Coronavirus: A thought experiment --The Optimists Inherit the World

Coronavirus: A thought experiment --The optimists inherit the world

As we try to figure out how the global economy is evolving, let us try a thought experiment.

Let us assume for a second that the global economy trend growth rate was 10%, not the 3 or 4 % that we have gotten used to over the last few years. Then let us assume that with that trend growth rate, we came to a complete stop for a quarter or two for whatever reason.

Then think how you would react to that outcome.

The capital stock supporting the 10% growth rate would not have vanished overnight, right?  This is not WW 2. There was no carpet bombing and therefore the capital stock did not get decimated.

Then ask yourself the most dreaded question: With or without the virus, Is the world population likely to suffer a meaningful reduction in its population. It is too early to be cavalier about that just yet and  I am not an epidemiologist, but I would guess that even if we had the sort of causalities being predicted –  an extraordinary outcome – the overall impact is still likely to be modest .

I am coming at it from the standpoint of an analyst and I fully recognize that it may be too soon to be talking about these gory things, but the conclusions still stand.  This isn’t the Middle Ages, after all.

The final question then is that the productivity that we have developed over the last few decades is likely to go down substantially.

The answer is a categorical no. In fact, one could argue that this episode has proved a larger point that the productivity growth has been low because the Corporations could continue with the status quo. The real productivity of the business sector is actually much higher and this episode will prove that in spades. Coming out of it, it may indeed be a revelation.

So, if you combine all of the above three arguments – the capital stock, population and productivity – are not likely to be impacted form a long term perspective. The growth outlook a few year out isn’t that deadly.

What is the real issue then?

 In other word, if the trend growth rate was 10%, we could look at it and conclude that for a few quarters the world is going to go thru a withdrawal, but eventually everything will be Ok.

That brings us back to the REAL question for the current times – It’s that the trend growth rate is not 10%. It is actually close to 3 or 4 pct. A global economy growing at a trend growth rate that is in low single digits, the shock is too severe.

Given the overalll trend growth rate – brought down due to structural - savings glut, globalization, too much debt -- and cyclical reasons – is just not large enough and therefore not conducive enough to regain its footing due to a demand and supply shock coming at the same time.

Let us pause for a second and recognize what the real issue is – it’s not that the Cornonavirus in and of itself can get us to a bad place from an overall growth perspective.  It can curtail growth for a few quarters, but if the global economy had more resilience – higher trend growth rate – it could overcome these obstacles easily.

The real issue for the current circumstance, then, is not that there is going to be a significant drawdown in the current growth rate – that is almost a given, for a few quarters.

 Instead, it is that the trend growth rate will adjust to an even lower level as it has over the last decade due to structural reasons. If we were in a bad place to begin with, we are going to be at a worse place as a result of the current crisis.

That is the real issue.

Therein lies the solution and why there is reason for hope that it is not going to be a problem from a longer term perspective.

The sudden stop in the global economy has brought back in policies what should have been implemented to deal with the lowered trend growth rate, a long time ago.

But we didn’t have the political consensus to get it done.

For all sorts of political reasons, they weren’t implementable.

I can come up with fifteen reasons why that has been the case – class warfare in the US, Northern versus South European fiscal conflict, China too internally focused, etc, etc, etc.

The virus is bringing the Political Economy conflict to the fore. And it is making us realize that the common enemy is not as much as the virus as it is the political doctrine.

Once we accept that and move beyond that, the world has a lot of reason to have hope.

And it is coming about. If The Republicans in the US are bring back an infrastructure driven jobs program and accepting deficits to the tune of 10-20% of GDP. That is saying something.

And that is not the case, just in the US. It is a fact the world over, especially in the EU, which was the last hold up for doctrinaire thinking.

So, Yes , the next few months and quarters are going to be extraordinarily trying. Policies in place, like social distancing effectively ensure that. But equity investing is significantly beyond just the next few quarters.

Beyond the next few quarters, the outlook for the world and its economic growth outlook is actually improving rather than deteriorating from my perspective.

It’s no doctrinaire thinking anymore. Instead, it is far more enlightened.

The bottomline is that world belongs to the optimists, not the pessimists. They may win for a few quarters and remind us of that victory thru their chest beating. But that is not going to last.

We have overcome a lot in our last few millennia and I have no doubt we will end up at a better place than where we are today.