The Unseen Cut

The Unseen Cut

The world will soon turn to economists and recognize only two kinds of us

 

I was procrastinating online some days ago when Quentin Tarantino hit me with an insight about economists.

Suppose that before you had ever heard of Coronavirus, say during last Christmas, you had asked an economist how the world was doing. “Well”, he would have said. Then you asked if there wasn’t any terrifying killer threat we should worry. “In the long run, there is. But in the long run – Keynes said – we will be all dead”, he would ponder.

But could such a problem surprise us and take its toll any time near?

Almost impossible, except in case of some bizarre and highly unlikely externality”, would have been his likely answer.

A friend of mine is a CIO in a Hedge Fund and for two months now I have been warning him exactly that. He takes it in reproach, arguing Coronavirus is an emergency and therefore we should waste no time concerned about long term. Instead, he spends his hours studying chloroquine and other medicines, in a hope they can cure his portfolio loss. Although this sounds to me  a bit nonsense – sort of as a Hedge Fund responding to GFC by investigating how many houses were tied to subprime at first place -, of course he doesn’t see it that way. He is positive we will soon wake up from this nightmare and return to our normal lives, aka supposedly normal asset prices.

I don’t think so. Economists very often ruin their reputations by trying catch phrases, but I will take the shot here: this is the end of the world as we know it.

Details aside, the global economy comes down to U$85trillion of GDP and U$253trillion of debt. For decades, debt has grown faster than GDP, and for decades we just rolled this situation forward. We bought time. In fact, we bought time, but we never paid for it.

Ultimately, everything comes down to productivity. If every dollar we borrow from the future or invent by printing new money generates more than a dollar increase on today’s productivity, we are fine. Monetary policy would still need to be planned but, overall, we should be fine. In the real world, on the other hand, every penny printed adds less of a penny in real production.

Then comes the Coronavirus. Because of it, the USA alone added up U$2trillion to its money supply in just one single month. My buddy says the amount should be sufficient to neutralize the emergency, and that’s all the math he does. An old consensus states that as long as the dollar is the international reserve currency and inflation is under control, the FED can get away with murder forever. Nonetheless, the universe never really wrote such a law or guaranteed such premises.

Soon, worldwide citizens will be discussing who will be saved by their national governments, who will not, and why. As most global labor force is informal, most large companies are transnational, most debt is private and the pandemic tragedy is so widespread across sectors, none of that should pass through history as easily as bank’s bailouts in 2009.

Nerves will be on edge. Governments will concentrate their concerns on the poorest groups, fortunately, but it is usually the middle class – because they pay the bills – who start deep social unrest. If from the GFC we inherited the Tea Party (right), Occupy Wall Street (left) and neo-populism (top), consider all those as a preview of the current political trouble.

Meanwhile, by current middle class I mean uneasy and frustrated millennials who crave real changes, whatever that means.

Thus, this time we are way more inclined to face the debt issue head on and once and for all, whatever the cost is. Not because of principles but by induction. After all, what could be worse than the 2% mortality rate of this widespread virus, massive unemployment, shelter-in-place routine and painful constraints that should last until a vaccine comes along?

Expect new kinds of solutions and disruptive cultural approaches to address debt and reserve.

So far, this may not be a French Revolution, but we have already watched the decapitations of some cornerstones. Central banks buying private bonds are on the news. Parliaments proposing well-intentioned but clueless packages that throw kerosene into the fire are the norm in all democracies. In my home country, Brazil, mayors issued decrees on closing access to sea waters and governors talk about arresting anyone who crosses the street. All of that with public opinion’s support, but none with constitutional one. Let’s not forget that social sacrifices against this virus are still in early days.

The next generation of Constituents will sure have a lot of work.

Almost forgot to say where Tarantino fits in all of that. Well, Pulp Fiction has some extra scenes online and I never knew. In one of them, Mia Wallace said she believes the world is crudely divided into only two kinds of people. Beatles people and Elvis people. “Beatles people may like Elvis and vice versa, but no one likes them equally. Somewhere, you must make a choice. And that choice will define you.

Mia’s thesis suits well for economists today. Some of us still believe in QE, others alert Japan proved it wrong. Some believe in Helicopter Money, Cantillon Effect and other new hot names you may read in newspapers soon. Others just disagree on each one of them.

Meantime, you don’t have to worry about any of those, as they mostly relate to attempts to save the old monetary order and its Pax Americana. That shouldn’t really make the cut in the real movie because it can’t possibly work.

We can’t go on together with suspicious minds“, Elvis said.

Help me get my feet back on the ground”, requested the Beatles.
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Bruno Pesca is an economist and definitely an Elvis person.

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