Will the “Virus Recession” be a Bad Memory in 2021?

Before the outbreak of the virus, all was well and fine in general as far as “the economy” goes: low unemployment, plenty of jobs, etc. Sure there were structural challenges for all countries, but we were not in crisis mode and global recession. Will this pass quickly? Will it all be “water under the bridge”?

The Economic Fundamentals

The fundamentals of “the economy” are that we produce stuff, called “goods and services” and we consume that “stuff” directly or indirectly in one way or another. For example, you may never take bridge X yourself, but the truck that brings the fruits you buy does, so you “consume” that bridge indirectly when you consume those fruits.

The stuff we consume is consumed by the population. The whole big “cake that we eat” is called “GDP”, or Gross Domestic Product, and it is literally everything you can think of that we consume (and produce): food, clothing, cars, bicycles, computers, phones, roads, planes, and everything else. Millions of goods and services. We consume lots of “stuff” that does not seem like consumption: when you use Waze or Google Streets to find your way to your destination, you are consuming lots of technology and knowledge.

Some stuff we import, which means others produce it for us. International trade can be seen as a production technology: I need 10 hours to produce 1 kg of coffee and you need only one hour, so it’s better you do the coffee and I use my time to produce other stuff that you might want from me, in exchange for your coffee. It is better for both of us!

The “cake that we eat” (GDP) is consumed by the population of “the economy”. Suppose we have a cake like this:

The cake is GDP. If we are, say, a total of 8 in the entire population, the average size of the cake is about like that slice that you see. This is “GDP per capita”, or roughly translated, “the average size of each piece of cake”… It is an imperfect measure of “GDP per capita”, also known as material standards of living.

As we know, the ACTUAL distribution of income and consumption is not that simple: maybe one of the 8 people consume half the cake and the 7 others consume the other half, which means “actual real cake size” of each person varies widely. There is “income inequality”… and wealth inequality also. This is normal: systems that want everyone to have the SAME size exactly regardless of what they do / produce all fail and create massive stagnation and, in fact, mass-poverty. As Winston Churchill once said about “socialism”:

“It’s inherent virtue is the equal sharing of misery” — Winston Churchill

So we have SOME inequality pretty much everywhere. Economic systems are extremely complex interconnected moving parts, all influenced by social, institutional, geographic, and many other factors.

The gist of “Economics for Dummies 101” would boil down to this:

  1. GDP per capita is important because even if it is very imperfect, it does give a general idea of the general material standard of living in a given economy. On average, all over the world, countries with higher GDP per capita have better material standards of living for the vast majority of their population than those with significantly lower ones.
  2. The main driver of GDP per capita is productivity, which itself is determined by investments of all kinds: public and private infrastructure, machines, research, innovation, and human capital, etc. These come from ‘investments” in all forms.
  3. Total GDP comes from 2 broad variables: i) the number of workers and 2) economic output per worker (aka “productivity”). The number of workers itself is influenced by demographics, immigration, and labor markets (high or low employment rates, etc.).

There are MANY MANY other things to say, caveats, nuances, and so on, but this is a short discussion about the long run impacts of the “virus recession” of 2020, not a full course on “the economy”…

Will these “economic fundamentals” change one year after the virus is over? That is a tough one! If it causes less immigration and trade, maybe a bit, yes: lower productivity and less workers than otherwise would have been. If it causes government budgets to skyrocket and cause cuts in education and infrastructure, maybe it will also: less physical and human capital in quantity and/or quality. If it causes further degradation of the social fabric, it could have long lasting impacts… these are up for speculation…

The Social Fundamentals

This is a very grey area that is complex and does have an impact on the more “hard-data” subject of the economic fundamentals. We came into this recession with high levels of division between “progressives” and “conservatives”. “Partyism” as we could call it. The fiscal impact of the shock will cause stress to public finances everywhere after 2021.

As long as interest rates remain low, we are OK, because high debt levels mean nothing if the debt service does not change much, and indeed this has been the case up to now, as I explain in “Is There a Government Debt Problem?”.

Due to unprecedented interventions and possible global supply disruptions being at least partially permanent, it could happen that inflation starts to rise after 2021, once things get back to normal… and that would cause rising interest rates… with the stratospheric government debt levels we will have after this virus recession is over, rising interest rates would make the tough choices resurface. In the face of a need to balance a government budget that has a long run structural sustainability problem and rising long run interest rates in the long run, you have 3 choices to fix the problem in a more fundamental way:

  1. Increase government income, which means increase taxes… to whom? This would require debating over the issues I discuss in “Taxing Corporations and the Rich.” Eternal debate and division…
  2. Decrease government spending, which means cutting somewhere… where? Eternal debate and division…
  3. Defaulting on debt, either directly or indirectly: directly means to just tell the bond holders you won’t pay them the full value of what you owe and indirect or implicit default is to cause inflation and a falling value of the currency to repay the nominal amounts as planned… but those amounts lose lots of their purchasing power! Mega defaults by major countries would be catastrophic to global markets and social order…

This all seems very much related to “economics”, but it becomes SOCIAL very quickly, because it makes the ideological divides stand out more. This is where you get eternal debates over taxing: how much, who, and how. It launches the debates about if income and wealth inequality are a problem at all, if inequality of opportunity is a problem, and the relation between inequality of opportunity and inequality of income/wealth inequality… lobbies and the “excessive policy influence” of lobby groups and social circles: industrials, pharmaceuticals, oil and energy, animal exploitation / agriculture, finance giants, tech giants, etc.

The social fundamentals will thus probably come to the surface due to tighter government budgets once all this is over, plus potential increasing divisions, racism, and geopolitics between the USA and China/Russia, the complexities and structural challenges of the Euro Area, and the rising tensions that already existed across Latin America, all of which will be exacerbated.

Conclusion

My 2 cents is that although the underlying “macro fundamentals” might not be hit all that much, social and political stability will be a challenge due to public finances, already-clear divisions and tensions made worse, and geopolitics.

Sure, we will have more “online work” and all that stuff, but to me that is not fundamental. That is obvious and quite trivial. What WILL be fundamental will be the fiscal impact and its consequences on societies going forward, and the next decade might be quite a challenge, as it was ALREADY shaping up to be a slow decade… Clap and share!

Me climbing in Wyoming!

Pascal Bedard

Sharing thoughts on economics, finance, business, trading, and life lessons. Founder of www.PascalBedard.com