The consequences of coronavirus for dummies in economics and finance

 

Michel Santi, Michel, I have known you for a long time. You are a financier, an economist, an entrepreneur,a visionary. I always thought you were an unconventional and fascinating person. Despite not understanding much, I always felt a different voice in you, as show your eight publications, seven of which on economics and finance, prefaced by prominent figures. You write for many prestigious newspapers, you have been an advisor for central banks. I know nothing about the topic. That is what I found interesting: questioning a top specialist from a naive, innocent point of view. In this case, about the consequences of coronavirus on finance and economy. At your suggestion, we have titled these discussions “Talking with Candide”. So that dummies in economics and finance– like myself – aren’t afraid to read you and draw the best from your writings. Here is the first of these talks.

Could you explain what will be the consequences of coronavirus on finance and economy?

I think that the coronavirus will have much broader implications than merely affecting the world of finance. Reflecting on coronavirus only within the small world of finance is a little restrictive. What I find a lot more interesting is seeking to understand what impact the coronavirus will have on our world, our character, our philosophy, our psychology…

Keeping in mind that these elements that I just mentioned will affect many areas, including finance. Do you see what I mean?

Absolutely.

 

Before and after coronavirus

In our world, in 2020, there will be a before and an after coronavirus. I think that what is happening today will have an impact on the generations to come.

For starters, this confinement of course. But also the transmission of coronavirus which affects mainly the vulnerable and the elderly. Social distancing. The recklessness of young people who, at the beginning at least, didn’t feel very concerned. Even though this has consequences on their parents and grandparents, many of whom are hospitalized or dying.

This will have an impact on the coming generations. These are the issues that really interest me and of which I don’t yet measure the extent. These are analyses that will come when we will be over with this epidemic!

A new economic and financial paradigm

For now, there is anxiety and confinement. There is loneliness as well, which affects everybody, including myself… So, the consequences on financial markets will of course be very important.

Firstly, because we are entering a new economic and financial paradigm : the fact that States and central banks are spending lavishly in order to mitigate the catastrophic effects of the economic paralysis we are living.

One must recognize that, since a few weeks, most of the world’s economies – including the largest– have gone into a slump. Absolutely nothing is happening. We will see unemployment rates get to unbelievable and unprecedented levels. In the United States, they will come close to 30%, even though the country had the lowest unemployment rates among developed economies…

States are spending massively in order to mitigate these catastrophic effects

These catastrophic effects can be felt in the States’ economies, populations, and businesses. This is why they must spend countless amounts of money. Even though States – mainly in Europe – were very careful with their spending until now.

Yes, we did notice that, even if we are Candide!

In the end of 2008, 2009, 2010, with the European crisis, there was a very significant fracture between Germany and the so-called Southern countries; because Germany blamed Portugal, Greece, Italy, Spain, etc., for having poorly managed their respective economies. Germany called these countries spendthrifts and blamed them for the European crisis.

But the European crisis has nothing to do with that. I won’t go on about this today. But it should be noted that there has been resentment, fractures, and even hatreds related to that. On both sides.

And now we see that in this coronavirus crisis even Germany is spending massively in order to save its economy!

A drastic paradigm shift in money management

The Northern, protestant countries thought it was so important to save this money and spend it wisely… They too are spending countless amounts now, as a result of this coronavirus crisis. There is a complete upheaval of principles regarding money in Europe. Including in Switzerland, which shared this same vision until now, and today is spending massively too.

But are we going to get to a “new” New Deal of sorts?

But there already is a New Deal! Money is losing its importance

That’s already the case, Candide! I mean to say that Germany is spending trillions of dollars to save its economy. Switzerland has implemented revolutionary measures a few weeks ago by providing up to 500 000 Swiss francs to every business, a five-year 0% interest loan, guaranteed by the Swiss Confederation. Renewable during two years.In other words, during seven years, almost without condition. To save its economy!

These Northern, protestant, Lutheran countries – Calvinist in the case of Geneva – gave so much importance to money… Now, they are injecting massive amounts of money, they are providing cash.

This is an incredible change of mentality. And which will have consequences that we can’t yet measure!

So, there you have it. To answer your question, I think one consequence of coronavirus we can already expect on economy and finance is this loss of importance given to money, something which will gradually make its way into our mentalities.

And it is a very good thing because it will probably – I hope – generate a certain solidarity.

Society is sinking its economy for the most vulnerable

Have we gone from a financial crisis to a means of production crisis, so to speak? People have money but can’t spend it. There are no masks. Hospital beds and respirators don’t grow on trees… Must we, in a way, rethink everything?

Yes, we must start everything again. We are also witnessing an interesting phenomenon, a politically incorrect one. This confinement was decided to protect the most vulnerable, the elderly and the ill. In other words, the least productive members of society. This is a very important point to raise.

Usually, the opposite would instinctively be done, because productive members of society and young people don’t really need protection from this virus. But society is sinking, so to speak, its own economy to protect the most vulnerable.

And that is very counter-intuitive. Usually, the world of finance is very Darwinian. A world which, in a way, couldn’t care less about protecting the most vulnerable. And yet, the opposite is happening. Our economies have decided to put themselves aside in order to protect the least productive.

And this is why I say that, in the future, there will perhaps be more solidarity thanks to this coronavirus.

Human solidarity or loan sharks?

If we look at the laws of nature, we notice it’squite cooperative after all. A lion eats a zebra because it’s hungry but it won’t stockpile fifteen of them in its fridge!

You are right, Candide. But still, nature is quite cruel! It’s for that very reason that we compare finance with the animal world. I mean, we even talk about loan sharks! No, really, there is something quite Darwinian about it. The strongest eats the weakest!

But, Michel, in times of crisis, solidarity rises and stands out, like after World War Two, don’t you think?

Absolutely. The question is, will this solidarity remain after the coronavirus? That is the great question, the fundamental question, really.

Confinement as an opportunity to meet oneself?

In the end, isn’t this confinement precisely the opportunity for soul-searching? Is it that important to possess the latest phone? Aren’t we going back to the basics of human life? To the question of purpose? Thanks to this confinement?

I don’t know. It is possible. Personally, I think this confinement is very frightening because the human being isn’t made to live outside his social environment. A famous Greek philosopher said that the human being is a social animal. And he said that during his time. So, personally, I think that without social ties a person like me is completely lost. Like for many people, social ties are vital to me. Without them, I languish.

I have already thought many times that at the end of this confinement I will be ten years older! (Michel bursts into laughter and looks like he’s twenty years old!)

And it’s only been two weeks!

Well, I hope you won’t! Getting older while gaining wisdom, maybe. But without the wrinkles!

To answer your question, I don’t think everybody can endure confinement. And I don’t think it’s suitable for good personal decisions. Not for me at least.

Confinement for a more spiritual economy?

You mean to say, Candide, that this confinement could help us reconnect with a certain spirituality?

Yes, everybody with his beliefs; the laws of the universe, God, whatever we call spirituality. But, in any case, outside of the fervent materialism in which our society has always lived until now.

There are people who don’t want to be spiritual, who will never be forced to be spiritual! Besides, Candide, today’s conversation has nothing to dowith spirituality! Economy and finance are topics that are totally unrelated to spirituality.

Alright Michel, but isn’t that precisely the problem?

It is true that the economist John Maynard Keynes assumed that economy is firstly a psychological science! Personally, I think he is the greatest economist of all time. He wrote books that I highly recommend to my readers. They are very assertive books. He has created a quite particular school of thought, Keynesianism, which saved our economies during the recent crises.

Keynes assumed that economy is mainly a psychological science. And, indeed, according to that point of view, economy can be considered a “spiritual” discipline.

Keynes reminds me a lot of the psychanalyst and psychiatrist Carl Gustav Jung, even if I had never thought of a correlation between the two before. Jung thought that conscience wasn’t something material, that it had a spiritual aspect. From that point of view, he completely diverged from Freud!

To get back to your question: yes, I think that this crisis will help us reconnect with spirituality. Or maybe it will at least allow us to go back to Keynes with a new perspective. Keynes thought that economy wasn’t just quantified or mathematical, that it was also a human behavior. A spiritual behavior related to confidence.

I don’t know if I’m making myself clear…

Yes, yes, you are very clear.

…but perhaps this crisis will allow us to manage our economies with more humanity…

Is finance playing God?

So, my last question will be: in the end, hasn’t finance been “playing God” recently?

This is a very interesting question.

There was a school of thought which prevailed  in the beginning of the 2000s which was called market efficiency, and which all executives followed. It assumed that financial markets were some kind of judge who achieved perfect balance.

And that all information was at all times reflected in the price, considered to be the absolute criteria of financial markets. The price set for everything, every supply, and every valorization!

This phenomenon had gone so far that, about ten years ago, the boss of a very famous bank called Goldman Sachs said… “I’m doing God’s work”!

You see, Candide, your question isn’t absurd at all! It makes sense. These financiers really believed themselves to be God’s gift to mankind! And they became disillusioned by the successive crises…

Not that much until now, did they?

No, really, they did! Because the financial markets and banks were saved in 2007, 2008 and 2009 only thanks to the States’ money. In other words, thanks to our money, in the end!

And, in a way, it was a humbling lesson. Even if the teachings were not learnt. But it was still a humbling lesson. There have been movements against finance afterwards, in 2009, 2010, and 2011…
I recall a former French president who won his election mainly by saying “My enemy is finance”. In actual fact, he later forgot about his blaring statement…

But there was something…

So, now, I hope that as a result of this coronavirus crisis we will go even further. Not that we abolish financial markets, because capitalism needs them. But that we will be able to cut them down to size.

Well, yes, but whenever I go to the supermarket during this crisis, I notice there’s no toilet paper left. So, about that market efficiency…

That, Candide, has not much to do with market efficiency, but rather with people’s irrationality. Panic makes people rush towards absurd things. But still, when people hear about confinement, it is understandable that they try to stockpile rice, pasta, toilet paper…

Our generation has really lived a life of plenty. Today, there’s even online shopping. So, when hearing about confinement, it is only natural that these primitive instincts emerge.

That, I can understand and I don’t condemn it. And it has not much to do with market efficiency.

Thank you very much for all this information, Michel.

You are very welcome, Candide. Until our next interview, with pleasure!