US Response to Coronavirus Dictated by Panic, Not Policy

By Paolo von Schirach –

WASHINGTON – Nobody is prescient. No one could have foreseen the timing and the extent of the coronavirus pandemic explosion which originated in China and then from there spread all over the world. However, as I noted elsewhere, the US was especially vulnerable, because it was utterly unprepared to meet any public health emergency.

No systems, no plans

Amazing but true, America had no “pandemic early warning system” in place so that a timely alarm could be sounded, nor did America have any meaningful public health “rapid reaction force” in place that could have been activated after the alarm had been sounded, in order to deploy all the necessary medical equipment and other materials where mostly needed, while ordering and enforcing the necessary contagion prevention measures, (immediate widespread testing, quarantines, social distancing, and lock downs).

True, eventually some of these measures were ordered and implemented here in the US. But, lacking anything even resembling a master plan, all this was done very late, and in a horribly inefficient, fragmented fashion, in a climate of confusion, disorientation and –at times– sheer panic.

Panic led to an extreme response

And the panic created by a disease with no cure and catastrophic predictions about millions of dead Americans, unless we closed everything down, led to the fateful decision to shut the country down, with full knowledge of the incredible damage to the economy that this decision would imply, including a slew of bankruptcies, and tens of millions of suddenly unemployed workers.

Let me make this clear. It did not have to be this way. We closed America down because, at the time, with no deployable countermeasures available and a deadly disease spreading rapidly, there seemed to be no other viable choice, if the main goal was to save American lives.

And, again, there was no other practical choice because the US had no deployable countermeasures, no contagion mitigation systems that could be activated. Here is the sad truth. When coronavirus arrived, America was literally a sitting duck, completely unprepared and therefore defenseless.

Amazingly, this means that America, the world’s leading economic power, leader in medical research and information technology, had not thought that a pandemic could occur here, and therefore had done essentially nothing to prepare for it. As a result, when coronavirus hit, the US had no workable tools to slow down the advancing pandemic, except for quarantines and lockdowns — public health countermeasures first deployed in Europe in the Middle Ages, at a time in which public officials literally had no other remedies.

Taiwan, South Korea and Germany had systems

In contrast, other governments over time had developed pandemic preparedness plans, and they activated them –immediately, as soon as news of the pandemic originating in Wuhan, China spread.

In Taiwan the government had a system in place (created in the aftermath of the SARS pandemic in 2003) that was immediately set into action when the Taipei government realized that something bad was happening in China, back in December 2019.

In South Korea, almost overnight, the government deployed a robust virus containment strategy based on massive testing and subsequent isolation of all positive individuals.

In Germany, a national and regional network of testing facilities sprang into action, almost immediately. As a result, Germany, to date, has by far the lowest number of fatalities per unit of population compared to the rest of Europe.

Because they had robust and tested “damage limitation strategies”, these countries had tools to limit contagion. Their number of fatalities is quite low, despite no cure and no vaccine. Which is to say that, unlike the US, other governments had thought about the possibility of a pandemic and had therefore funded and put in place policies and countermeasures that helped them contain the damage. If they could do this, so could we. The fact that we did not is a huge stain on America, the country that is supposedly ahead of everyone in innovation, science and high tech.

Early warning system would have contained the pandemic

Let me be clear. A US early warning system would not –I repeat, would not– have prevented this virus for which there is no cure from reaching the US and infecting people. However, a sophisticated early warning system, (which includes the ability to learn as early as possible about an unfolding epidemic anywhere in the world, and then quickly track and isolate positive individuals in order to prevent or at least slow down contagion), combined with prepositioned stockpiles of medical emergency material, (masks, protective gear, ventilators, field hospitals easily deployable by the military in high incidence localities), most certainly would have slowed down this pandemic, while reducing its spread and scope. Which is to say that, if America had had a robust pandemic plan in place, we could have avoided shutting down almost the entire economy, while probably saving thousands of lives, even in the absence of a cure or vaccine.

Millions of victims?

As we had none of the rapid reaction tools in place, overtaken by panic, federal and state policy-makers concluded that the only choice before them was between condemning literally millions of Americans to a certain death caused by an advancing coronavirus, or closing down almost the entire US economy in order to slow down contagions, this way preventing a horrible human tragedy. And so, lacking any plausible alternatives, Washington and most of the 50 States decided to literally close down the biggest economic power on Earth.

What is terribly wrong with this scenario is that this “either we kill people, or we kill the economy” choice could have been avoided by having a tried and tested contagion prevention national plan in place that would have worked like a very powerful shock absorber. This is what Taiwan, South Korea and Germany, among others, did –rather successfully.

Of course, as I said above, even if America had been properly organized to react to this pandemic, there would have been some contagion, many deaths, huge economic damage and enormous dislocation resulting in a recession. Hence the need for the US Government to intervene with emergency funds. But, for sure, both the economic dislocation and the emergency interventions would not have been on this scale, (almost three trillion dollars!), because the damage, while still very substantial, would have been far more limited.

Are we going to learn from this disaster?

I really hope we learnt our lessons here; even if at the cost of more than 50,000 lives, and counting; and close to three trillion dollars in emergency aid to corporations and individuals, and counting. I hope that by now our elected leaders have realized that the US cannot afford to have essentially no workable rapid reaction system in place when it comes to low probability but extremely high risk public health occurrences.

Of course, it will cost money to set up and maintain the necessary early warning and rapid reaction infrastructure, trained workforce and chain of command.

But this strategic investment will be only a fraction of the close to three trillion dollars we have already spent so far, not to mention the fact that early detection will give us the ability to save thousands of lives by preventing out of control contagion via timely quarantines and other targeted isolation measures.

Paolo von Schirach is the Editor of the Schirach Report He is also the President of the Global Policy Institute, a Washington DC think tank, and Chair of Political Sciencand International Relations at Bay Atlantic University, also in Washington, DC.




Will The Fed Raise Interest Rates? May Be Not

WASHINGTON – Until a couple of days ago, most economists bet that the US Federal Reserve would finally begin to raise interest rates at its December 2015 meeting, this way ending the anomaly of the longest era of zero interest in modern history.

Promising picture

The general picture looked propitious for such a move. The US economy just added 271,000 jobs in October, many more than expected. Wages are going up a bit. Unemployment is down. Overall, it seemed that the new data indicated that a strong economy would fuel more inflation. And this new trend would justify raising interest rates.

What will happen to stocks? 

And what about the consequences? Well, here it gets tricky. This Fed move on interests would signal to stock investors that the ground may begin to shift. Higher rates mean that in a short while, (depending on how fast the Fed moves to bring interest rates from zero back to a historic norm of about 4%), other investment instruments like savings accounts or bonds will become once again more attractive.

In short, if it is indeed true that this unprecedented era of zero interest created a stock market bubble because it forced people to move away from other forms of investments, then we can expect that its end may bring about a stock market decline, or worse.

Right now, people have an extra incentive to invest in stocks because –thanks to zero interest rates decreed by the Fed– it is the only game in town. You cannot make any money by placing your funds in savings accounts. When interest rates go up again, people will have choices.

Fed watching 

Because of all this, these days markets move up or down mostly on the basis of what analysts believe the Fed will or will not do, and how soon. This happens because stocks are sensitive to interest rates moves, and also because there is no action on any other economic policy front that may trigger market reactions.

Paralysis in Washington 

Washington is paralyzed by political dissent. Therefore, no chance of anything happening there that would influence economic policies and therefore economic and investment decisions. No serious public spending reform plan on the agenda, no changes to major entitlements, and no tax reforms that would modify economic incentives.

In other words, nothing is coming from Washington that would signal markets that soon it will be easier to go into business, create new companies, invest in them and profit from them.

Will the Fed move?

So, we are left with Fed watching. As noted above, looking at the positive signs from the US economy that were streaming in in the last few days, it looked as if the Fed would finally have the margin to move.

Indeed, on the surface, the US is doing fine. The stock market is buoyant. Lots of new jobs added in October. More Americans are employed. Higher interest rates, phased in a little bit at a time, would not smother this fairly solid economy.

Outlook not so good anymore 

Well, this was only a few days ago. But now things do not look so good anymore. For example, let’s take a look at commodities. By any measure the sector, a close proxy of industrial activities, looks awful. The Bloomberg Commodity Index is now down to its lowest level since the 2008 financial crisis. The price of copper, widely used in all sorts of industries, is now down to a six-year low. Most commodity prices are back to where they were before China engaged in its gigantic domestic investment program that drove up the cost of everything. As a minimum, this serious decline means that most industrial economies, and not just China, are slowing down.

Commodities down, world trade down 

And it gets worse. Because of sharply lower demand for their products, many emerging markets that produce and export commodities are either in a recession or close to it, (think of Brazil and South Africa). Besides, despite the official statistics pointing to lower but still significant growth, China is exporting and importing less of everything. This affects all its trading partners, from Australia to South Korea.

And there are more bad signs. Maersk, the Denmark based leading maritime shipping company, recently announced that it canceled several orders for new vessels. In other words, a giant player that manages a large chunk of world trade does not believe that current and projected global traffic volumes justify buying more container ships. (Incidentally, recent data about the movement of goods in and out of major US ports also indicate a sustained decline).

More Americans are working, but few good jobs

Back in the US, while more people have jobs, most of the recent additions are in leisure and hospitality, health care, and other services. Most of these jobs are low paying. In many cases they are not full-time. In other words, there are no new jobs in critical wealth creating sectors such as oil and gas, mining and manufacturing.

Sure, more American are employed, and this is good news. But their jobs depend on government spending (health care), and on the spending of other Americans employed in wealth producing sectors.

So, here is the thing. While we have more bartenders and waiters, we have had zero growth or declines in manufacturing, oil and gas, and mining. This is not a sign of a robust economy, going forward.

If the global economy slows down significantly, many US exporters will be hurt. Some, like Caterpillar, are already doing poorly. And this is because fewer foreign customers are engaged in new construction projects. Hence no need to buy more earth moving equipment from Caterpillar.

Other Central Banks not about to raise rates 

Last but least, you have to consider what the other monetary authorities are doing. The Bank of England just decided not to raise rates. The European Central Bank is engaged in Quantitative Easing and plans to have more of it, largely on account of disappointing growth within the Eurozone, (only 0.3% in the last quarter). The Japanese economy is (once again) sputtering.  Finally, China is trying to stimulate its economy by easing credit and lowering the amount of reserves banks need to keep. Therefore you can expect more, not less, monetary easing in the rest of the world.

So, here is the global picture. The US may be doing almost OK –for now. But the rest of the developed and developing world is slowing down. For this reason all other central banks will keep interest rates at zero or close to zero.

If the US acts on its own 

In this context, if the US will raise rates all by itself, as a minimum we can expect a massive flood of foreign capital seeking higher rewards into America. This would drive the US dollar further up, significantly hurting US exporters, including all major manufacturing companies. And remember that the newly added US jobs in leisure and hospitality largely depend on other gainfully employed people having the discretionary income to spend on restaurants and holidays.

Stampede out of stocks? 

And it gets worse. Everybody agrees that the US stock market is overvalued on account of zero interest rates that drove people away from other forms of investments. What we do not know is how overvalued.

Assuming even a modest Fed move on interest rates in December, we cannot expect rational, measured reactions. Foreign investors, fearing that the Fed might get aggressive, may flee from higher risk countries. The dollar shoots up. US exporters are hurt, badly. Their stocks sink, dragging down their vendors and suppliers. Other vulnerable stocks follow. Can this become a rout that drags down “everything”? Yes, this can happen.

Is the US economy rather weak, after all? 

Therefore, the odds are now against the Fed raising rates. But, wait a minute. If the Fed does not raise rates, then it signals to Wall Street that the US economy, contrary to its earlier analyses, is not that strong. If even a modest Fed move on interest rates might upset the whole thing, this means that the economy has no strong foundations.

For this reasons, some investors are likely to sell stocks anyway, finally realizing that they are holding stuff of dubious, most likely artificially inflated value.

Preserve your capital, stay out of over valued assets 

Either way, we lose. If investors were wise, they would give up the notion of making any money in stocks, given this weird environment characterized by a slow-moving US, a weak global economy, and expensive assets.

US stock are over valued. Therefore it is not smart to keep buying them. Of course, if you go into cash, you make no money, we know that. Still, better to make zero profit than losing your capital. As I said, if investors were wise…




How Bad Is The Chinese Economy?

WASHINGTON – There is no way to tell which way the Shanghai Stock Market is headed. However, it is clear that the July 27 8.5% loss is not just an ugly day in a period of unusual volatility that will eventually come to an end.

A bad day in Shanghai

The fact is that this collapse, the worst one day decline in many years, took place despite highly publicized and very costly ($ 200 billion) government-led counter measures aimed at stabilizing the markets, after a massive rout in early July.

Counter measures 

The Beijing authorities watched (probably in horror) a precipitous share prices decline, day after day. They got really worried that a true stock market collapse would ruin millions of retail investors, this way creating a political problem for the national leadership.

And so they rapidly concocted a series of massive interventions to support share prices. They suspended trading. They ordered brokerage houses to buy selected stocks. They made public funds available to execute these trades.

And, sure enough, the $ 200 billion medication worked, at least for a while. For a few days the markets calmed down. On account of the government administered shock therapy, share prices stabilized. In fact, there was some recovery from the huge dip that had taken place in early July.

No real confidence

But on Monday there has been another major collapse, despite the massive intervention aimed at restoring investors’ confidence. And this is truly worrisome, because it means that millions of Chinese investors deep down do not believe that the government has either the ability or the staying power to stabilize the markets, this way saving their investments.

That said, despite this set back, the Beijing government cannot stop intervening. It simply cannot take a chance and allow a market led by millions of scared investors who would love to run for the exit to find its natural bottom. This bottom may be much, much lower then the lows experienced in early July.

What’s really going on? 

And this is only half the story. Forget for a moment about manipulated and therefore meaningless share prices. The fact is that most of China’s economy is manipulated. Therefore, it is next to impossible to determine its real health conditions, in the midst of signs that indicate a slow down.

Unfortunately, many Western observers keep forgetting that a large chunk of China’s economy is controlled by the state through State Owned Enterprises (SOEs), always funded by state controlled Banks. These large corporations do not follow market rules as we understand them. You can rest assured that government appointed managers will hide losses, while highlighting bright prospects. You see, the government cannot fail.

What we know

Still, despite this fog, we know a few things, none of them reassuring. We know that, thanks to an ill-advised gigantic stimulus plan aimed at facing the 2008 international financial crisis, in the last few years there has been an unprecedented, in fact grotesque, overbuilding of “everything” in China.

We also know that, in order to support its gigantic construction projects, China added an enormous amount of capacity to every industrial sector supporting it: steel, cement, glass, copper, appliances, furniture, and so on. Taken together, these sectors amount to anywhere between 25 and 30% of GDP.

We know that, on account of this construction frenzy, overall supply of commercial and residential properties now vastly exceeds demand. There are way too many vacant villas, apartments and half empty shopping malls.

As a result of this property glut, construction –the main driver of China’s economic growth– had to slow down, dragging down not just unlucky developers but also a huge part of the economy. We know that factory utilization is down to 70%, a pretty bad number.

Debt-financed investments 

Given all of the above, we can conclude that most of China’s recent growth is based on debt-financed excessive investments in unneeded capacity. The stimulus policy aimed at countering the ill effects of the 2008 international financial crisis led to a colossal level of malinvestment.

Still plenty of cash 

The Chinese Government does not have to pull the plug, right now. It still has plenty of cash reserves (trillions of dollars) to fuel this madness a little longer. But how much longer? How much more good money can they throw at zombie companies, in order to prolong the illusion that they are viable? How much more cash will they use to support shares that investors would love to unload?

It is a political issue 

In the end, this is not an economic policy issue. This is a political issue. In a true free market, the state would not massively intervene in the economy. It would allow private companies to compete, while allowing foreign investors to participate on an equal base. This way, without state interference, markets would eventually re-balance demand and supply.

But it is hard to see how China can get from here to there. Hard to believe that the national leadership will liberalize the economy right now, when things are slowing down. There are just too many risks.

Without the recent massive interventions, the Shanghai Stock Market might have collapsed, this way ruining tens of millions of small investors. Likewise, forcing zombie firms to shut down may be good for the future health of the Chinese economy; but it would cause short term misery for millions of workers, suddenly without a job.

The instinct is to control 

I just cannot believe that a political leadership that can claim legitimacy mostly on the basis of a long (past) record of impressive growth would accept a most serious retrenchment of the Chinese economy. Their instinct is to intervene, extend credit, mask problems, and prop up failing companies.

Of course, this means burning cash for no good economic purpose. But this is the only way to survive politically, at least for a while.

 




End Of China Boom Caused Commodity Prices Collapse

WASHINGTON – Global mining giant Anglo American just announced that it will downsize –in a dramatic way. It will cut 53,000 jobs. This is no surprise. It is the painful consequence of the end of the crazy China bubble.

Commodities are down

Indeed, all commodity prices are significantly down. Compared to 2014, iron ore is down 45%, copper down 25%, aluminum down 18%, and so on. And this collapse is due mostly to lack of demand from China.

If these are the painful consequences of the end of the China boom, it may be instructive to go back and see how it started.

How it all started

When China’s leaders announced a gigantic, publicly funded, stimulus package to counter the ill effects of the US-induced 2008 global financial crisis, the world applauded. “There you go. This is how you deal with this problem caused by the short-sighted and in the end stupid Wall Street crowd. This is a real fire wall. Nothing like the puny, timid package passed in Washington. You counter a major crisis with a really big package. This one will do it”.

Well, the package was big, no doubt. In fact it was so big that it unleashed a gigantic China boom. Goaded by the central authorities, the Chinese provincial Communist Party chiefs ordered massive construction projects. They built and they built “everything”: luxury housing, commercial real estate, shopping malls, infrastructure. And of course, for a while this worked out well. Companies were doing well, workers were employed, and so on.

They over did it

Yes, except that the Chinese over did it. And not just a little bit. They over did it in a grotesque, historically unprecedented way. They overbuilt everything, everywhere. And of course, in order to fuel this boom, they added too much capacity in all the sectors that supported it. Too many steel mills. Too many ships to carry what seemed to be an ever growing supply of iron ore. They augmented capacity in glass, cement, copper wire, you name it.

Boom in commodity producing countries

And this is only half the story. Until this craziness lasted, the Chinese boom fueled an economic boom in commodity producing countries. Brazil did extremely well by boosting its exports to China. Same for Australia, and many African countries.

But this Chinese debt fueled boom, induced by ill-advised public policies ordered by Beijing, had to come to an end. Simply stated, there is too much supply, not enough demand. And in the meantime, China total debt skyrocketed to unprecedented levels.

Mining companies trying to adjust

And now? Well now we see the outcome of this gigantic malinvestment. As indicated above, British mining Giant Anglo American is trying to cut its losses by eliminating 53,000 jobs. World wide the mining industry is in bad shape, and so are the countries whose growth depends on it.

China’s policies did not work

What is the lesson of this? The lesson is that Chinese policy makers are just sorcerer apprentices who believed that their smart ideas would provide effective tools that would beat a negative global trends caused by reckless American policies.

True enough, all governments around the world tried to enact measures that would limit the damage. Washington intervened massively to prevent the collapse of American financial institutions. It also bailed out General Motors, the giant car manufacturer that was already in serious difficulty before the Wall Street financial collapse. Still, while we can debate the wisdom of the counter measures, overall Washington did not make the problem worse.

The Chinese wanted to avoid the economic consequences of a financial crisis they did not create. And this is understandable. However, in their zeal, in the end they created a huge debt-fueled boom that caused a massive misallocation of capital, in China and across the world. If you just lost your mining job in Australia, Brazil or South Africa you know this.

Chinese over capacity will be sold to us

And this is not the end of the bad news from China. If you were wondering what will China do with its massive over capacity in practically every industrial sector, here is the answer. They will do their very best to sell their gigantic steel (and everything else) surplus to us, at rock bottom prices.

You see, this being China, they simply cannot shut down money-losing steel mills, this way causing massive unemployment. No, they will keep producing, at a loss if necessary, and dump the stuff here, this way causing US steel producers to go out of business.