Among the chorus of medical enthusiasts demanding we stay locked down, there are those not wrestling with the economic implications continuing with preachments about avoiding work. People with triple-digit IQs are also weighing in. Triple-digit IQ people are asking about how we pay for this and what 2021 looks like.
The economic reality we currently live in, that of creating dollars but not wealth, is a recipe for disaster. The Canadian financial institutions, which are generally the healthiest in the world, can arithmetically tolerate the current situation for roughly six months, at which point they collapse, but arithmetics aside, it’s likely that their shareholders pull out before then.
It’s not a lives vs. stock market question. There comes a point in the economic downturn that farmers no longer get paid, and famine becomes a reality. There comes a point when nurses’ pay-cheques bounce, and hospitals shut down. Considering economic realities is not motivation from greed. Those wishing that the police bully us into unproductivity for the sake of doctor’s orders must be made to understand this.
Never before have we so desperately needed an interdisciplinary approach to policymaking. Michael Burry, who accurately forecasted the 2008 financial collapse before others within the financial industry, is also a medical doctor. His prescription is to immediately end the shutdown, and return to work (taking obvious medical precautions, and warning that seniors and immune-system compromised isolate).
JP Morgan is warning of a 40% contraction in GDP in the second quarter, this has gone up from 24% several weeks ago. The entire contraction of GDP during the Great Depression was 15%. My view of the stock market is that investors haven’t adequately priced the pending decline into stock prices just yet.
When we return to work, what exactly is it that we’ll be returning to? Restaurant sales will fall victim to social distancing. Non-essential travel is going to slaughter the tourism industry. The pending foreclosures, missing rent payments, are going to cause contractions in real estate and the financial industry.
Other industries won’t find business booming, If someone sells computer games, there won’t be as much disposable income for people to purchase these games. Contractors looking to do renovations will come across the empty bank accounts of their potential clients.
The outlook is stagflation. Creating dollars but not wealth results in rising prices – inflation, noxiously coupled with high unemployment. People will be without a job while experiencing a higher cost of living. This is the economic horror of little to no incoming for finances, but a huge outgoing flow.
Keynes famously predicted that this was impossible, believing that inflation improved an economy, but the 1970s proved him wrong.
Being neo-Keynesians, governmental policy-makers can’t react to stagflation. Their policies for economic growth either cause inflation or higher unemployment. The Keynesian assumption of an inverse relationship between inflation and unemployment incapacitates government action during this crisis.
There is a capitalist solution. If government action causes more harm in stagflation scenarios, like gasoline to a fire, then as the reality of stagflation sets in we could reduce government action. Reduce spending, reduce inflation, and reduce taxes, to ameliorate employment, via improving investment and expanding businesses.
High taxes harm the economy. Huge spending helps the economy, assuming it isn’t a situation of deficit spending or it’s an environment of low-interest rates. Low taxes cause business expansion and investment. Low spending means some people don’t get an economic stimulus.
Thus we have a game theory: High taxes/high spending, high taxes/low spending, low taxes/high spending, low taxes/low spending. The only economically viable models, in the long run, are high taxes and high spending, and low taxes and low spending. In times of stagflation where high spending is enormously problematic and high taxes are enormously problematic, the only solution is to reduce taxes and reduce spending.
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