Coronavirus: the battle economists (and all of us) also fight

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Since I read the US Government discusses giving US$ 1,000 to every adult after Rep. Mitt Romney’s initiative (with eventual variants, like restricting the benefit to persons with annual incomes below US$ 75,000) , many thoughts about the ways in which the economy should be adjusted to the impact of global mobility restrictions came to my mind. These are only debatable and refutable ideas, but that’s just how things start.

Something unusual happens in this battle: banks, one of the most powerful over the field, are on the frontline, as cannon fodder. Grace periods will become fundamental to maintain the payment chain. There are crisis recovery models to recycle and, of course, enhance and amplify (there is no precedent of a global impact on this magnitude: the 2008-2009 crisis didn’t have the power to physically paralyze the real sector, so things could keep going if liquidity and demand were there). But mainly, there has never been such a predictive capacity based on computational power to plan the trajectory based on dynamic equilibriums, either at micro and macroeconomic levels (with the caveat of their limittions for establishing a flawless and fully comprehensive method, but still considered the best way of tracing paths to act as professionally as possible on the basis of empiric evidence and the most accurate simulations available), and on sensibilities modeled on the basis of decades of financial records. Also, things can be communicated in real time and the impact of this can be measured almost with the same speed, something that bolsters the application of any strategy and reminds the importance of having from plan B to Z at hand to adjust things on march if necessary, which is nothing but a scenario-sensitive Plan A.

Thankfully, the standards of Basel III have driven the system to establish capitalization and provisioning levels that give a range of maneuver is very superior than before the 2008 crisis, and by the way, can be more less exigent temporarily while this one is surmounted. Perhaps we are facing the first modernity test, after the financial system learned the lessons from the inexperience on the management of risks of flow internationalization during the 1990s, the excessive reliance on new business models during the Dotcom, and the recklessness on the leverage over financial innovation in 2008-2009. It may be said that the banking sector and financial system have developed antibodies, as the monetary system did against hyperinflation, today a phenomenon of pariahs and a thing from the past for most economies. And another challenge stays on its feet: the banks, the Government and the rest who are involved in the reduction of transaction costs play a fundamental role on making use of virtual platforms and simplifying bureaucratic burden.

Service companies are next on the line: once the financial modeling has been adjusted, the terms in which what has been earned is charged or collected must be adjusted to the reality of clients, under the same survival logic applied to banking, including special prices. Nobody will want to afford the cost of recovering clients once things het normalized and, even less, lose liquidity in a moment in which raising money in a possible measure becomes fundamental. 

The question is what will happen with the activities that depend strictly on people’s mobility: tourism, transportation and any physical commerce or service. This is, by far, the most sensitive part of the productive chain and, unfortunately, the most promising for productive diversification in modern economies, especially those that base their competitiveness on extractive sectors. If extreme restrictions to mobility last only a few weeks, then the focus of financial relief may be transversal to all the affected. But if the extreme preemptive measures are extended, including the closure of borders with relevant markets or the capacity of venues and means of transportation is restricted, then internal tourism campaigns, tax deductions and other recovery measures will need to be implemented to impulse a shocked demand that may probably require an additional thrust to be able to react to these types of stimulus. 

In general, the private sector must be the one to stand defiant on the frontline, and the public sector, the one that defends and supplies it with solid and credible proposals. In economies with a low debt levels or a high payment capacity that can feed the balance of payments, high amounts of reserves and good sovereign debt records, expansive shocks can be backed with traditional mechanisms: bond issuing, expenditure packages and tax deductions or monetary stimulus to bring liquidity to the system and mitigating exchange rate hikes, which by the way could be pressured by eventual increases in the demand for US dollars if a sovereign debt issuance wave is released globally. 

Anyway, this should remind us that after an intervention comes therapy, and that this can be done through a recovery of production as soon as it becomes a possibility. The best way of achieving this is by integrating global markets: a rebound on exports feeds the current account and allows to stabilize the projections for the balance of payments for any country that eventually faces problems with it. In parallel, those who said multilaterals were on their dusk, must go for a glass of water and swallow their pride: export credits, conditional lending and concessional loans for States that have not already achieved to rise will be fundamental to come out of this situation. 

To finish, I ask the following question: should credit rating agencies discount the effect of reasonably-structured stimulus plans to cope with the crisis, especially giving less attention to fiscal deficit and focusing more on the credibility of the impact of this leverage? This will probably be a key point for lubricating the machinery, always exempt from the moral hazards of offering blind leniencies that may bring catastrophic problems to the financial system.

But overall, it is us, regardless of our nationality or productive interest, the ones who have to put our shoulders to the wheel and accept that, for a while, we may have to assume a new normal while this hard situation lasts. It is time to think on what is fundamental and to plan the survival of the extraordinary for afterwards, always not stopping to dream with the achievement goals we have traced. What we are experiencing today is a test for institutions and society as users of technology, science in general and economic theory, which is nothing but political technology, and what has proved to be efficient to cure diseases that not long ago used to be chronical, as hyperinflation and the denial of access to quality products at low prices because of import substitution.

P.S.: Don’t give up on the struggle against global warming, equal opportunities and treatment (non-ideologized), and corruption. Members of governments, guilds, international organizations, think tanks, NGOs universities and politicians can keep working on these aspects from their homes. Let’s just praise and expect the absolute resilience of some big heroes during this pandemic: Zoom, Skype, Whatsapp and the rest of platforms that allow us to stay connected.