any confidence in Rupee by this fraudulent act. This may help the burglars not he Wildlife Sanctuary SinhaLE, Lankawe
    This new fraud will kill the exchange rate completely. International countries are not going to wait and watch while Wildlife Sanctuary Sinhala Intellectual Species Buglers robs the money in their countries and bring it to Lankawe and escape all criminal and tax laws of their countries.

    (Posted somewhere else too. )

  • 1
    1

    You all talk very big about DEMOCRACY. Some how, democracy under the NEO LIBERAL CAPITALIST SYSTEM where every thing is run by FOR PROFIT systems. Today, news says 320,000 is infected, 8500 are dead and TRUMP says, if this NO OF DEATHS stops some where AT 100,000 THAT WOULD BE GREAT. What do you say about those 8500, Did their govt fail them very bad. What do you think about privatization of everything and contracting out everything to overseas companies. Sri Lanka wants to privatize everything (e.g. private hospitals or health sector) . Countries do not want to export things, If not sri Lanka may import infected food material.
    I listened, this year USA budget deficit may be FOUR TRILLION while economists already world economy lost four trillion.

  • 0
    0

    Today Lanka successfully hit 200 LKR per Dollar. Welcome to a Dollar (not Renminbi ) driven economy.

  • 1
    0

    So now you know Word’s Worth, Do you?

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