Stay home. These words, often a welcome respite from the grind of daily life, have come to represent an unwelcome confinement to avoid the potential for infection and even death. COVID-19 has moved governments to extraordinary measures to impose a severe economic contraction to stave off a massive pandemic with the expectation that if the infection rate is not controlled then a depression would result. Compared to the banking and real-estate crisis of 2008-9, governments and central banks have responded more quickly and massively with fiscal and monetary measures to keep markets operating and provide support to businesses and individuals. While we all debate whether these measures will be enough, the answer is dependent on our collective ability to control the spread of the virus and reduce the length of our confinement and virtual suspension of economic activity. At this moment none of those questions can be answered with any certainty.
Looking forward, this crisis is likely to have some lasting effects on our personal lives, nations and economies. The following is a short and incomplete list of what we should expect.
National debts will increase massively, and weaker nations will not be able to meet their repayment obligations. The US dollar is the world’s reserve currency and the US government and Federal Reserve can literally print money to lessen the effect of the crisis at home. The Fed has announced that they will purchase $1 trillion of debt per day until the end of March to inject liquidity into the financial system. The federal government stimulus and relief package is likely to be worth $2 trillion when all measures are implemented. European banks, including the European Central Bank, have undertaken similar measures. However, the international flight to the US dollar has caused many developing nations’ currencies to collapse in value. Much of their international debt is denominated in US dollars and their economies will not be able to generate the revenues required to repay those loans. The international banking system should prepare for a third-world debt crisis to begin as soon as the COVID-19 crisis subsides.
Discretionary consumer spending will take years to return to pre-2020 levels. Consumer spending represents about two-thirds of the Canadian and US economies, and let’s face it, we love to visit the mall and just buy stuff. Being laid off and surviving off savings and government assistance focuses the mind beautifully on what spending is necessary for survival. If I was in the scented candle business, I would be nervous about sustainability, the same goes for the Royal Canadian Mint. How many collectible coins do you really need, anyway? There are many storefront retailers who will not survive, not because they did not provide the right product mix or excellent customer service but due to a lack of retained earnings to get through the closure period. Large malls will also face vacancies that will take a long time to fill, there were already too many of them across the US – more will close permanently. Montreal would be best to put off digging up the next section of St. Catherine Street for at least a year because if they kill the foot traffic in 2021 the city will discover that the street will reopen to an 80% vacancy rate.
People need to take more responsibility for their overall physical and financial health. I do not need to recite the rising rates of obesity and the associated health problems that develop or are amplified as a result. Many of the COVID-19 victims were elderly, which is not their fault, or had pre-existing medical conditions that weakened their overall state of health. We must all try to be more active and take better care of ourselves, because the medical system does not have the capacity to save us all. Experts want to “flatten the curve” so that the system can handle the COVID-19 pandemic, but there are also non-Coronavirus related medical needs that were already stressing the system. As for our finances, it is shocking that 10 years into one of the longest periods of economic expansion in the post-WWII era approximately half the population cannot afford to go a month without revenue. Yes, there is economic inequity, but there must be an increase in the personal savings rate for those who had steady income during good times and less of an expectation that government will be there to provide support during crises. John Maynard Keynes, the 20th century economist who first advocated massive government intervention in the economy to lessen the effect of a down economic cycle also advocated that governments need to run surpluses in good times. The same goes for personal finances at every income level. I am waiting to hear the first brave politician who makes this statement publicly.
The crisis is in early days yet. We will long for the good old days of complaining about construction, traffic congestion, China-US trade wars and expensive gas (Russia and Saudi Arabia took care of that). There is good news out of China demonstrating that isolation, quarantine and social distancing works, and Wuhan has reported no new cases for several days. There is a way out and there will be another side to this crisis. Churchill put it best during the Battle of Britain, “This is not the end, this is not even the beginning of the end, this is just perhaps the end of the beginning.”