When all this is over, my takeaway from the period of Covid is this: its most intense phase (which as expected, will end in June) will not have generated the much-feared chaos – at least, not economically.
Now – careful: I didn’t say that there was no economic crisis, or that there were no human tragedies. But we should use words precisely. There was no “chaos” because the whole world was going through pretty much the same thing at the same time. Everyone went through the same disruptions together, slowing down to the same extent, applying pretty much the same measures at or near the same pace. So formally speaking, until the vaccine arrived, no country was singing from a different song sheet than any other country, thus avoiding creating the conditions of economic chaos. Shock yes – chaos no.
Now is the time to change!
And the world’s propensity to generate disorder is about to wake up. Emmanuel Macron, president of France, was right when he spoke about a European lack of ambition. As usual, the Europeans, skeptical and cautious about spending, failed to realize how much the vaccine was a necessary stimulus investment; and that that song sheet score had to be played faster and louder.
As a result, the entire continent will drag itself along at the speed of the weakest of its member states. But let’s not throw the baby out with the bathwater. Europe is doing much better than many other places. We can even retain the remarkable equality of treatment of EU countries. In time, this policy will pay off.
If most of the pandemic in the northern hemisphere is behind us at this point, we can however now be almost certain that it will last, despite all our efforts, around 4 years on a global scale, with varying effects depending on time and place. In 4 or 5 years, it will probably end up like a bad cold, and it will return in small outbreaks that we will no longer even try to control.
About the economy? Bonus points for thinking in outcomes!
Philosophically, without the slightest doubt, we can recognize that thinking in terms of OUTCOMES (results) once again supersedes thinking in terms of INPUTS (allocated resources, expenditure). Advantage to the Anglo-Saxon vision.
Beginning with the vaccine, destinies will diverge. Maybe not a lot… – say, 2 to 6 months. All the same, that will play in the balance and in part on the question of rates and inflation strategies. How did central banks, all of which acted in the same way throughout the crisis, continue to synchronize perfectly while some are idling and others are throttling to full speed?
That is where national strategies can find an opportunity in decoupling, for the benefit of those who will return to growth first.
What are British and American central bankers seeing?
- Temporary inflationary context, due to restarting supply chains.
- A fairly rapid return to good employment levels, beyond what was hoped for.
- Considerable cash reserves in households and businesses, in a context of growing confidence.
More than anything, they think we are looking at a minimum of two years of strong growth. They can also imagine that a little underlying inflation is showing up for longer than expected; the virtuous pair of strong growth plus inflation is a great opportunity to refocus on priorities… And to:
- Let key rates rise a little, restoring value to money, and therefore putting banks back in business.
- Facilitate repayment of debt.
- Foster the productive economy after a decade of easy money speculation.
- Put pressure on European debt while the ECB will not yet allow itself to let rates rise.
That’s a lot of reasons to make good use of these three short months in advance, offered free of charge by Pfizer, Moderna and Astra. Particularly when, like Joe Biden, what you really want to do is politics.
I am not sensing that inflation is back in a big way. Instead, I see an opportunity to use the existing financial windfall and potential for growth – probably higher than expected before Covid – to bring the financial system back to greater sustainability, and to allow American citizens to find more jobs that pay better.
Incidentally, this inflation will let the US government deleverage cheaply, while tapering (gradually reducing monetary easing policy). In addition, a return to slightly higher rates would put pressure on European debt, private or public. Why cheat yourself of this small trip-up…?
Why assume such conspicuous growth?
As I wrote in my last article, injections and massive distributions of dollars to Americans are like a new Marshall Plan. Finally, we are not that far off that in Europe either. When combined with the savings reserves that a clear recovery will increasingly make unnecessary, a rebound in consumption is inevitable.
As for business investment, it will be conditioned by two simultaneous and brutal needs: digital acceleration of course, but also the environmental revolution. Add to this the American willingness to invest in stabilizing the economies of Latin America and you begin to see the extraordinary wave of investment that is coming in the US, and more generally in the dollar zone.
All in all, consumption will move sharply upwards, along with simultaneous investments by three generations of companies: 1) pre-digital and pre-green companies, undergoing massive transformation; 2) first-generation web pure players; and 3) the most recent business models, native or near-native Covid (digital, green, remote, and networked), which will try to knock out the two previous generations.
When so many forces combine simultaneously, economic growth becomes the only option. It will be strong and relatively durable. Now, I am not claiming that we’re back in post-world-war boom times. But a lot of people are going to try to make us believe exactly that, to the point where even the phrase “Cold War” will return to the headlines, following the rumors of unrest in Belarus and ‘boots on the ground‘ in Ukraine.
Taken in tow by the US, the West will try to play all-out against Russia, China … A substitute communication is taking place as geopolitical tensions once again take center stage – as usual. Another proof of this is the surge in violence between Israelis and Palestinians. It would seem that permanent war is reassuring….
No doubt, the question is whether the West can afford this challenge.
But what if the long-awaited digital productivity shows up? And what about green productivity?
In updating my economic plan, I anticipated a potential explosion around 2024 or 2025, when debt pressure will become too strong to sustain everywhere. It would be common sense to think that things cannot go on this way, and that reality will make Biden – and the Keynesian period that we are entering – pay. (That’s why there’s a question mark after the “BAM” event in the graphic.)
For my part however, I think that Joe Biden and Janet Yellen (US Treasury Secretary) are making a very good bet: believing that we have entered Phase 2 of the Digital Industrial Revolution.
There have always been two phases in industrial revolutions. One phase, which we could call Technological Revolution, and a second phase of generalization when the dividend falls, namely productivity. Associated as it is with ecological transition, the digital revolution is about to deliver on long-awaited productivity.
Covid is certainly an unexpected accelerator – proof that you can’t make predictions. But remote work, made possible by tech, will in turn make it possible to recover efficiency in tertiary jobs.
This productivity was predicted by Joe, Janet, and the Europeans – just look at the global taxation project that the G7 just came up with. Productivity, delivered to companies, along with the increase in taxes imposed on global groups, will pay the bill for Covid.
I’m definitely betting with those who think in terms of outcomes. Ultimately, they’re the ones who are always right!
My team of consultants is also ready to provide their full support every step of the way.