The front of the struggle around the consequences of the crisis catalysed by the coronavirus is unfolding in the same way as in 2008 around the emission and “flooding” of economies with money. But the direction and order of the implemented measures in this case differ significantly from the crises of previous years.
Global shocks
The size of the blow is estimated by economists to be larger than that of any crisis over the past 20 years. It will be larger both in the terms of economic consequences and in the variety of its manifestations. It is not only about economic consequences, but also about health consequences and new patterns of social behaviour. The impact on the economic effect from the reduction of social capital may be even greater than the direct economic losses from the closure of production and the breaking of chains.
In this regard, the central banks of countries, whose currencies are included in the reserve basket, have embarked on a large-scale implementation of quantitative easing. The United States will spend $ 2 trillion to overcome the consequences of the coronavirus, including paying more than $ 1 thousand to each citizen with incomes up to $ 75 thousand and another $ 500 for each child in the family. As a result, the average American family will receive about 4 thousand dollars. The rest of the funds will go to help small and medium-sized businesses. Investments in the economy are already being compared to the infusions of the war. Europe has also reaffirmed its commitment to any financial and fiscal stimulus measures. But the problem is that the average level of interest rates is already moving towards zero, and the dynamics of reducing the debt burden and intensifying economic growth is far enough from positive values.
The essential difference between this crisis and that of 2008 is that previously there was a shock on the part of aggregate demand, when there was an insufficient number of solvent investors and consumers in the economy. Today the main shock comes from the supply side.
The trade blocked with China disrupted most of the value chains and industries.
Helping demand or “distributing cash” to households can only partially solve the problem, since subject to quarantine and restriction of interactions, people, even if they have money, will not spend on a certain list of goods and services. That is why today it is advisable to support the proposal, which, in contrast to the stimulation of only backbone companies in 2008, is the “carpet”.
It is noteworthy that, unlike the previous crisis, the $ 2 trillion emission was directed not through banking structures and a credit multiplier, but through targeted financing channels. Manual regulation, which determines who gets what and how much, suggests that the issuing governments have information where funds are needed here and now and what economic effect they can bring.
Redefining the role of banks
The amount of funds channelled in this way speaks not only of a new financial practice of crisis management, but rather of the beginning of a review of the role of banks in the monetary system. Fintech companies will come to the forefront in developed post-crisis economies, which is facilitated by digitalisation in the form of an increase in the share of cashless payments and consolidation of the leading role of the platform economy. The largest financial services company today is China’s Ant Financial with over 1 billion users and not a single branch. Just 10 years ago, it was Citigroup with 200 million customers. Half of the world’s financial transactions today already take place outside the banking system.
The specificity of economic measures taken by highly developed countries is caused by the fact that the source of global liquidity is the US Federal Reserve System, which works in cooperation with such large banking cartels as Bank of America, JP Morgan Chase, Citigroup, Wells Fargo. They, in turn, own four oil whales: Exxon Mobile, Shell, BP, Chevron. The Big Four Banks in tandem with Deutsche Bank, BNP, Barclays and other European banks are also in the lists of owners of top 10 companies and holders of almost all companies included in the Fortune Global 500. This makes it possible to manage economic crises quite effectively in terms of compensation for losses in some sectors at the expense of others, as well as redistribute the economic values of a number of countries due to their high degree of dependence on global markets and value chains.
The relationship between the governing system and the governed one explains the practice of diametrically opposed economic measures against the background of the crisis. For example, a decrease in the refinancing rate and a reduction in the cost of all credit products of American and European banks are taking place against the backdrop of opposite measures of financial regulation in third countries.
Overflow of values
In this case, the difference between the managing and the managed systems is that the “extra” money is not the first to seek to go to the “refuge currency” in times of crisis, they are already a similar currency, the high demand for which is supported through the oil sector and the largest companies included in the Fortune Global 500, as well as the largest rating agencies such as Moody’s and global media, which create a shell of trust as the main factor in the intrinsic value of fiat currency. Situations when we observe the shift away from the “safe haven currency” into such invariably valuable commodities as gold are characterised by an extremely high degree of uncertainty and are accompanied, as a rule, by the loss of part of income.
The countries of the controlled system, on the contrary, always try to fix any “extra” money in some other more stable currency, thereby loading the financial system of their country, whose response is to raise interest rates and raise the cost of money. In these conditions, the country has an extremely narrow corridor of opportunities for overcoming the crisis. And it may seem that different principles of a financial diet, reducing spending by increasing the cost of money, practicing various benefits and restructuring debt to support domestic demand will help maintain the status quo and keep the economy from collapsing. But further on, in a crisis, this practice only leads to an aggravation of the situation and “overflow” of values towards the centre of liquidity of the management system. In the modern economy of managing economic crises, these measures are referred to as painful deflationary measures, leading to debt collapses and a series of uncontrolled defaults.
If earlier the main principle for the control and controlled systems was “we are all in the same boat”, now the disintegration tendencies on the wave of trade wars and quarantines establish a new principle “every man for himself”. Now, due to the closing and segregating global financial markets, the availability of imports and foreign exchange will drop significantly.
We are talking about a smooth transition from trade and currency wars to restrictions on the withdrawal of capital from developed countries, tightening currency regulation and the practice of confiscations in case of violation of these rules.
It is highly likely that this will happen, and the only question is whether the collapse of global markets will be catastrophic for Belarus, or whether it will be compensated by an internal system that is resistant to external conditions.
Impact mitigation
We want to ask the following question: “Can countries, whose currencies are not reserve, follow the recipe for quantitative easing in the implementation of their stimulating policies in order to achieve sustainability?” As long as interest rates are lower than the rates of economic growth and inflation, it is possible to borrow on the market to eliminate the consequences of the crisis for the countries issuing reserve currencies. The important thing is that this measure is a loan, which in the future will greatly increase the size of public debt, interest rates and budget deficits.
As a rule, we hear that quantitative easing measures are generally correct, regardless of the country applying them. The only important thing is the size of the infusion, commensurate with the volume of the economy of the issuing country. But in reality, it turns out the opposite, since any additional injections in excess of the money that rotate in the tax (R) and exchange (V) cycles, increase the demand for the “haven currency” of the country of the governing system. Moreover, if incentive payments are used to support demand, as is usually proposed, and these payments exceed the amount of required consumption, the rate of conservation of these funds in foreign currency will increase significantly and will quickly lead to inflation.
To support the status quo and mitigate the consequences of the crisis, it seems expedient to receive targeted payments in the amount of the established consumer basket. The preferred method for these payments in the context of Belarusian realities in the short term is seen not as a basic unconditional income, but rather as a guarantee of an unconditional job.
Today there is a noticeable rise in the popularity of the Scandinavian model and a kind of a big Keynesian shift against the background of deepening inequality in the leading countries.
Citizens of these countries are increasingly advocating the nationalization of key strategic enterprises and industries (starting with the pharmaceutical industry and the medical device industry), an increase in the volume of social services and guarantees.
Against this background, it is noteworthy that Belarus is a country that has a considerable practice of combining a market economy and social support. A complicating factor in our country is the lack of our own material and energy resources, the high energy intensity of fixed assets, the associated high depreciation costs, and sometimes their actual idle time due to the increased share of imports in the cost of high-tech and instrument-making products. The solution of these problems against the background of increasing macroeconomic and market liquidity of the Belarusian economy can lead not only to stabilisation of the situation, but also to the growth of the national economy.