Economic implications of a SARS/Coronavirus outbreak

[jbocker]

Hey can we get this back on track. We all don't mind a chip now and then, but there is little value in the bickering for a page or so. I am sure you both can contribute good arguments on subject without sledging.

 

[Smurf1976]

It's not my role to moderate this forum but I'll say it anyway - let's focus on the subject not throw stones at each other.

The subject is:

Economic implications of a SARS/Coronavirus outbreak

 

[over9k]

Well we're now at the point where voluntary human behaviour is having as much of an effect as government imposed lockdowns.

In places that controlled the virus, like au or nz, people are returning to face to face stuff because they feel safe to do so. In places like the united states however, even though the lockdowns have been lifted, things like shopping centre foot traffic are still waaaaay down because anything which can be done by distance, is being done by distance.

I could post up a bunch of graphs, data etc but they'd probably be a bit superfluous.

What I'm saying is that if the virus respreads throughout aus, even if all the lockdowns are not reimposed (which victoria shows us they obviously would be), people are not going to return to crowded venues etc even when they have the (legal) option to.

In other words, if the virus spreads through aus, government lockdowns now really won't make much difference to the australian markets because they will have already dropped/people will already be staying home. The U.S data over the past month or so of a reopened country with virus everywhere shows us that the public has FINALLY been spooked by this thing.

 

[Smurf1976]

What I'm saying is that if the virus respreads throughout aus, even if all the lockdowns are not reimposed (which victoria shows us they obviously would be), people are not going to return to crowded venues etc even when they have the (legal) option to.

An interesting point there would be possible differences in the types of activity and how they are affected?

As random examples and assuming they can be used legally:

Restaurants, cafes and other places serving food for consumption on the premises.

Nightclubs, pubs and other places where alcohol is the primary or only thing sold apart from the music or other entertainment.

Major ticketed events - sports, concerts etc.

Large informal outdoor gatherings - eg the Adelaide Christmas Pageant attracts an estimated crowd exceeding 300,000 to the Adelaide CBD on one day each year.

Long haul public transport - anything going interstate or overseas.

Urban public transport - within the same city.

Anything involving close contact - hairdressers, beauty salons, massages etc.

And so on. I'm thinking that considerable differences may exist between these things. Eg someone might not be willing to use suburban trains or buses given they could drive instead but they might decide to take the risk of attending a concert given it's either take the risk or miss out completely, there's no direct alternative (well, apart from watching it on a screen). Etc.

 

[over9k]

Agreed - but worth noting that it's quite difficult to, say, eat food or drink beer with a mask on. We also need to think back to the fundamentals of superior vs inferior goods too and wonder which of these things the public thinks it really can do without vs has no choice but to take the risk with.

I don't see why AU wouldn't see very very similiar patterns of behaviour to the U.S - if the virus was to spread here, all we'd need to do would be to think of australia as being a certain period of time behind the united states.

 

[qldfrog]

Agreed - but worth noting that it's quite difficult to, say, eat food or drink beer with a mask on. We also need to think back to the fundamentals of superior vs inferior goods too and wonder which of these things the public thinks it really can do without vs has no choice but to take the risk with.

I don't see why AU wouldn't see very very similiar patterns of behaviour to the U.S - if the virus was to spread here, all we'd need to do would be to think of australia as being a certain period of time behind the united states.

Usually 20y behind...
More seriously, it is just a question of when: either that respan in Victoria spreads everywhere or we will have to wait for the next one from an airline pilot delivery freight, an illegal immigrant landing in northern Australia, a torrent straight islander dealing with png.
The notion of staying in a bubble and being safe is ludicrous.so now, tomorrow or next winter, we will get it.let's be real and make sure we are ready for proper treatment and correct society reaction, and live with it...

 

[over9k]

Dunno. Huge bounce in the U.S overnight though so we'll see how the ASX does today.

What we do know with certainty is that there's now at least another 6 weeks before things even begin to return to normal again.

 

[Klogg]

Dunno. Huge bounce in the U.S overnight though so we'll see how the ASX does today.

What we do know with certainty is that there's now at least another 6 weeks before things even begin to return to normal again.

What people haven't discussed much is what happens when we hit 'normal'. We're seeing extraordinary stimulus and money printing across many countries. So I thought I'd park the 'this is the way to deal with it' and talk about the long-term results of these financial activities.

Right now we're seeing huge unemployment and government deficits. Assuming we get a vaccine or herd immunity, what will the result of this be?

I liken this to something like US spending during WW2. Massive deficits run by government to reach a goal - somewhat similar to now.
Have a read of this section about inflation in the American economy (from here - emphasis my own):

Between April 1942 and June 1946, the period of the most stringent federal controls on inflation, the annual rate of inflation was just 3.5 percent; the annual rate had been 10.3 percent in the six months before April 1942 and it soared to 28.0 percent in the six months after June 1946 (Rockoff, “Price and Wage Controls in Four Wartime Periods,” 382)

Given the massive levels of debt we're seeing worldwide, my own preference would be to go down this path, rather than the deflationary mess Japan are seeing. I'm not sure what the differentiating factors are that cause each scenario though.

If the inflationary environment took hold, you'd see everything go up in price, relative to government currencies. (Australia would have the same result, given the massive government spending, stimulus and tax cuts). As soon as a vaccine hit, total money and credit would increase, so people can afford a lot more.

As a result, my base case is massive asset price inflation over the next five years due to coronavirus.
The biggest risk to this scenario being inflation doesn't take hold - but I don't think we know exactly how to stop/start inflation TBH

Would love to hear other views, especially opposing ones.

 

[jbocker]

Usually 20y behind...
More seriously, it is just a question of when: either that respan in Victoria spreads everywhere or we will have to wait for the next one from an airline pilot delivery freight, an illegal immigrant landing in northern Australia, a torrent straight islander dealing with png.
The notion of staying in a bubble and being safe is ludicrous.so now, tomorrow or next winter, we will get it.let's be real and make sure we are ready for proper treatment and correct society reaction, and live with it...

Appreciate that there is a cost of being in a bubble, and while we are paying for it I sincerely hope we (and eventually the world) are learning massively from it. We are the only larger (western) nation (adding in NZ) that has developed the bubble, and it is susceptible and extremely fragile. We need to know how to keep its advantages minimise the costs of keeping those advantages and be a leading light. Victoria is exactly what we risk into the future, and we will learn how to get on top again. We cant throw in the towel yet.
Hold tough Vic, we are behind you and wish for success.

 

[IFocus]

Would love to hear other views, especially opposing ones.

Cannot see it being anything but ugly, problem is Governments / Central Banks are far more now prone to intervention on much larger scale applying unproven theory that really no one knows where is will end up.

Not the answer you are looking for

 

[over9k]

What people haven't discussed much is what happens when we hit 'normal'. We're seeing extraordinary stimulus and money printing across many countries. So I thought I'd park the 'this is the way to deal with it' and talk about the long-term results of these financial activities.

Right now we're seeing huge unemployment and government deficits. Assuming we get a vaccine or herd immunity, what will the result of this be?

I liken this to something like US spending during WW2. Massive deficits run by government to reach a goal - somewhat similar to now.
Have a read of this section about inflation in the American economy (from here - emphasis my own):

Between April 1942 and June 1946, the period of the most stringent federal controls on inflation, the annual rate of inflation was just 3.5 percent; the annual rate had been 10.3 percent in the six months before April 1942 and it soared to 28.0 percent in the six months after June 1946 (Rockoff, “Price and Wage Controls in Four Wartime Periods,” 382)

Given the massive levels of debt we're seeing worldwide, my own preference would be to go down this path, rather than the deflationary mess Japan are seeing. I'm not sure what the differentiating factors are that cause each scenario though.

If the inflationary environment took hold, you'd see everything go up in price, relative to government currencies. (Australia would have the same result, given the massive government spending, stimulus and tax cuts). As soon as a vaccine hit, total money and credit would increase, so people can afford a lot more.

As a result, my base case is massive asset price inflation over the next five years due to coronavirus.
The biggest risk to this scenario being inflation doesn't take hold - but I don't think we know exactly how to stop/start inflation TBH

Would love to hear other views, especially opposing ones.

Well the real problem is the debt burden. That's a chicken that is going to come home to roost eventually. Inflation would indeed ease the debt burden but the reserve bank will also pump interest rates in response to it, which would bone everything. It'd be a classic stagflation damned-if-you-do-damned-if-you-don't scenario. The question I guess would be what the central bank response would be and how much government policy will/will not relate to it.

People kind of forget that if your interest rate is below your inflation rate you effectively already have negative interest rates. It's kind of amazing how many people forget that when you hear the banging on about negative rates etc on the news.

The other massive elephant in the room that people forget about is capital flight. Very easy to trigger a metric shiteload of that if you get things wrong too.


Related to the thread: ASX has bounced this morning after the stellar run on wall st last night, even despite the vic lockdown. Though the vic lockdown was probably priced in the moment it was announced so the drop a couple of days ago was the actual market response to it, not today.

 

[jbocker]

Appreciate that there is a cost of being in a bubble, and while we are paying for it I sincerely hope we (and eventually the world) are learning massively from it. We are the only larger (western) nation (adding in NZ) that has developed the bubble, and it is susceptible and extremely fragile. We need to know how to keep its advantages minimise the costs of keeping those advantages and be a leading light. Victoria is exactly what we risk into the future, and we will learn how to get on top again. We cant throw in the towel yet.
Hold tough Vic, we are behind you and wish for success.

NSW next?
I note we have climbed back to 71 on the ladder (list of countries by total cases of COVID). Best was 72.

 

[Knobby22]

NSW next?
I note we have climbed back to 71 on the ladder (list of countries by total cases of COVID). Best was 72.

We were in the top 10 at the beginning!

 

[Klogg]

Cannot see it being anything but ugly, problem is Governments / Central Banks are far more now prone to intervention on much larger scale applying unproven theory that really no one knows where is will end up.

Not the answer you are looking for

In the short term, I agree - a complete mess

As for an unproven theory. Yes, to a degree. We've never printed on this scale before, with inflation so low. But if you look back at history, there's always been an event or series of events triggering inflation.
WW2 printing and removal of the gold standard as a few of those.

Well the real problem is the debt burden. That's a chicken that is going to come home to roost eventually. Inflation would indeed ease the debt burden but the reserve bank will also pump interest rates in response to it, which would bone everything. It'd be a classic stagflation damned-if-you-do-damned-if-you-don't scenario. The question I guess would be what the central bank response would be and how much government policy will/will not relate to it.

In response to the bolded section - I'm not so sure. Right now, their measure of inflation does not include asset prices. And those with most of the debt, also hold most of the assets (it's hard to have significant amounts of debt if it's not backed by an asset).
If you inflate asset prices, you solve the problem - and this doesn't show up in CPI



Appreciate the responses so far.

 

[over9k]

True but so much consumption is debt financed that I just don't see how we get a consumption bounce/stimulus without some kind of serious side effect. It's either borrow the cash or print it because there sure aren't any savings like a sovereign wealth fund or something waiting for a rainy day such as this one.

Sometimes you can reach a point where there are no good options.

 

[Smurf1976]

let's be real and make sure we are ready for proper treatment and correct society reaction, and live with it...

Trouble is, that's a multi-year strategy realistically and one that won't look overly different to what we're doing now in the medium term.

Slowly let the virus spread so that hospitals can keep up etc. Realistically that means subdued business activity for an extended period in order to implement such a strategy and therein lies the problem. Can business really cope with years of restricted patronage to make that work? We allow them to open but not to the point where too many people are in the restaurant or on the tour bus together. We have AFL games but only once every 3 weeks at any given location, we can play cricket but we cut it to a single day. etc.

For anything other than international tourism, the "bubble" would seem to offer a much faster return to normal if it can be achieved. A fully functioning domestic economy, minus international travel, versus a heavily subdued domestic economy for the next few years but we allow international arrivals.

Even for the parts of the country heavily reliant on tourism, well if Australians in the big cities can't travel overseas then no doubt many could be persuaded to take a trip to the NT or regional WA or Tasmania or wherever.

 

[basilio]

I think one of the most significant consequences of the ongoing COVID epidemic will be a collapse in large areas of consumer activity.
International holiday travel we know is off the radar. There goes many tourist destinations, airlines and associated industries.

Locally restaurants, cinemas, hotels, public sport in fact much of the community public activity is severly affected. These are all important employment bodies as well.

Our tertiary education institutions rely heavily on overseas students. On top of that those students also underpin rental properties and consumer spending in Australia. Maybe someone can find stats on these three industry sectors and see what impact a 65% drop has on our GDP.

So then we have to consider what impact these contractions will have on

• The housing market
• The retail sector
• Investments in commercial property as well as housing
• The banks that currently finance these industries

 

[basilio]

But I hasten to add that none of the above consequences will have any effect on the stock market.

I understand that always goes up.

 

[basilio]

Klogg has been looking for a response to the issue of overwhelming debt created by the government to sustain the economy in the last few months.

The fact is take away that input and the full impact of the consequences I outlined would be felt within a fortnight. That is why many people are nervous about the projected closure of Job Keeper in September and the ratcheting back of unemployment benefits at the same time. To a large extent this why many people are taking a close look at MMT (Modern Monetary theories) as a response to the situation we face.

 

[qldfrog]

Trouble is, that's a multi-year strategy realistically and one that won't look overly different to what we're doing now in the medium term.

Slowly let the virus spread so that hospitals can keep up etc. Realistically that means subdued business activity for an extended period in order to implement such a strategy and therein lies the problem. Can business really cope with years of restricted patronage to make that work? We allow them to open but not to the point where too many people are in the restaurant or on the tour bus together. We have AFL games but only once every 3 weeks at any given location, we can play cricket but we cut it to a single day. etc.

For anything other than international tourism, the "bubble" would seem to offer a much faster return to normal if it can be achieved. A fully functioning domestic economy, minus international travel, versus a heavily subdued domestic economy for the next few years but we allow international arrivals.

Even for the parts of the country heavily reliant on tourism, well if Australians in the big cities can't travel overseas then no doubt many could be persuaded to take a trip to the NT or regional WA or Tasmania or wherever.

Europe is restarted, i have nothing else to say.whereas we are just waiting to be hit again .
Economically this is black and white,.
Yes if there was a real chance of a vaccine or miracle treatment we could lick for a year and justify it by lives saved.
No vaccine, decent treatment available now, this is a lose lose game to adopt that policy.
Anyway.i have nothing more to add, anyone willing to can look at real casualty rates per infection and mortality rates based on various policies as fully known now.