John McDonnell has come out to say that the economy cannot be allowed to suffer as a result of a lack of demand. He wants money to be thrown into circulation to workers, and to businesses. Others, like Paul Mason have made a similar demand for an Emergency Universal Basic Income, though, for many, this would simply be a prelude to its introduction permanently, in others words paying people not to produce, in the same way that, currently, some farm subsidies pay farmers not to produce food. Its all Utopian, and, thereby, dangerous and reactionary stuff. The problem being caused by the moral panic created around COVID19 is not any lack of monetary demand, quite the contrary, it is an artificially created lack of supply, caused by irrational demands that people stay home and self isolate. Any lack of demand comes not from a lack of actual monetary demand, but by an artificially created lack of physical demand for goods and services, as a result of the same calls for people to stay at home, and not go out. But, those calls, and the moral panic they are creating, by shutting down supply, will result in millions being laid-off, and thereby losing incomes, which will then result in a lack of monetary demand down the road.
There is no lack of monetary demand currently. Just look at the panic buying. Panic buying by definition indicates not a lack of demand, but a shortage of supply. Supermarket shelves are rapidly emptying. The official story on this is that its not a lack of supply that is causing it, but simply panic buying. But supermarkets have introduced limits on the number of items that customers can buy, so that should have diminished any such demand. Moreover, if there really is no problem with supply, then supermarkets could more easily prevent panic buying by ensuring that they, in turn, buy in more inventory, on a more frequent basis, so as to ensure that their shelves are overflowing, and so convince customers that they do not have to stock up now before supplies run out. They have not done so, which suggests that actual supply chains themselves are actually breaking down, as workers follow government advice and stay away from work, so that production of a range of goods and services inevitably stops.
In addition, supermarkets and others stores are already responding to increased demand by raising prices, but, as I wrote the other day, that inflation of prices is nothing yet compared to what is coming down the line as falling supply confronts rising levels of monetary demand, as vast amounts of money tokens are pumped into circulation. A more accurate picture of the way that supply is being constrained and supply chains are breaking down is given by the reports from market traders, who say that wholesalers are now running short of supply. Today we heard that Jaguar Land Rover is closing down production. It comes on top of other car producers stopping production. That might not seem a problem in terms of supply chains, but when its considered that these vehicle producers also produce vans and other commercial vehicles, vehicles which wear out and have to be replaced, for the economy as a whole, on a daily basis, then even here it can be seen that, in an integrated, and interdependent economy, based on a comprehensive social division of labour, even the stoppage of production in one area, has ramifications for the rest of supply. As the saying goes, “For the want of a nail, a shoe was lost, for the want of a shoe, a horse was lost, for the want of a horse, a battle was lost, and for the loss of a battle, a kingdom was lost.”
But, similar closures, in other industries, can be expected as again workers take the government's advice and stay at home. Next week, that will increase dramatically as parents stay at home to look after children now prevented from going to school. That in itself poses problems for those of us who actually do need to self isolate. Not only does this contraction of supply mean that its harder and harder to obtain supplies to replenish the hoards built up to survive any period of self isolation, but it also means that where its currently possible to go out to walk the dog, or take exercise, without coming into contact with people, when large numbers of children are off school, playing in the street, or out and about with their parents, it will be much more difficult to avoid physical contact, outside the prescribed 2 metres.
Supply is being rapidly shut down as a result of workers taking government advice and staying away from work. Increasing pressure is being applied to them to force them to do so, and as the number of workers going to work falls below minimum levels, firms will inevitably be forced to shut down rather than continue to operate vast amount of expensive fixed capital at below minimum efficient levels. They may keep workers on their books while they do that, but its unlikely, given the time period the government is talking about, that they will pay them whilst they do so. If they did, it would mean taking on borrowing to a huge amount. Already, Ford and other large companies in the US have drawn down on their credit lines with the banks. That is causing the liquidity in banks itself to be drained. As the banks then try to get liquidity in the overnight lending markets, those overnight lending rates, such as LIBOR have again spiked, as they did in 2007 and 2008, presaging the onset of a credit crunch, and the global financial crisis. Already, we see the same kind of dash for cash, and liquidation of any and all liquid assets to get hold of cash that I warned about in 2008, as meaning that the financial meltdown was at hand.
Firms, of course, can avoid that borrowing themselves, if the government agrees to bankroll them, which is essentially what the governments around the globe are proposing to do, and what Labour and other opposition parties are calling on governments to do. But that changes nothing, it only changes who is borrowing the money, and who will hold responsibility for this vast unsustainable amount of debt, when its all over. As with the £2 trillion pounds that was borrowed and flushed into the economy to bail-out the banks in Britain, in 2008/9, it will be the government. The difference is that to bail out the whole economy, in the same way, will cost at least £20 trillion, and the consequences of that will make the austerity that followed 2010 look like wild extravagance.
The problems facing firms are not any lack of monetary demand. The panic buying in supermarkets certainly does not indicate lack of monetary demand. The lack of demand, in certain areas, is wholly a consequence of people responding to the moral panic over COVID19, and the consequent calls to self isolate by physically staying away from stores selling non-essential items. In fact, it will be a boon to online retailers, as Adobe Analytics shows is already happening in the US. It was also reported the other day in the US that workers following government advice, or simply responding to the growing moral panic by staying home from work has also seen a surge in demand for marijuana.
But, simply handing out cash to people whose reason for not spending is not shortage of cash, but an unwillingness to actually physically go out and shop, so as to avoid social contact, and abide by the government advice on social distancing, is not likely to make them do so! It may encourage them to panic buy dope, or other items online, but is unlikely to be of benefit to bricks and mortar retailers. What it will do, as supply continues to fail, as workers stay home, is simply to push up prices, as excess liquidity chases inadequate physical supply. Sellers, seeing supply chains closing down will try to make hay by maximising short term profits by ramping up prices to as high as they can, which will disproportionately hit the poor. Again this is a taster of what life would be like under a crash out Brexit.
But, as firms close down, and begin to lay off workers, this artificially induced reduction in supply will then cause a reduction in revenues. Workers will lose wages, businesses will lose profits, money-lending capitalists/shareholders will lose interest, landlords will lose rents, the government will lose tax. By definition, consumption is funded from revenues, and if those revenues fall sharply, then consumption will fall sharply. Trying to make up for that fall in revenues by simply printing more money tokens is a fool's errand of the kind that only people having suffered all of the money delusion of the last 30 years could propose. You can hand out million Pound notes to everyone for all it matters; if no one is producing anything to be bought by all of that paper, its true nature as being worthless will be quickly manifest. In fact the toilet paper being panic bought and hoarded would be more valuable, as it would at least still be capable of performing the purpose for which it was created.
The answer to this crisis is not printing more money tokens and turning them into expensive confetti, or then using that worthless paper to hand out to everyone so that they continue buying goods and services whose supply is being deliberately curtailed. The answer is to put an end to the moral panic that has been generated over COVID19, and which is taking on all of the characteristics of previous moral panics such as the Salem Witch Trials. The answer is to tell the population at large that 80% of them are in no danger of serious consequences from COVID19, and so it is safe for them to go about their lives as normal, working and consuming. In that way, supply will be restored, the basis of panic buying will be removed, workers will continue to be employed, and to earn wages, firms will make profits, interest and rent will be paid, and tax will be collected.
Of course, those that have created this moral panic will try to continue to scare monger as they did in telling people not to have their kids vaccinated for MMR. They will point to the isolated examples of individuals who do not appear to be amongst the 20% of the population identified as being at risk, and yet who appear to have had more serious symptoms from having contracted the virus. But, that is idiotic. Firstly, no one knows the full medical history of any of these isolated individuals who appear to have had serious consequences from contracting COVID19. Did they have underlying conditions that simply had not been identified previously, for example, had they been ill recently with the flu or some other condition that had weakened their immune system, had they been taking drugs or other chemicals that might have made them susceptible. But, even if none of these things applied, and whilst it is obviously serious for the individual concerned, in terms of formulating public policy, it is irrelevant.
According to Sir Patrick Vallance the real number of people actually infected with COVID19, in Britain, is around 100,000 – since he made that statement the number has probably risen to at least 150,000 given the infection rate. But, only around 3,000 people had been ill enough, from having done so, as to need hospital treatment. That leaves 97,000 people who were infected, but who had no serious consequences from it. However, we would want to err on the side of caution, and say, as the governments advisors do, that around 20% of the population might suffer such consequences. That leaves 80% who would not. If, however, someone in this 80% does have serious consequences does that nullify the scientific assessment? Of course not. Even physical science is not absolutely precise, and works on the basis of probabilities. If there are 100,000 people infected, and out of the 80,000, thereby, predicted to have no serious consequences, 1 actually does, that means that 79,999 did not. It would be idiotic to base public policy on a probability of 1 in 80,000! Just as the fact that someone in the 20% might conceivably contract the virus, but have no serious consequences, would not be a reason to base public policy on that one individual, rather than the 19,999 others who are likely to have serious consequences. It would be like saying because someone wins the Euromillions jackpot, I am going to base my life on the probability it will be me!
The rational response to COVID19 is to isolate the 20% who are at risk, and to do everything possible to enable them to do that effectively. Part of being able to achieve that is to ensure that the moral panic is ended, and that the other 80% are assured that they are not at serious risk, that they can, and should, continue to go about their business as usual, thereby continuing to produce all of the goods and services upon which the whole of society depends, and also thereby continuing to produce the revenues that the whole of society requires, in order to be able to continue to consume those commodities. Otherwise society is headed for disaster, not one caused by COVID19, but by a total economic and social breakdown. If electricity supply workers stay home, or refuse collectors, or sewage workers, that will become apparent in very short order.
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