Post Covid Prices and Revenues - Borrowing and Spending

Borrowing and Spending 

Having closed down employment, in a number of areas, the government was faced with the problem that thousands of businesses would not be able to pay the wages of their employees. They would be unlikely to borrow, even if they could, to pay those wages, so the government said that if they furloughed those workers, rather than sacking them, they would cover 80% of those wages. Eventually, the government also had to make similar arrangements for the millions of self-employed. In total, it already appears to have cost the government more than £22 billion. On top of that, the government is losing billions in lost taxes as workers are laid off, and businesses shut down. Estimates just for this cost, just for this year are around £337 billion, but the total cost will be way more than that. After 2008, the government spent £2 trillion bailing out the banks and financial system, but now its not just banks that require bail-outs, but whole swathes of the economy from airports and airlines, to car makers, and, in Britain, all of that is compounded by the additional costs of Brexit. It means that borrowing has already soared and is set to continue. In April alone, Britain borrowed £62.1 billion, which is as much as it borrowed in the whole of the previous year! Even if the lock down ends, and the cost of furloughing ends, the government will still face continued spending and reduced tax revenues due to rising unemployment and business failures. The Bank of England says it will be the worst economic slowdown in 300 years. Its not just that profits have disappeared for those businesses forced to close down, but that reduced economic activity, in general, has hit the sales of many other businesses, whilst their costs have risen, because of the measures that have been introduced in response to the virus. Again Brexit magnifies those problems even further, because of all the additional costs it brings, and the likelihood that it will result in businesses relocating to the EU, that trade will be reduced and so on. 

Some businesses, of course, have benefited. Netflix benefits from people stuck at home seeking entertainment to distract them as does Amazon, which also benefits from people doing other forms of online shopping for products used in other forms of home entertainment. Some DIY stores have done well in selling paint, as people stuck at home have taken the opportunity to decorate. In the US, sellers of marijuana report a big increase in sales. Fedex has done well in being able to ship this increased volume of online shopping. 

However, overall, businesses have seen their costs rise, and their sales decline, meaning that their profits have been hit. Businesses, individually, rely on their profits to provide them with the money capital required for expansion. They rely collectively on total profits for expansion, because the profits of companies that don't use them for their own expansion go into the banking system and capital markets so that other companies can borrow to finance their own expansion. Realised money profits are the major source of supply for additional money-capital. This is important, because the rate of interest is determined by the supply of and demand for money-capital so that if its supply is reduced, interest rates rise. 

At the same time that profits have been crushed, firms have had to borrow to pay bills. The fact that a car factory is not working does not mean it has no costs. It has costs in the form of property taxes, possibly rents, even some heating and lighting maybe necessary for security and so on. It also has to cover things like any contributions to employees pensions, and, in the US and elsewhere, payment into workers health insurance schemes. Ford, in the US, has drawn down $15 billion dollars from its credit lines with banks, and around $124 billion had been drawn down by other US companies by the end of March.  Many companies are looking at the need to issue bonds or additional shares, in order to raise finance. Its unlikely that any firms are going to be engaging in any share buybacks which is one way that share prices were boosted over the last thirty years.

The Moral Panic Effect

Demand, Supply and Prices of Production