Rabobank: "There Will Be Attempts To Go Back To Normal After This Crisis, But It Will Be Impossible"

Submitted by Michael Every of Rabobank

The Grand National-ists

The weekend’s world-famous UK horse race, the Grand National, was won by Potters Corner, trained in Wales and ridden by Jack Tudor, at 18-1. That’s a little unusual – but not as much as the fact that this was all a virtual race run on a computer because the actual Grand National was cancelled for the first time since WW2 due to COVID-19.

I mention this because there is a lot of Grand National-ism about at the moment due to this virus. After all, Germany accused (then apparently retracted, to far less attention) claims of ”piracy” as 200,000 face masks in Bangkok destined for it ended up in the US instead: this is normally called “gazumping” in the UK, and in healthier times is seen as perfectly natural – which says something about how we used to operate. The US is also refusing to send medical gear to Canada. Germany itself had of course previously refused to send ventilators and masks to Italy when asked, and France requisitioned private-sector stocks weeks ago. Meanwhile, China has placed strict controls on the export of personal protective equipment (PPE), masks, and virus test kits – which is a problem given it is still the world’s bulk producer - though the Czechs, Dutch, Spanish, and Turkish have all reportedly returned such gear for being faulty, and one news report alleges Pakistan received a shipment of masks clearly made of women’s underwear.

In terms of medicine, there is also a struggle to access virus testing chemical reagents – Israel has had to scale back its testing as Germany has nationalised one of the chemical producers and South Korea has been forced to close one of its plants due to the virus itself. The US is trying to persuade India, the world’s bulk producer, to lift an export ban on hydroxychloroquine, an anti-malaria drug that some trials and one US president regard as having huge potential in fighting COVID-19. China still remains the bulk producer of the ingredients for many other drugs the whole world relies on, and is at least getting its supply chain slowly back in action – though the political good will is where other fears now lie.

The point is that suddenly, and in a crucial area at a vital time, free trade has collapsed. Borders are closed. Planes aren’t in the air. Key goods either aren’t available along supply chains, or national governments are stepping in to hoard or redirect supply for home use – and crucially there is no way politically any government is going to emerge from this crisis saying “Let’s get back to BAU and rely on global supply chains for XXX because its 2% cheaper.”

Yes, local production will take time and be more expensive and will often mean redundant capacity - but that is called crisis preparation. Just look at the human body. Why do we have two lungs? Two kidneys? Will those who preach efficiency donate (or sell) one of each pair – they won’t ever need them, after all. No takers? I thought not. No, for ourselves we take a more defensive stance.

So much is going to change. In oil, for example, the US and *Canada* are apparently in serious discussion about imposing tariffs on foreign oil in order to protect their own domestic industries if the Saudis and Russia cannot agree to sit down with the States and agree on a huge output cut. The fact that the date for that latter decision has been pushed back from today to Thursday has seen energy slump in the Asian session – but also underlines the risk that the US (and *Canada*!) will protect their own industries and workers regardless of what free-trade doctrine tells them to do.

That’s just one key example, but there is a growing recognition of what we already argued would be the case weeks ago in “28 Weeks Later”: yes, there will be an attempt to go back to business as usual after this crisis, but in many key respects this is likely impossible.

We were all stunned by Thursday’s 6.6 million US initial claims number, which was twice as bad as the previous week’s 3.3 million. Then on Friday we got a print in US payrolls just over -700K. If one cannot see the new political imperatives wrapped up in that kind of wrenching socio-economic disruption then perhaps one never will. But please don’t take my word for it. Listen to the serious and/or financial press:

  • Bloomberg argues “This is The End of Western Capitalism as We Knew It”;

  • The Atlantic argues The Revolution is Under Way Already”, drawing historical parallels with the US today and the build-up to 1789 in France;

  • A Financial Times editorial argues we need radical reforms that reverse the policy direction of the last 40 years: governments must play a larger role in the state; public services must be seen as investments rather than liabilities; labour markets re-regulated; redistribution included on the agenda; and wealth taxes and universal basic income included in the mix; and

  • Spain’s Prime Minister has written an op-ed arguing that “Europe’s future is at stake in this war against coronavirus”, arguing “either we respond with solidarity or our union fails.” Fiscal solidarity, that is.

True, the ‘talking heads’ and politicians do like to talk. Yet it is very hard to imagine how, once we all finally get back to life as normal in X weeks or months, people will accept the status quo ante of unsustainable structural imbalances in the economic and financial system; of asset bubbles over salary; of lionising tech disruptors over their hard-working and insecure delivery drivers; and of economic resources always being steered towards the needs of “GDP” and business and/or finance, not to doctors, nurses, public transport, society, or even science. Add in the need for local production to allow a spare lung and kidney, and the global economy and markets will surely look very different. Of course, this is not even considering how we will deal with the massive new debt we are about to build up. Do we pay carry it like an albatross around our necks? Or do we default one way or another? The implications are enormous, whatever we decide.

Of course, it’s unclear what markets will look like a lot sooner than that. One wonders how long until we only have virtual markets to play with in AI computer simulations like the recent Grand National. (Then again, it might do less harm to the economy in the long run if all speculative cash just played a giant on-line game– while actual productive capital was ploughed into the real economy and social needs!)