Doldrums

It has been a glorious summer on Vancouver Island. Sunny, not too hot, with just enough rain to keep things green. COVID has largely passed the Island, especially the south Island, by. We never were in “lock down” but people stayed home in April and May, over the summer they have been venturing out. Social distancing has become second nature and about half the people you see are wearing masks indoors. (I am not. But, then again, I am almost never in stores or other indoor spaces.)

From a business perspective, this summer has been as quiet as most other summers are. Working with the junior mining industry you get used to the rhythm of the seasons. Right now, the majority of our clients are out drilling, mapping and soil sampling. They will have news in September and then we will get busy. As I have worked from home for a couple of decades COVID has made next to no difference to what I actually do with my days.

Having said that I cannot help but notice that COVID and its economic consequences seem to have befuddled the politicians and the markets. In Canada we have seen a 30% plus crash in the GDP but, with the exception of the March crash, our stock markets just motor ahead. Our Federal politicians have thrown fiscal caution to the wind and are heaping money on a grateful populace. Where is this money coming from? Well, the simple answer seems to be “The Future”.

The logic is that in an emergency it makes sense to keep things going by borrowing and then counting on future earnings to repay the debt. Interest rates are at an effective zero so this is, in principle, costless. More importantly, no one seems to be looking too carefully at the various programs designed to keep people and businesses going when there is no work and no trade.

Does this make sense? Can it make sense? I am reading a wonderful book on Keynes, The Price of Peace, and my sense is that the later Keynes would be fine with this unfettered spending. After all, the alternatives are too bleak to be contemplated.

Which is worrying because it means that there does not seem to be a plan to deal with the economic consequences of this exercise in emergency spending. What happens when interest rates go up even a little? What happens when mortgage deferrals end? What happens when the CERB runs out? If no one goes to the office but instead works from home, what happens to downtown infrastructure, businesses and buildings? What happens when the stock markets notice a 30% drop in the GDP?

There is a whole literature devoted to both the last summer before WWI and the last summer before WWII. I don’t think we are on track for war but I do think we are going to have the answers to the questions above in the next few months and we are not going to like them at all.

To some extent these questions will be asked in all the Western, developed, economies and the answers will differ significantly. Unfortunately, Canada, while having avoided a really awful COVID outcome, does not seem to have thought through how we rebuild our economy. Worse, at the federal level, we have a minority Liberal government which seems to think the coming economic distress will be ideal for resetting our economy along greener (and possibly, more gender/race inclusive lines). The idea that it might be useful to put as many people back to work as quickly as possible does not seem to have occurred to the Liberal government.

Regardless of government action, the “Market” is, eventually going to have something to say about how Canada has responded to and will respond to the economics of COVID. A 30% drop in GDP will not mean nothing; but it is hard to anticipate what will actually happen. Especially as our trading partners have, in many cases, experienced a similar collapse.

As they say in the stock market, things are looking “toppy”. Thrilling as Tesla and Apple’s share price rises have been, it is not unreasonable to think that parabolic is not sustainable. Solid as the Canadian bank share prices have been, as mortgage payment deferrals roll over into defaults, you have to think there will be some contraction. Real estate is hitting new highs with the abundance of cheap money available for mortgages, but if people do not have jobs, how can they pay those mortgages?

Modern economies are built on certain key assumptions. The most basic of those assumptions is that, more or less, production and consumption are in rough balance. While states and central banks have tinkered at the fiscal and monetary margins, until relatively recently, massive interventions were pretty much reserved for wartime emergencies. That restraint has now vanished.

Which is interesting as a matter of policy but what will its actual effects be on the day to day reality of economies. In a wartime emergency, spending big is not done to stimulate the economy, it is done to fight the war. Money is spent on war fighting tools which are very quickly consumed without leaving any trace in the overall economy. (Yes, wages for war work will rise but that usually reflects the scarcity of “manpower” which building armies and navies creates.)

The present circumstance is very different. Money is being spent and created at a wartime pace, but there is no wartime economy to finance. In fact, there is only a 70% peace time economy.

The consequences of the GDP collapse may be able to be postponed for a few months or a year, but, eventually they will begin to show up. Personal income will fall, tax revenue will drop: but there will still be the debt taken on during the COVID emergency.

I am taking my young dog down to Moses Point for a bit of a frolic. In 1914 and 1939 anyone with any awareness at all realized that war was imminent. Mary Wesley’s The Camomile Lawn, Anthony Powell’s, The Kindly Ones capture the sense of a last, good, summer. The water sparkles in the sun, the boats cruise by, but best to take a jacket because the cool breeze of fall is blowing and Moses Point is quite exposed.

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