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The Global Economic Doctor
Scott B. MacDonald, Ph.D.
April 6, 2020

The Global Economic Doctor

A New World Taking Shape in the Mist

A New World Taking Shape in the Mist

Summary:  It is difficult to escape coronavirus. Between the major cable networks running scoreboards numbering the infected and dead and the barrage of stories on social media, the virus dominates the news flow. The only other major story beyond coronavirus is the oil price war between Russia and Saudi Arabia, which is causing a considerable amount of discomfort in the U.S. and Canadian oil patches. The virus and the oil price war are a one-two punch to the global economy and are reshaping the world. As 2020 plays out, our approach to cross-border economic relations, travel, urban planning, healthcare and the structure of daily life is changing. The bottom line is that coronavirus is the black swan that most of us failed to see.

We would make the following observations about how our world is shaping up:

1. The coronavirus has accelerated the process of de-globalization.

The backlash against globalization had already started before U.S. President Donald Trump was elected, but his administration clearly helped bring back the idea of the strong border and economic nationalism. For all of the U.S. leader’s chest-beating about taking a tougher stance on trade, the Trump administration never intended to bring global trade to a halt. Coronavirus has taken us several steps beyond the outcome of the trade wars. Global trade has collapsed. At the same time, much of the world depends on trade to help economic growth, but it has to be more balanced. If nothing else the shortage of basic medical supplies, like face masks and plastic gloves, has painfully emphasized that being overwhelmingly dependent on one country for most supplies is not a good idea. Managing de-globalization is going to be a difficult task.

2. The world has become much more Darwinian in a very short period of time.  

This hits on two levels: (1) governments are now competing over access to essential medical supplies and other critical goods and (2) there is a shift toward rationing on the part of society. An area worth watching in advanced economies is who has access to companies like Amazon, Kroger and Walgreens and the services they offer and who doesn’t. These companies have increased hiring and are functioning as quartermasters for the U.S. economy. But you must be able to afford it. If you lack a credit card or your finances are stretched, you won’t be able to purchase key goods and have them delivered to your doorstep. You will have to take your chances at the local grocery store, where you are more exposed to contracting coronavirus.

3. The age of the consumer as we know it is over.

Since the 1970s the consumer has been king. For a long time, the world was constructed around consumers, pushed upwards on the economic food chains by the advance of larger and more luxurious shopping malls at the high end and big-box retail at the lower end. Globalization with Western accents expanded the consumer culture around the world with Tiffany, Chanel and Courvoisier replacing the rustic austereness of Mao and Gandhi. This system was based on a combination of just-in-time supply chains that were willing to sacrifice American and European workers, a heavy dependence on cross-border commerce and transport, and a belief in the ongoing upward social mobility of billions of people. Now, between trade wars and coronavirus, the world of retail, shopping malls and fashion fickleness is being eclipsed by the need for basic goods produced closer to home. Fashion is out and dependability is in. You can’t eat fashion, but locally grown and affordable food served up hot does a lot to keep the grim reaper from the door.

There is another important point to be made – the “new dependable” companies (some listed above) reflect the trend toward more activity taking place in digital form, a process made possible by the fusing of traditional businesses with online technologies. As the Financial Times’ John Thornhill (March 20, 2020) noted: “Why talk about fintech, healthtech, and edtech when all finance, healthcare and education companies will function on both levels?”  Coronavirus has only sped up the process and the melding of traditional and digital companies has been evident in dealing with the crisis. One reflection of this is that while Amazon, Kroger and Whole Foods are hiring workers, Macy’s, Kohl’s and Gap are furloughing theirs.

4. There is a blurring of the line between public and private sector economic activities.

Since the coronavirus commenced, there has been a flourishing of Public-Private Partnerships (PPPs). The White House has been active in invoking a wide range of emergency powers,such as shortening the testing time for new drugs and asking GM to make ventilators.  At the same time, companies from key sectors like big pharma, retail distribution and grocery, have stepped up. The longer the medical crisis is, the longer this trend is likely to continue. It also extends to how far the U.S. government  will go to bail out or bail-in (government takes partial ownership) corporate sectors. In the U.S. there remains considerable debate over whether Boeing should receive federal help. The same debate is going on over U.S. energy companies, which have been hurt badly by the plunge in oil prices to around $20 a barrel (they briefly slipped below $20 in late March). The bruising fall in oil prices has been more pronounced in landlocked oil production centerslike the U.S. Permian Basin and Alberta, Canada. A number of major U.S. oil names, such as Marathon Oil, Apache and Occidental have seen their stock prices savaged. Any bailout of U.S. companies, including airlines and energy, raises the question of moral hazard. This leaves the big question: if the government steps in, what are the conditions of a bailout or a bail-in?  What does this blurring of government and private sector activity foretell for the post-coronavirus economy?

5. The coronavirus is setting up the planet for a more intense and sharp-elbowed geopolitical landscape, with the Sino-American rivalry dominating, but with other contenders seeking their place in the new power game.

China is already spinning a new coronavirus narrative — the virus is a weapon allegedly deployed by the U.S. to hobble Chinese industry. Obscured in the new narrative is that the coronavirus broke out in Wuhan and that the Communist government’s suppression of initial discussion about the virus hindered a prompt response for the rest of the world.  Moreover, China’s claims to entirely have halted the coronavirus are considered suspect. China is now urging the citizens of Wuhan to go back to the shopping malls, restaurants and other entertainment venues. China has begun sending help to other countries, including Italy and the Netherlands (mind you many of its face masks sent there were faulty). //www.foxnews.com/world/wuhan-residents-say-coronavirus-figures-released-by-china-dont-add-up; //time.com/5811222/wuhan-coronavirus-death-toll/.

The main zone of this intensified rivalry is going to be Eurasia, with the major prize being Europe, an affluent, yet aging consumer market controlling a key geo-economic space that backs up to Eurasia and faces outward into the Atlantic and Africa. Here is where the destinies of the U.S., China, and Russia are going to be played out. The politics engaged will include everything from energy needs to manufactured goods, tourism and investment.  The Cold War suspended Europe’s geopolitical importance, but the New Cold War between the U.S. and China has brought it back. In the middle of all of this, Europe has to decide if it wants to be the battleground, much like Germany and the Holy Roman Empire were in the Thirty Years War or if it wants to make the hard decisions to make it into a global power in its own right – beyond its so-called soft power. Coronavirus is one of those once-in-a-century events to function as both as a black swan and a catalyst.

6. Domestic U.S. politics are likely to get more contentious.

Coronavirus has left the U.S. political scene greatly unsettled. Before coronavirus, the U.S. political system had become highly polarized, fragmented along a number of societal cleavages ranging from urban-rural, interior state-coastal state, racial, and economic. In many respects, there is an air of Germany’s ill-fated Weimar Republic (1919-1933) in which a number of forces are seeking to revive the idea of a strong nation and traditional values, colliding headlong with other societal forces that yearn for new freedoms of expression, ranging from political experimentation (the growing attraction of socialism) to sexual identity (encompassing everything from bathroom access to which pronouns are appropriate). One of the worst things that could happen is that the 2020 elections are postponed due to virus-related problems. Considering the sharp cleavages, such a development could send people into the streets.

The Trump administration and Congress agreed to a $2 trillion stimulus package, while the Federal Reserve has been active in providing liquidity.  It is likely that a second large package will be required, especially when considering the needs of the states in dealing with the crisis and the shutdown of local economic activity. The U.S. economy is heading into a deep contraction with high unemployment in the second quarter and will spend the rest of the year seeking to find the path back to growth and employment. The ranges of contraction are substantial, with the worst cases calling for a GDP decline of up to 35 percent for the April-June quarter. Social distancing and the closure of a wide range of retail outlets, malls, restaurants, and movie theaters is decidedly having an impact on an economy where the consumer accounts for 70 percent of economic activity.

Parting Thoughts

It was Mark Twain who is attributed with saying, “History doesn’t repeat itself but it often rhymes.” In a sense, our unsettled world, reflects the uncertainty of earlier periods of history such as the period leading up to Britain’s Glorious Revolution in the late 17th century, the outbreak of the French Revolution in the 1780s, and the turbulent 1930s that led to the bloodbath of World War II.

The global economy has turned a corner, shifting from a world of cross-border trade and investment, marked by a fulsome embrace of world culture to a major and unexpected black swan event that has pushed the global economy down a different path. Global economic recovery will come, but it will need a return to a more balanced form of globalization. For the U.S., major challenges loom as the recovery will probably take longer than expected. Nonetheless, 2020 will go down in history as a watershed time and it is up to us to meet the new challenges.

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