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Why COVID-19 Will Hurt the Global Economy

 By   Shlomo Maital  

        COVID-19 Map

   The ‘new coronavirus’ dubbed boringly COVID-19 has brought to mind an insight of Charles Darwin:

   It is not the species best adapted to their environments, that thrive and prosper, but rather, those who learn fastest to adapt to changes in their environment.

     The reason? Environments are constantly changing. Living species have to adapt, and some do it far better than others.

       Viruses are an example.   Keep in mind- viruses are not actually living things, as cells are. A virus is a small infectious agent that reproduces only inside the living cells of an organism. It inserts its ribonucleic acid (RNA) into the DNA of the cell, reproduces, kills the cell, bursts out and continues with its marauding raid on the human body, like Genghis Khan’s pony-mounted fighters.

        Viruses can infect all types of life forms. And they have learned, through evolution and mutation, to defeat the human body’s antibodies – soldier cells that attack and kill foreign invaders, or antigens. Viruses learn and adapt fast.

         And we humans?  

         The damage to the global economy from the COVID-19 virus will be greater than we expect.   World capital markets, down 10% and more, are now waking up to this fact. But why?

         Most economic downturns occur on the demand side of the supply-demand nexus. Some shock occurs, people cut back, spend less, invest less, governments slash spending, exports fall – and the fall in demand slows the economy. This is standard, and it describes every single economic downturn.

         When President Reagan implemented huge tax cuts in 1981 and then again in 1984, he ascribed them to ‘suppy side economics’ – desire to boost the supply of saving and capital, by putting more income in the hands of the wealthy. It worked – but not in the way Reagan thought. The rich spent the money, there was a huge demand boom, and America had a decade-long demand-side stimulus boom.

           COVID-19 is unique, because it is the first major supply-side disaster, since the global economy’s architecture was redesigned and rebuilt at Bretton Woods, NH, in July 1944, 76 years ago. China produces a great many of the world’s manufactured goods and parts. Most of its factories have slowed or closed. This is a huge disruption to the intricate system of global supply chains.

     What can be done?   Very little, because we have neglected supply side policies, and have underestimated how fragile and delicate the global supply chain system is.

       Central banks can slash interest rates, but interest rates are already rock bottom. Governments can spend money, but they already are running big deficits.

       And anyway, these are demand-side policies. Yes, they can help soften the demand problems arising from the supply shocks – tourism is collapsing, airlines are in trouble, etc. But these are secondary symptoms.

         How to restore the global supply chain? That’s the key issue. It requires a meeting of the world’s leading countries; meanwhile global companies like Apple are scrambling to find quick temporary fixes, and there are few good ones.

           Darwin was right. Our environment changed, when a tiny virus originating in Wuhan, China, set out to spread itself. How fast we learn to adapt will determine how costly that little virus will be to the world.

We Ignored Keynes in 1919 – Are We Repeating the Mistake in 2019?

By Shlomo Maital

  Today’s New York Times has an Op-Ed by Boston College political science professor named Jonathan Kirshner.* He reminds us of a book published 100 years ago, by J.M. Keynes, that contained a precise prediction: the Versailles Peace Agreement, that imposed unbearably heavy war reparations on Germany, will create the new world war and facilitate the rise of the Nazis.

   It did.

   Keynes was then an obscure economist who advised British Prime Minister Lloyd George and who attended the Versailles conference. He returned home from it, greatly upset and worried, and wrote The Economic Consequences of the Peace, published by Macmillan on Dec. 8, 1919.

     Kirshner writes, “Keynes’s book is essentially correct with regard to its most important arguments. But it was, and remains today, largely misunderstood. The enduring contributions of the book are to be found not in Keynes’ first dissenting clause (his “objection to the treaty”), but in the second, about “the economic problems of Europe.” Keynes was sounding an alarm about the fragility of the European order.”

     Keynes’ book is relevant today as well. The current world economic and political order is exceedingly fragile. Very bad things can happen, unless we wake up.   Russians, Iranians and others constantly meddle in democratic elections, now in the UK, and in the US. Far-right racist politicians gain political power and representation. The US withdraws from the Paris climate accords, and engages in trade/tariff wars. The “left-out economy”, as TIME magazine calls it, finds new political voice, as demonstrations break out all over the world, facilitated by social media.

     The current world order was shaped in part by Keynes himself, at Bretton Woods, NH, in July 1944. It worked very well indeed, helping many nations in Asia especially become wealthy. But it also meant, by the same token, that many nations and many people, not skilled and wise enough to compete globally, became poor.

     Only one thing was missing from the Bretton Woods architecture – a way to tax the rich to help the poor. It was a fatal mistake. It took 75 years, but the left-out underclass are now rising up and are threatening the current world order, creating chaos in many countries.

       It’s time we read again Keynes’ little book and began to think about addressing the left-out economy more seriously.   What Keynes warned us of, in 1919, came about 20 years later, in 1939, with disastrous consequences.

  • Jonathan Kirshner. “The man who predicted Nazi Germany”. New York Times, Dec. 9/2019

July 1-22, 1944, Bretton Woods, New Hampshire:

The Forgotten Anniversary

 By Shlomo Maital  

Hotel Mt. Washington, Bretton Woods, NH

    Today, July 20, the 50th anniversary of Neil Armstrong’s Apollo landing on the moon – and all the media are obsessively recounting, replaying, and reliving it. We learn about the world-shaking debate, whether Armstrong said “one small step for A man”, as intended, or whether he skipped the “a”. (Complex voice analysis has been done to resolve this world-shaking question).

     There is another anniversary, ignored – and far more important:   The 75th anniversary of the Bretton Woods, New Hampshire, conference, July 1-22, attended by the Allies, that redesigned the architecture of the world economy. It was done in 21 days, because the wealthy Boston millionaires had booked the Hotel, Hotel Mt. Washington, for their summer vacation. That is symbolic, because ultimately, it is the 0.001% billionaires who are destroying the amazing system built in just 3 weeks in New Hampshire.

     Leading the US delegation was a Treasury official, a bureaucrat, Harry Dexter White. Leading the British delegation was the most renowned economist of his time, John Maynard Keynes. Keynes had the intellectual firepower. But White had the powerful US economy behind him. Keynes’ plan was to create a world central bank. White said, no, we already have one – the dollar will be the world’s currency.

     White won.

       At the beautiful old wooden hotel, the delegates created the I.M.F., World Bank, General Agreement on Tariffs and Trade and the Bank for International Settlements. They laid the foundation for a global trading system with zero tariffs (“Most Favored Nation”) that led to massive creation of jobs, exports and wealth, mostly in Asia but in war-torn Europe as well.

       The system created in Bretton Woods 75 years ago has served the world well. It helped China boom, as well as Japan, Taiwan and Korea, and India too. It helped Europe unify. It may have prevented a new World War. And ultimately, it sank the U.S.S.R. by showing that free markets worked best.

       The Bretton Woods agreement has affected everyone, mostly for the good. But – it had a fatal flaw. When you create opportunities for some people to grow wealthy, by definition you also create dilemmas in which many people (unable to compete) become poorer. So what was lacking at Bretton Woods was one thing – a truly effective mechanism to redistribute wealth, for people and countries left behind.

     Ultimately, that small omission is destroying the Bretton Woods system. It is bringing ‘populist’ leaders who ignite trade wars, foster xenophobia, build walls and claim to prioritize their own countries, other nations be damned.

       Let us celebrate Bretton Woods’ Diamond Anniversary. Let’s remember the enormous benefits it brought. Let’s remind ourselves that much of the Bretton Woods system is worth preserving and strengthening, while fixing the flaws.

       I was two years old in 1944. Most people alive today were born long after Bretton Woods. Most do not even know what was done at Bretton Woods or how it affected them.

       I wish the media could leverage this crucial Diamond Anniversary to remind everyone, to educate people, to reaffirm the ultimate value to humanity of free, open trading, of commitment to creating value for the world, not just for white American males, and to take responsibility (as the US did in 1944) for struggling nations left behind.  

         I just searched Google News. The Financial Times did print a couple of pieces on Bretton Woods. So did TIME magazine.  It’s barely a ripple…not even that.

        

Why Britain (and the World) Deserves Crackpot Boris Johnson, UK’s Next PM

 By   Shlomo Maital  

 

   In a few days, rank-and-file Conservative voters in Britain will choose Boris Johnson as their new leader (and automatically, as Britain’s new Prime Minister), over the solid, stable, experienced Jeremy Hunt.

   Johnson follows in the footsteps of Donald Trump. Trump, once a Democrat, now leads Republicans, with hurtful racist words that fire up his “base”, white males, and sow discord, violence, dissent and hatred. Trump got elected, because — well, here’s my explanation.

     As author Yuval Noah-Harari writes, four ‘global’ ideologies exist: fascism, communism, socialism, liberalism. The first three were tried, disastrously, and mostly failed, except for the social democracy version now prevalent in Scandinavia, which isn’t really socialism (state ownership of property and businesses).

     Liberalism?   The United States built a powerful, beautiful vision of a world driven by liberalism (democratic nations trading openly, based on dynamic competitive economies) at Bretton Woods, NH, on July 2, 1944. That’s 75 years ago.   By exporting, many nations grew wealthy – mainly, in Asia (China, Korea, Taiwan, Thailand, India). The US offered a huge market.  

       At the end of World War II, the world was largely destroyed, except for the US, whose economy doubled twice during the war, and whose GDP comprised a startling 75% of world GDP. By opening its market, and building a global trading system, the US helped the rest of the world (Europe, Asia) grow wealthy. And Europe wisely joined once-hostile countries into a powerful open economic bloc, of 28 nations.     This was an enormous success for liberalism.

       But now, 75 years later, it is failing. It is falling apart. Trump’s trade wars are spreading. Japan and Korea are now in a trade war. And there will be others.

       Why?

       Because of us.   Because those who saw what was happening, who knew enough to see it, who saw how many countries and people (nearly all of Africa, the underclass in the US, UK, Europe, and elsewhere) were left behind, how wealth became obscenely concentrated among the 0.001%, how these wealthy people controlled democratic systems with their wealth — those who saw it, simply sat on their hands and elected liberals who did nothing about those left behind.   

         And now – the bill for this neglect has been presented. And it’s huge. The US underclass elects billionaire Trump, who has rewarded fellow millionaires with an obscene tax cut – yet, the underclass still loves him Why? Because he twists the tails of the educated elite, the liberals. And that’s worth everything – because if you are humiliated and downtrodden for 70 years, and you think you have a leader who speaks for you (he doesn’t, really) – that’s worth everything.

         And now, Johnson. He was a left-leaning Mayor of London. Now he’s turned far right, for the Brexit crowd. Why? It’s in his interest. Votes, you know. He was once pro-immigration. Now he attacks Muslims and immigrants. He once strongly supported oil companies. Now he’s an eco-warrior. He beat up his girl friend, police were called – and he refused to explain, not a single word. He says he will take Britain out of the EU, deal or no deal, by October 30 — when a no-deal exit will drive Britain into recession. He wrote a crackpot novel, “Seventy-Two Virgins”, — compare it with John F. Kennedy’s non-fiction book Profiles in Courage.

         Like Trump, Johnson says dumb hateful things – and gets away with it. And by the way – Trump strongly endorses him.

         In the disastrous referendum on Brexit, initiated by the hapless David Cameron (an ego trip, he was sure it would be defeated – and ended up throwing Britain into endless chaos), Johnson supported “leave” using false data and false claims. Totally false. And he got away with it.

     There is an alternative. Wise Jeremy Hunt, Foreign Minister, long-time Health Minister, who ran London’s amazing 2012 Olympics –   perfect for UK PM, but about to lose when rank-and-file Conservatives choose their idol, Boris.

         Johnson once wrote about Churchill:  he became Prime Minister “despite members of the Conservative Party having been conditioned to think of him as an opportunist, a turncoat, a blowhard, an egotist, a rotter, a bounder, a cad and on several well-attested occasions a downright drunk.”

         All of those words, each of them, describes Johnson. And Johnson is no Churchill. Britain will pay heavily during his likely-short tenure.  Britain will get anti-Semite Jeremy Corbyn, in the next election, as their leader, and things will get much worse, if that is possible.

         Good luck, Britain. Bull in the China Shop Boris.   He’s your choice for Prime Minister.

         And we liberals are all to blame. We saw the huge gaps in income and wealth emerging, within countries and between countries – and ignored them.

         Now, with Trump, Johnson, and others – we are paying for it. In spades.

         Ouch.

        

In a Vacuum of Political Leadership: Can Business Step Up?

By Shlomo Maital

   The Guardian carries an interesting interview with Paul Polman, Dutch CEO of Unilever, global food giant that employs 170,000 and has a market value of some 90 billion pounds sterling.

     He makes a point we have often stressed in this blog: Multiplying global challenges demand global coordination and policies, yet countries increasingly are looking inward, “America First” from Trump is not the only example.    

“Actually, that is one of the key issues in the world right now – the lack of global governance in a world that has become far more interdependent,” he says.

“Some countries have played their role historically, but seem to be falling back to their home base; others have not been able to step up to the plate, claiming developing market status. But increasingly the issues that we are facing – climate change, unemployment, social cohesion, food security – these are issues of global proportions. We are often trapped in short-termism … or other things.

“Many of the institutions that were designed have served us very well, but they were designed in 1948 at the time of Bretton Woods [the conference held in 1944]. It is not surprising that you have now got an Asian Infrastructure Investment Bank and other alternatives because the world has moved on.”

     I wish Polman would create a new “Bretton Woods” – a summit of top CEOs of the leading global companies. If politics is local, business is global. Why not then have global business rethink our policies and global infrastructure, and begin acting to implement them? These huge companies have enormous power, based on the electoral impact of their workers and the funds they donate to political parties.

 

 

Blog entries written by Prof. Shlomo Maital

Shlomo Maital

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