The Post-COVID Economy

The Post-COVID Economy
Coronavirus – a sanitation worker wearing a mask and cleaning the streets

The new coronavirus has accelerated changes that normally would take place over the span of several decades. Schools, workplaces have been transformed instantly, distance learning and the home office, although not entirely unfamiliar previously, have become the standard overnight.

With many places still facing lockdowns and the chance of further waves far from being excluded, the world has started slowly reopening. We are emerging from our homes squinting in the bright sunshine to discover a new world order. We are detecting some of the new contours but are not sure as to what it will really look like.

What will change, and what will remain more or less the same? Who will win and who will lose?

This pandemic will go down in the history of mankind as a landmark event. Future historians may well be referring to it as the start of a new age, the true beginning of the new Millennium. Several of these changes, however, did not start a few months ago and therefore it is fair to say that the pandemic has merely served as a catalyst accelerating trends having already been brewing under the surface for some time.

The story goes back to the late 1960s. At that time, the economic world order created after WWII came under enormous stress. Rooted in fixed exchange rates and the strength of the almighty US dollar, then still pegged to gold, the Bretton Woods system was approaching its final days. More and more countries demanded that their dollar reserves be converted to gold, which caused the US gold reserves to shrink at an alarming pace. The answer in 1971 was the unpegging of the US dollar from gold and the introduction of floating foreign exchange rates. With the removal of this inconvenience, a new age of financialization set in.

Credit cards, financial innovations and new loan products appeared, money started to flow at an increasing speed. The financial sector, consumers and manufacturers all benefited from this development. The initial result of this abundance of money was high inflation in the 1970s. More and more regions of the world got into the game making Japan, Germany, South Korea, Taiwan and later China the factories of world. A widespread hunger for dollar and plentiful manufacturing capacities helped tame inflation and contributed to the evolution of a new golden era of globalized financial capitalism.

As talent naturally flocked to where money was, everyone was seeking a carrier in finance. Well-paying manufacturing jobs started to disappear in the developed world causing the middle class to lose the foundations of its existence. The new overlords were not the manufacturing capitalists of the early 20th century but rather those within the real powerhouses, i.e. the now unconstrained financial innovation centres; banks, funds and stock exchanges. 

The former servant of capitalism; finance became the most profitable enterprise. With nation states stepping back, the markets were given a field day.

Instead of being supported by gold as before, this new mountain of money, however, was underpinned by a simultaneously increasing amount of debt. This debt naturally meant a burden that had to be spread across the field. With debt growing, the fragility of the system increased exponentially resulting in the 2008 collapse of the whole system after the burden of debt had been distributed so wide that the ones on the edge of the financial cliff could no longer repay it. For want of a better option, central banks came eventually to the rescue stepping in as buyers of last resort to purchase worthless papers. After a few years of anxiety, everything started to look normal without the fundamental problem of the system, the enormous debt burden having been tackled.

At that point, a tiny microscopic thing, not even alive and capable of reproducing on its own, started to spread by using cells in humans to replicate itself. It wasn’t as deadly as Ebola or as contagious as measles but turned out to be pretty damn good at both. As there was no vaccine and no cure, the only way to slow its march was by seriously constraining physical interaction among humans. Unsurprisingly, economies all over the world came to a halt triggering the most serious global economic depression in 90 years.

First it hit tourism and airlines, later followed by almost every other sector in the economy. Central banks did what they always do best by printing vast amounts of money. The fiscal answer provided by the governments had to be expeditious as well since the spread of the contagion needed to be arrested at all costs in the economy. At the time of writing this article during the summer of 2020, we are still in the middle of the storm and the calm we all are waiting for is still a significant stretch away.

One concept that emerged from the ashes of the pandemic stronger than before is the nation state. The answers found and implemented thus far did not come from the markets or the industry. The pandemic is being treated and stopped by law and order and the application of science. It’s not the markets but the nation state that spends vast resources to stabilise the job market. Its organizing power is unparalleled and, as the past few months have demonstrated, remarkably fast and effective in times of crisis.

It’s not the markets but the nation state that spends vast resources to stabilise the job market. Its organizing power is unparalleled and, as the past few months have demonstrated, remarkably fast and effective in times of crisis.

Deserted Berlin - Rush hour at the Brandenburg Gate with no people or cars

With the coming depression, financial obligations will be harder and harder to fulfil. Both private and public debt will be seen as an unnecessary weight. The era of financialization may be over. A new type of capitalism and financial system is forming right in front of our eyes but its final arrival might be still several years, maybe a decade away. Although its shape is unclear, the strong nation state is certain to play a much larger role in it.

Money might be decoupled from debt but then what will it be resting on, if not on gold or debt? Will central banks start to issue digital currencies backed only by the promise that financial obligations can be paid with this instrument? We don’t know yet but we might be moving in this direction.

Global supply chains have collapsed before our eyes in real time. Will companies of developed nations be willing to continue to rely on these even though they have proved to be so fragile? Or will they return to home soil even when they risk losing money and reducing profitability by paying higher prices and wages? Chances are high that the former manufacturing centres of the world will shift again. Capital is cheap, interest rates are historically low, automation technology is readily available, so it makes sense to modernize and rethink manufacturing. If your major cost is not the wages you pay, it does not make a whole lot of sense to operate your factory on the other side of the world where wages may be lower, but uncertainty is definitely higher. Manufacturing will be reshored in the medium run, as costs will be similar and the security of production will become a vastly more important consideration.

Not only manufacturing will be digitized this time around. The pandemic has shown that a wide range of office jobs can be done from home and those jobs are very likely to be done from the distance in the future as this could lead to a significant cost reduction. Office jobs will be outsourced and digitized even more. It is not far-fetched to anticipate that in a few years from now, a well-functioning Artificial Intelligence (AI) used in place of humans can be as effective as a mediocre financial analyst.

With fewer manufacturing and a shrinking number of white collar jobs, the international pool of part-time workers as well as unemployed and unhappy citizens is likely to grow. The market won’t come to the rescue. It will be again the nation state that will spring into action and hopefully save the day. If it’s going to be through a job guarantee or basic income or something else, we don’t know yet but the answer is certain not to come from the markets.

To be sure, not all nation states are successful in handling the crisis. There are both good and bad examples with an abundance of vast differences among the success stories. There are successful countries among democracies like Germany or New Zealand as well as among authoritarian states like China or Vietnam. But many democracies, including the US and the UK, have failed to excel with plenty of strong centralized regimes like Iran also unable to handle the crisis.

We can identify a remarkable pattern nonetheless. Where short-term economic interests were coupled with short-term political interests, the result was certain disaster. On the other hand, where the long term interests of the nation state and the citizens were pursued in joint action with science, success stories emerged.

The obvious winners in the pandemic were Asian states which had been beaten by SARS more than a decade ago. An unlikely group of winners has also emerged in Central Europe. Led by Germany, this region includes Czechia, Poland, Slovakia, Hungary, Croatia, Austria, and Slovenia. To the east, the west and the south of this group, every single country has performed worse during the pandemic. These successful Central European countries with their strong leadership highly educated and disciplined population and strong scientific foundations seem to have scored a major victory against the virus.

It is not unreasonable to expect these countries to also be among the winners of the new world order that is taking shape. With their economic integration, competitive wage base and good education, they are ideal candidates for future reshoring in manufacturing and the outsourcing of service activities. These countries boast a low debt burden, both private and state, making them even more competitive in the evolving international environment. Also these countries are among the safest in the world to live in, violent crime is low, police are well trained, and enjoy the trust and support of the population. The quality of living in Prague or Budapest is no doubt world class and the more than reasonable price tag attached to life in these places will likely attract a number of future remote workers from various corners of the world, for whom the combination of a good life, security, low costs and highly developed services will provide a convincing enough reason to relocate there.

To be sure, not all nation states are successful in handling the crisis. There are both good and bad examples with an abundance of vast differences among the success stories. There are successful countries among democracies like Germany or New Zealand as well as among authoritarian states like China or Vietnam. But many democracies, including the US and the UK, have failed to excel with plenty of strong centralized regimes like Iran also unable to handle the crisis.

The losers of the new era will come from such highly financialised countries as the UK and the US. Their financial sectors will shrink as both sovereign and private debt will be defaulted upon in the medium term. This will shake their economy and political systems to the core. After the storm, however, calm will set in and a new order will rise, a more sustainable form of capitalism that is less globalised, more regional, less financialised and more sustainable. The centres of the new world order will shift, and we might be focusing too much on the Pacific, and less so on the new Europe.

Related Articles

Related

Ageing Europe

In addition to climate change and digitalisation, ageing is one of the largest challenges facing society in the 21st century. Adverse demographic trends can be observed in almost all countries in Europe, as fertility rates are below replacement level in these countries. In addition to the fact that Europe today is the continent of empty cradles, it is well known that the world’s population is rapidly ageing.

read more

New environmentally friendly jobs for the new decade

The world around us changes all the time; the only thing that is constant is change. Old things and old ways die out from disuse or undergo major changes, while new, previously unknown or little-known sciences and occupations emerge as a corollary of technical progress. However, the questions naturally arise not only which jobs will survive, and what jobs will emerge, but also how these jobs will relate to the environment. Human impact on the environment has never been greater than in the last hundred years.

read more

Budapest, how wonderful…

Budapest is one of the most attractive cities, in Europe, rich in architecture and art. Thanks to its special qualities, it’s a wonderfully located city, divided by the River Danube. One of the capital’s most noteworthy attraction is Central Europe’s largest wholesale market for fresh vegetables and fruits – the Budapest Wholesale Market.

read more

Leave a reply

Your email address will not be published. Required fields are marked *

Travel Quickie

Travel Quickie

Travel Quickie

Travel Quickie

Follow Us

Travel Quickie

Recent Tweets