By Henrik Tuxen
During this period of lock-down, time is freed (for those of us lucky enough to work from home and have a garden) to think about what next. It will be different for sure. However, I don’t believe anybody can imagine how much different and, indeed, in what direction. Much depends on the political decisions taken by individual states/regions and between those states/regions now. As many have pointed out, coronavirus does not recognise borders, while states/regions concentrate on responses within them with an added pinch of nationalism. If this is the path chosen, getting back in economic terms from this politically and humanitarian (for good reasons) supply and demand induced recession, could take 10 years. Alternatively, this could be a turning point for a reset of the economy in a different, maybe overdue, direction. However, this will depend on international co-operation across states/regions, which is at the moment is in short supply.
In thinking about “what next” I have for inspiration drawn from three difference sources: “A Brief History of Doom” by Richard Vague, “Capital and Ideology” by Thomas Piketty and Standard Oil’s demise. Richard Vague draws the conclusion that while economists concentrate a lot on government debt (which will reach levels last seen after WW2) to Gross Domestic Product (GDP), private debt, in the form of companies and individuals, is the better predictor for potential financial crisis. Richard Vague observes that a “a financial crisis is highly likely if the ratio of private debt to GDP grows by 15 to 20 percentage points or more in a five-year period and the ratio of overall private debt to GDP reaches or exceeds 150 percent”, and adds “It is important to note that only in rare cases have financial crises occurred when not preceded by rapid private debt growth”. Taken on these measures alone, the Global economy was, already before the Covid-19 crises set-in, close to both the measure of 150% as well as 15-20 percentage points increase, but not, in a five-year period. Private debt as a percent of GDP was on a worldwide scale 150% in Quarter four of 2019 (Institute of International Finance) and had risen from c.90% in 1995 and c.135% in 2007, which gives a percentage points increase of 60 over 24 years and 15 over 12 years respectively. Although the latter measure is not as rapid as Richard Vague pointed to, directionally it points to “something in the making”.
China and the US together make up approximately 40% of the worlds GDP. In China, the private debt to GDP increased from 105% in 2008 to 208% in 2018 a percentage points increase of 103. The area to look out for here is non-financial firms, mostly owned by the state. In the US, where the private debt to GDP is about 150% (and has moved down since the financial crisis a decade ago) there are subsets of concerns like the leveraged loans market (large downgrade of bonds from investment grade to junk) and student debt. Any of these and indeed a number of other causes could be the trigger.
Thomas Piketty has tracked inequality over time from the late 18th century to now. Focussing on the period from 1900 to 2020 above, we see that the share of total income going to the top 10% of earners was for the US about 42% in 1900, dropping to below 35% in 1970 and then by 2020 reaching just below 50% and above the 1900 level. The same pattern goes for Europe and Japan, although Europe starts at 50% in 1900 and ends just over 35% in 2020. However, all regions show a market take-up from 1980 to 2020 reflecting, among other things, a market driven philosophy, tech firms, lowering of taxes monetary expansion and equity rises, mostly to the benefit of asset owners. This leads to a more divided society.
The inequality transforms itself into an increased level of monopoly power for, in particular, technology driven firms being controlled by very few people which therefore have a disproportionate level of influence on society. The European Commission has picked up on this and in 2019 fined Google €4.3bn for monopolistic behaviour and the Federal Trade Commission (FTC) and the US Department of Justice (DOJ) splitting potential jurisdiction for possible antitrust probes (FTC taking Facebook and Amazon, and DOJ Google and Apple). In this respect, it is worth remembering that the only company, since Standard Oil in 1911 was split into 34 companies (incl. the Seven Sisters), that has been split up was AT&T, which had to divest itself of Bell System in 1984.
In conclusion, will it be possible to see a new order emerging of a more egalitarian society (progressive taxation), where people’s worth (rather than wealth) is recognised to a greater extent? Where international cooperation (like the UN and related institutions after WW2) can step beyond nationalistic tendencies to prepare for the next Codivit-19, which will come? Or, indeed a solar eruption eradicating all electrically powered devices (incl. money)? The list is long and we will need to learn from Codevit-19 and secure cooperation beyond borders for our next challenge. And that’s where the money should go!
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