Sweden Sees Worst GDP Drop On Record

Sweden has had the worst drop in its GDP on record.  In the second quarter, it fell by 8.6% compared to the previous quarter, and by 8.2% compared to the same quarter last year.  That is slightly worse than the 7% drop that had been forecast.  However, it is only a fraction of the drop that occurred in other EU countries, and less than a quarter of the drop in the US, where GDP dropped by more than 34%!  

The difference is that Sweden did not lockdown as all these other countries did.  Its economy shrank, because like every other country it is affected by what happens in the global economy.  In particular, it is affected by what happens with its closest trading partners in the EU, and all those countries did severe damage to their economies by imposing lockdowns on social activity.

Because it never locked down, and because the drop in its GDP is much more slight than for other countries, Sweden will recover faster.  GDP is a measure of new labour undertaken, i.e. of new value created.  The 24%-34% drops in GDP seen in other parts of Europe, and the US, is simply a reflection that lockdowns resulted in around 24% - 34% of the labour that would normally have been undertaken, and new value created, not happening.  It shows that, even allowing for the fact that large amounts of labour were shown capable of being performed on line, by workers in their homes, the lockdown was, in large part, a bit of a sham.  It means that 65% - 75% of labour continued to be undertaken, showing that the lockdown was really a lockdown of social activity not of employment.

Still, preventing a quarter to a third of your workers from working by a government imposed lock-out is still a severe shock to economies.  It would have caused a much more drastic demand shock, on top of the severe supply shock, had governments not introduced support for workers being furloughed.  But, those schemes present a further problem.  Businesses pay wages from value created simultaneously by workers.  In other words, as Marx describes, quoting Thomas Hodgskin, workers produce their own wages.  As Hodgskin says, the bread that workers eat during the day, has been produced by other workers earlier that morning.  Workers produce their own wages both in terms of the value of those wages, i.e. the new value they create by their labour, but also physically in terms of the actual use values they consume, as wage goods.  In fact, Marx says, Hodgskin was absolutely correct that this is not only true just for wage goods, but for all the circulating capital, i.e. also the raw materials etc., which the workers produce with their contemporaneous labour.  As the capital turns over, the capitalist does not pay the workers wages, or buy this raw material with new capital advanced by them, but out of the money they obtain from the sale of the commodities that the workers themselves have already produced.

So, when a large number of workers are prevented from working and producing new value, whilst the previous product of their labour is consumed, because governments step in to provide the money wages, this has two consequences.  Firstly, it means that these money wages, now provided by the government, chase after commodities - goods and services - that have not been produced.  The money tokens handed out by the government do not represent real money, because money is the universal equivalent form of value, and no equivalent for this "value", represented by the money tokens, has been created.  So, these money tokens search after, and compete for, commodities that have not been produced, and in doing so, they push up the prices of those commodities, i.e. inflation.  Put another way, the printed money tokens do not constitute real money, and even putting the same quantity of them into circulation, when the amount of goods and services in circulation has been reduced, is the equivalent of devaluing all money tokens in circulation.

But, worse than that, global economies were already awash in liquidity, i.e. there was far too many of these money tokens in circulation, compared to what was required for the circulation of commodities.  But, that was deliberate, because central banks ensured that all this liquidity was directed into speculation in financial assets and property, causing the prices of those assets to hyperinflate.  At the same time government's facilitated that by introducing policies of fiscal austerity to slow down growth of the real economy, and so of capital accumulation, so as to keep interest rates suppressed, and keep asset prices inflated.

But, now, as a result of the lockdowns, governments have had to massively reverse those policies of austerity.  Now they are borrowing on an astronomical scale, and using the proceeds of that borrowing not to inflate the prices of bonds, and financial and property assets - though central banks have continued to be engaged in that activity on a vast scale, which is why bond prices have continued to rise - but to cover the costs of the furlough schemes, and so on.  When those furlough schemes end, firms will lay off millions of workers, and so governments will find they must then borrow on a large scale to cover the costs of unemployment and other welfare benefits.  On top of that, huge business that are strategic for economies are going bust, and states will have to intervene to bail them out, the cost running into trillions of Pounds/Dollars etc.

That means that interest rates will inevitably spike much higher as the effect of all this borrowing by governments, businesses and households unfolds over coming months, and as all of the liquidity pumped into circulation, causes those prices of wage goods and other commodities to also spike higher.  Those higher prices themselves mean that the money governments must borrow to pay for all the commodities they consume in hospitals, schools and so on will likewise increase, and this additional borrowing will push interest rates higher again.  Higher prices for wage goods, will push wages higher to cover for the inflation, and so the huge wage bills of the state, as well as for businesses will increase, meaning they too must borrow even more money to cover these costs, and that will push interest rates higher still.  Those higher interest rates means that asset bubbles will burst spectacularly, be it for bonds, shares, or property, and when they do, they will take the bubbles in other assets, such as Bitcoin, art, wine, vinyl records, classic cars, gold and so on, with them.

The one thing keeping those bubbles inflated - the thought that some bigger fool will buy them at a higher price tomorrow - the bigger fool actually being central banks, that undertook QE for that purpose - will no longer exist.  The speculators in these assets do not hold them to obtain revenues, because, in real terms, i.e. after inflation, pretty much every government bond in the world, with maturities up to 20 years, is providing a negative yield, i.e. the lenders are paying the borrowers to borrow from them!  This is the insanity of QE, and the idea behind the magic money tree (MMT) that has destroyed real economies in order to keep these asset prices inflated.

With no real return on these assets, and with their prices collapsing, turning capital gains into capital losses, the driver for money to be diverted into speculation rather than real capital accumulation will also disappear.  The owners of money-capital will be forced to look to use it as real money-capital for the accumulation of real productive-capital, to obtain profits.  When that happens, the real economy will expand rapidly, and that in itself will put upward pressure on wages, and on interest rates.

That is what awaits all those economies that imposed lockdowns, and that have borrowed to have workers refrain from undertaking labour, and creating new value.  Sweden, which imposed no lockdown, has not only suffered an economic slowdown a fraction of that of other countries, but it does not face anything like the kind of problem with long-term borrowing, therefore, to cover the cost of the furlough schemes arising from that lockdown.  Its debt will be much less than other countries, and the rates of interest it will face, whilst rising, as global interest rates rise, will be lower than for many of its debt ridden competitors.

Moreover, because lockdowns were never going to be, and have proved not to be an effective means of preventing deaths from COVID19 in the medium to longer-term, Sweden has not suffered a higher per capita mortality rate than other European countries.  Its rate is only slightly more than half that in Britain.  Sweden has essentially eliminated new deaths from COVID19, and because it has never locked down, it does not face any increase in deaths resulting from a relaxation of such lockdowns.  By contrast, Spain and other countries that imposed extensive lockdowns, are seeing a spike, as they relax them.  Indeed, the same is true for countries that early on introduced effective test and trace regimes, which in any case, can never be effective in large open societies such as Britain, and most of Europe.  With the coronavirus likely to be around for a very long time, any idea that lockdowns, test and trace, are going to be any more effective in the future is clearly a forlorn hope.   So, attempts to simply re-institute such regime will only result in even greater economic damage, for no effective benefit.  The only effective strategy, and only one economically feasible in the short-term, is to isolate the 20% of the population actually at risk from COVID19.