Economists don’t usually get involved in the messy work of making predictions, largely because they are terrible at it. Fortunately, before I was an economist, I was a trader, with a very good track record for making predictions after the last financial crisis.
What does the future hold for the economy after the coronavirus pandemic? Predicting the economy is always uncertain, but I fear for what’s about to unfold.
Some economists are predicting a “return to normal” after this crisis. But in my view, this group has failed to understand that the financial situation of a large number of important groups in the economy has changed significantly.
This is easy to miss, because for many people, our situation has not changed hugely: if we are working from home, we have kept our incomes; if we are self-employed or temporarily unable to work, the government is paying us something close to our usual incomes. Since much of our expenses are essential (rent, mortgage, bills, food), our expenditure is not hugely down.
But this is not true for all groups:
1. The rich are in a much improved cash position, since their incomes (rents, interest, bills, high income jobs) have largely not been affected, but their expenses, largely discretionary spending on luxuries, have declined sharply. As I explained in my last article, many are sitting on growing piles of cash.
2. Governments have borrowed newly printed money from central banks and given it to workers who can’t work. Because the government is borrowing to do this, it will be left sitting on large debts.
3. Central banks have printed a huge amount of money. This goes (via the government) to workers who pay it to the rich, where it stays, since the rich aren’t spending. The overall quantity of money in the system increases a lot.
4. A significant number of companies and individuals are losing out due to falling through the gaps in the current support package. Most obvious are small business owners, the recently self employed and those between jobs.
What will happen next? It's difficult to know for sure, but here's what I expect will unfold.
Stage 1: Panic
The sharp decline in revenues for many companies and individuals will cause panic. Many people and companies desperately need cash to avoid bankruptcy, and some may be forced to sell assets to raise cash. Central banks will continue to pump cash into the system, which ends up in the bank accounts of the rich. But the rich, fearful of high volatility in asset markets, and uncertain of which companies will go bankrupt, either hold onto the cash, or buy the safest assets – gold and government bonds – which have already seen prices going through the roof. Some individuals may be forced to sell their houses to replace lost incomes and support struggling businesses.
Stage 2: Bailouts and the huge inflation of assets
Eventually, governments will make it clear who will be bailed out and who will not be bailed out. New information will also make it clearer how long the economic shutdown will last. By this point, the rich will be sitting on large piles of cash and will be keen to put it to work.
Here it is important to understand what happened after 2008, when money printing was used on a large scale to subsidise a weak economy. In the aftermath of that crisis, asset prices exploded. US stocks increased by over 400% (not including dividends) from their lows in 2009 to their highs in February this year. UK stocks also doubled in less than 10 years. Within less than three years from mid 2008 the price of gold, in pounds, more than trebled. And of course, we all know what happened to UK housing prices. This all happened despite persistent economic weakness.
Perversely, the 2008 economic crisis caused the biggest and longest lasting bull market in assets in recent history. The rich will have learned from that crisis, and will be keen to buy assets again, at bargain prices, as soon as more certainty returns. The rich will buy assets, particularly from those who have been hardest hit and need the money, at cut-down prices, and then will benefit from an even sharper appreciation of asset prices this time, since the money printing is now even larger in scale.
The housing market
Transacting in the housing market has already become very difficult. We have already seen the supply of mortgages dry up, and those that remain require very large deposits. This will prevent a large number of people from buying houses, and will push prices down in the short term, but will not affect those with very large deposits or cash buyers. While ordinary people will be pushed out of the market, and some desperate people will be forced to sell at cut prices, the rich will be the only buyers for a while. They will buy houses from desperate sellers and they will buy houses that young, working couples wanted to buy to raise families in. Then, if the experience of 2008 is anything to go by, prices will rocket for the next five years.
After the crisis subsides the government will be left with a huge national debt. After 2008, a political decision was made to respond to this with austerity. It remains to be seen whether this will happen again. I’m a forecaster of economics, not politics, but unless something is done about these debts then they will loom over governments for decades, if not generations, and will inevitably cast a shadow over public services and social support nets.
Who are the winners and losers?
In terms of long run effects on wealth, the winners and losers from the above scenario are as follows:
1. The big winners are the rich. They accumulate cash during the crisis, buy assets for cheap in the immediate aftermath, and then they enjoy a huge appreciation in the prices of both their new assets and the ones they already owned.
2. The big losers are the people who fall through the cracks of the government support package: small business owners, the newly self employed and people between jobs. These are the people on the other side of the of the transaction when the rich buy assets at cut down prices – the people forced to sell out of desperation.
3. Young families who wanted to buy housing will also lose out, especially if they lose access to mortgages. They will be forced to rent while houses are bought by wealthy cash buyers. They will then have to save up a lot longer to buy an equivalent house as prices rocket.
4. Wage earners will also lose out in the long term. Just as after 2008, a sizeable increase in house prices relative to wages will make housing unaffordable to working people unless they have family wealth to call upon. The current strategy will probably lead to a world where buying houses from one’s own wage income becomes increasingly an impossibility without family support.
5. The government is left with very large debts.
To put it quite simply, asset owners will win, and workers will lose. The rich will win, and the poor will lose. Of course, the situation is more complicated that; the idle rich such as creditors and landlords do better than the rich who run businesses; workers in office jobs don’t lose out as much as workers in hospitality. Ultimately, if you do not own lots of assets, you are losing. Even if you own your own house, which will eventually go up in value, you should ask yourself, where will my children and grandchildren live if they cannot buy a house on their own wage? Will they all fit in this one house?
Is there another way?
We should be grateful for small mercies here. The UK is a modern, rich country. The government has been able to put together a support package which, although it has some holes, is large, extensive and will support most of those most in need. The government has been able to pay for this with printed money, which is quick and convenient, and avoids anyone having to pay the bills right away. Many countries do not have this luxury. Many governments in Asia, Africa and Latin America will struggle to find the money to support very poor people with no work, and face a very real risk of large scale starvation.
The current UK plan, to pay the rich for food, energy and housing with printed money, will prevent starvation and homelessness from exploding here. But it will likely generate a big increase in house prices and inequality, and another big transfer of power away from working people and democratically elected governments and towards a small but intensely wealthy elite.
It does not have to be this way. After the peak of the coronavirus epidemic has passed us, the increased wealth of our richest will remain, and so will the government debt. The ability to keep printing money to pay that debt will buy us precious time to decide how to deal with it. This time gives us an opportunity to have a discussion about who pays these debts. Do we leave the rich with profits, and the government with the losses, or do we share the burden more evenly?
In recent years excellent work has been done by economists such as Gabriel Zucman and Emmanual Saez on the idea of a wealth tax – a simple tax which charges the wealthiest people in the country a certain or a progressive percentage of their wealth above a certain threshold. The idea has been circulating since before the coronavirus crisis, and was supported by both Bernie Sanders and Elizabeth Warren in their campaigns for the Democratic Party candidacy.
This simple mechanism could be used to reverse the huge jump in inequality that we will otherwise see as a result of this crisis. It would help to bring government debt back down, and it would mean that the huge increases in printed money could result in higher wages and better public services, rather than simply higher inequality and unaffordable housing. Since the crisis is international, this would be the perfect opportunity for countries to act together in implementing such a tax, which would eliminate any risk of evasion.
When the worst of this crisis has passed us, and the health crisis has become an economic one, it is vital that we start to have a discussion about who pays the cost. If we do not have this discussion, or we decide to leave the burden on the government and workers while the rich profit, then the economic future of this country could be very bleak indeed.