Economic impact of corona lockdowns
by Christian Kreiß
[This article published on 7/13/2020 is translated from the German on the Internet, https://www.heise.de/tp/features/Wirtschaftliche-Auswirkungen-der-Corona-Lockdowns-4842158.html.]
Facts and figures that receive little attention in our leading media
According to the International Labor Organization (ILO), almost half of the world's workforce is threatened with an existential threat to their livelihood due to the worldwide corona lockdowns on the Western model. The ILO in Geneva reports that 1.6 of the two billion people who work irregularly, i.e. without employment contracts, and who often live from hand to mouth, are particularly affected:
For millions of workers, no income means no food, no security, no future. Millions of companies around the world can hardly breathe. They have no savings or access to credit. These are the real faces of the world of work. If we don't help them now, they will simply go under.
According to DW, the income of these people has fallen by an average of 60 percent worldwide, in Africa and Latin America by more than 80 percent. The reason: 436 million companies and self-employed people worldwide are active in industries that are particularly hard hit by the lockdown measures.
According to the Wall Street Journal, the number of hungry people in the world will double from 130 to 260 million by 2020. Experience has shown that there are many children among them. There are always quite a few dying.
We will probably see several million more starving deaths this year, mainly children, especially girls, especially black and colored people. The reason: the Covid lockdown measures, which were based on the Western model and were adopted unquestioningly in most Third World countries. For comparison: the number of corona deaths worldwide is currently just under 0.6 million. The average and median age of the partially cruel Covid deaths is over 80, most of the Covid deaths were seriously ill several times before. The starvation deaths in the Third World, on the other hand, are often very young, affecting mainly children.
An example: In India, exports and imports slumped by 60 percent in April 2020 compared to the previous year, and in May the figures were 37 percent (exports) and 51 percent (imports). Some 100 million Indians were sent through the Covid lockdowns into unemployment.
According to the Wall Street Journal, 36 Third World countries are facing severe debt problems. In banking parlance: the credit rating of many bonds is shaky. I was an investment banker for seven years and I think these financial problems will end badly for some countries and hundreds of millions of people. Because the global economy, and with it profits and cash flows, i.e. the ability to repay debts, is going down the drain, but the outstanding debts remain. This can hardly function without debt default, debt cutting, debt waivers or insolvencies. These often lead to financial crises, currency turbulence and import/export problems in the countries concerned. This is usually accompanied by high unemployment, poverty, misery and social unrest. The reason for the coming bond crisis: corona lockdowns worldwide along Western lines, following our example. As a result, we are causing misery, suffering and death on a considerable scale in the poor countries of this world.
The situation in the USA
According to the Economist of April 16,2020, a quarter of all small businesses in the USA do not have enough cash to survive a month of payment default. Between March 21 and July 4, 2020, 50 million people registered as unemployed in the USA. The official unemployment rate in June 2020 was 11.1 percent and youth unemployment was 20.7 percent. However, experts point out that the official unemployment rate is under-reported.
According to the Wall Street Journal, in May more than 30 percent of 16-19 year olds in the USA did not find a job. Black people were particularly hard hit. At the end of April 2020, around 40 percent of US households with children under 13 were "food insecure", i.e. the mothers interviewed did not know how to feed their children. The percentage of mothers with children under 13 who reported that the food they bought was not enough increased by 170 percent compared to 2018 due to the lockdown.
One of the reasons: Even before the current lockdown-induced economic depression, the assets of the lowest 20 percent of US households - between 2007 and 2019 - had fallen by about a third according to the Wall Street Journal, and their incomes had fallen by 2 percent in real terms in these 12 years. Then came the lockdown. It hit the bottom fifth of the US population correspondingly hard, especially the minorities, blacks and colored people. According to the Wall Street Journal, the unemployment rate in the bottom quarter of the US population is much higher than the national average at over 30 percent, because unskilled jobs are often very service-oriented and have little home office space.
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The Corona Fear and the Coming Economic Depression
by Christian Kreiß
[This article published on 3/31/2020 is translated from the German on the Internet, https://www.heise.de/tp/features/Die-Corona-Angst-und-die-kommende-Wirtschaftsdepression-4693816.html.]
The stock market crash of 2020 and the deliberately induced financial panic of 1907 - are there parallels?
The crash on Wall Street between February 20 and March 23, 2020 by about 33 percent1 is unique in economic history in terms of speed and momentum. In the last 100 years, there has never been such a severe crash in such a short time. To understand the panic on the stock markets today, a look at the panic of 1907 can be illuminating.
From March to November 1907, Wall Street stock prices plunged by about 37 percent.2 The consequences of the financial panic for the real economy worldwide were catastrophic. Between May 1907 and June 1908, US production fell by 11 percent, the number of insolvencies rose by 47 percent within a year, and the unemployment rate in the USA tripled from 2.8 to 8 percent.3 In view of the virtually non-existent social security mechanisms at the time, this economic downturn meant misery, need and hunger for millions of people worldwide.4
The stock markets have not recovered from the 1907 crash for more than two decades. Seven years later the First World War broke out. Incidentally, even after the end of the next major stock market crash between 1929 and 1932, the war came almost exactly seven years later.
Are we possibly facing similar economic and political developments in the coming years? Are we facing a massive economic crash in the coming months, even an economic depression with an army of unemployed people? And maybe even war afterwards?
To answer this question, I would first like to take a look at the causes of the stock market and financial crisis of 1907. According to three contemporaries5 , the world economic crisis of that time was actively and consciously brought about by John Pierpont Morgan and his banking and industrial empire. And it went like this.
John Pierpont Morgan owned 141 banks and 36 large railroad and industrial corporations before the crisis broke out.6 In the course of the spring and summer of 1907, the Morgan banks granted generous loans, most of which ran until August 22, 1907. In parallel, JP Morgan sold non-strategic shares at very good prices until the summer of 1907, as share prices had risen sharply since 1903. On 22 August 1907, the Morgan banks refused to extend the loan terms and a bank run, accompanied by subsequent panic, began.7
The peak of the banking and stock market panic was between 21 and 23 October. On 24 October 1907, JP provided Morgan with a loan of 10 million dollars, thus putting an end to the stock market and banking panic. This is why John Pierpont Morgan is still often referred to today as the savior of the country and the savior from the crisis.
JP Morgan profited twice from the crash and the panic: on the one hand, unpopular competitors were driven into bankruptcy, and on the other hand, in the course of the stock market crash, cheap shares could be bought up on a large scale and on a grand scale at very low prices, so that JP Morgan achieved extremely high profits and a massive increase in power after the crisis8: In 1913, JP Morgan and Rockefeller controlled 341 large companies or 20% of the US national wealth.9
In current economic historiography10 , only the second part, the rescue of the banking system, and JP Morgan as a benefactor are described in a one-sided way. It should not be denied that John Pierpont Morgan was a strong public benefactor, supporting his Episcopal church, schools and hospitals, giving grants to universities, and as a sensitive art lover, owning and donating exquisite art and book collections to the public.
But where did the financial means for his charity come from? From a "crook's prank".11 This one-sided portrayal of history continues to distort reality to this day in a massive way in favor of the owner of large estates. This is probably largely due to Morgan's donations to the universities. This is the most effective way to influence historiography in the long term.
Interest in economic crises
And so the question arises: What is the situation today with power interests? A look at the financial crisis of 2007 shows impressively that even a good 10 years ago there were circles and institutions that made high profits from collapses. For example, some short speculators got very rich from the stock crash and subsequent collapse of the investment bank Lehman in September 2008.
Translated to today, this means that not everyone involved in economic activity has an interest in avoiding a major economic crisis. There are certainly circles or institutions that make profits from possible collapses. For example, some hedge funds may not only bet on falling share prices, but also speculate on falling government bond prices via credit default swaps (CDS). In the event of national bankruptcies, huge profits then beckon. For some speculators, a collapse of a country would be a dream come true. Today, just as in 1907/08 and 2007/08, there are certainly strong forces that are speculating on an economic downturn or even depression in order to profit from it. The central question is: How influential are these forces today?
Similar to JP Morgan back then, the motto for some speculators today is: the greater the depression, the higher the profits. So one can ask oneself: How could one make a coming crisis really deep and bad? According to the motto: Better an economic downturn of 20 percent than just one of five percent. Rather 25 percent unemployment than a measly 15 percent.12 In short: How do you manage to make an economic downturn as severe as possible, to bring about a "perfect storm" as they say on the stock markets? The goal is clear: the stronger the downturn, the more competition you can eliminate, the higher the profits and the more firmly you hold the reins afterwards.
The prerequisite for this is, of course, that you are well prepared for the crisis yourself. The most important means for this are huge cash reserves. Cash is king: that applies to every crisis. Another helpful tool is good political relations, as the 2007/2008 financial crisis has shown. At that time Lehman was not rescued by the incumbent finance minister, who was previously head of Goldman Sachs, i.e. a fierce competitor of Lehman. Since then this competitor no longer exists for Goldman Sachs.
So how can we make the crisis as severe as possible? And this is where Corona comes in: You can use this virus for your own purposes. I am not suggesting that the Corona virus was bred and circulated by conspirators or that its spread was encouraged.
But what you can do if you are influential, have a lot of money and good contacts with the media and politicians is this. As a small power and financial elite, you can ask yourself the question: What is more useful for our purposes? By presenting the consequences of the corona virus in the media in a mild and balanced way, or by dramatizing the effects of the corona virus or even promoting a public mood of fear and hysteria? The answer is simple: the more health fear is stirred up in broad sections of the population, the more pressure is put on politicians to act dramatically.
China was a good place to study the possible handling of the virus and the possible effects of political measures on the economy for quite some time. That showed: ...when there are closures and lockdowns, it leads to a drastic supply shock and disruption of supply chains. On the demand side, curfews, lockdowns and forced quarantine lead to a catastrophic collapse in demand. So you can do the math: If we generate both a supply shock and, most importantly, a demand shock, and once demand has collapsed thoroughly and a sharp downward spiral in the form of a major corporate meltdown has been set in motion, then the chances of a really nasty economic crash that cannot be stopped by central banks and expansive fiscal policies are not bad.
In short, it was easy to calculate that the systematic fomentation of fear and hysteria via the corona virus in the mainstream media would lead to actionism on the part of politicians, then to a collapse in demand and finally to a severe economic depression, from which one could profit enormously - following the example of JP Morgan in 1907, where this worked out perfectly. By the way, the press was not entirely unimportant at that time either. It went out to JP Morgan in praise. The journalists' fear of negative reporting was far too great.13
Influencing the media is not particularly difficult for powerful people. The vast majority of private media in the Western world are in the hands of a few dozen very wealthy families; in Germany there are about seven. They know each other in the establishment, exchange friendly information, have good contacts with politicians and the directors of public broadcasters. In this way, it is possible to turn particularly anxious and warning physicians into opinion leaders. Virologists and doctors who are more relaxed about the spread of corona - and there are quite a few14 - are de facto no longer given a voice or are belittled by the mainstream media, even if they are proven experts. It is all about emotions.
All the collective fear of the corona virus is fueled by a very unstable economic climate. Over the last 40 years or so, the inequality of distribution has increased sharply almost everywhere in the world. As a result, mass incomes have grown much more slowly than investment or production.
However, industrial mass production is only possible with mass demand. However, mass demand has only grown about two thirds as much as mass production. So we have built up an overcapacity of about one third in the western world, measured by the real available mass incomes. How was that possible? The ever-widening wedge between mass income and production since about 1980 has been financed by ever increasing debt. These debts cannot be repaid in full. So we are seeing a debt bubble that is now about to be cleared. The situation is fatally reminiscent of that of 1913 or 1929.15
So a debt bubble, too weak mass demand and an overcapacity of about one third meets a media-generated corona mass hysteria and willing politicians who bring public life and thus mass demand almost to a standstill. This is an extremely explosive situation, stock market-wise: the perfect storm.
I therefore expect terrible conditions, looting, protests and riots, not only in poor countries, but also in Europe. This is already being prevented today by the increasing elimination of civil rights and enabling legislation. I also anticipate strong national conflicts within Europe and a break-up of the euro. This is likely to lead Europe into chaos and conflict.
Cui bono? Who has the benefit of the coming disaster? Just like JP Morgan in 1907, a small power and financial elite should benefit greatly. In Italian, bundle means "il fascio". This is where the term fascism comes from, the bundling of power among a small group of people. I fear that we are facing such power processes. All this is masked by a partly hysterical fear of disease, infection and death by the corona virus. This, however, distracts attention from something else entirely: to restrict our human rights and undermine democracy by bringing about the most enormous and overdue settlement crisis possible - in favour of the power of the few.
Christian Kreiß is Professor of Finance and Economic Policy at Aalen University.
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