The thing about events which are unprecedented, is that no one knows what the hell will happen.
It’s human nature to look through a positive lens. That’s why sharemarkets and property markets have largely gone up for two generations since 1983 (with just a few blips in 1987, 1992 and 2008).
But this period of unprecedented expansion has coincided with a massive increase in debt around the world (but especially in the US, Europe and China). It’s been so long since we’ve seen a protracted downturn that it seems like no one knows what to expect. Forty years of a relentlessly positive trajectory will do that.
The demand shock that’s currently unfolding feels more like the Great Depression or a World War than the global financial crisis.
There may be a couple of ways to get out of this mess.
The first: by some miracle, an effective viral treatment is discovered using existing drugs (that don’t need to be clinically proven like a vaccine). That, however, isn’t overly likely.
The second: a full lockdown (like what China was able to execute). That is a slightly stricter measure than what was proposed by the Victorian and New South Wales premiers yesterday. In China, no one was permitted outside their premises other than one person buying food each day.
China showed that a strict lockdown works: within 14 days you know everyone who has the virus and can contain and properly trace it.
Scott Morrison’s half measures and suggestions that we face six months of tight restrictions are likely to massively exacerbate the economic calamity. If Morrison’s six months of half measures are enacted, here are some of the lkely economic implications.
Airlines: Many will be nationalised. The extent of job losses will depend on governments, but it likely won’t be pretty.
Restaurants: They operate on wafer-thin margins at the best of times, so the majority won’t make it (many are already frantically sacking staff to stay afloat). Delivery/takeaway-focussed businesses may scrape by.
Services: Hairdressers, beauticians, massage therapists, gyms. First, staff will be sacked. Then, leases will be given up and businesses shut (although these businesses can eventually reopen as they require minimal capital).
Sporting clubs: It’s hard to see many surviving without significant government support. Many have been loss-making during the greatest period of economic prosperity we’ve ever seen.
Live venues, pubs and clubs: Dead. They have high fixed costs and literally may not be able to open for a year.
Hotels and main street travel agents: Mostly dead given high capital costs.
Construction businesses and property developers: May survive in the short term if they can shrink their cost bases enough, but the subsequent depression will finish them off.
Marketing and media: Will probably slip into administration and be acquired by lenders. The first thing businesses cut (and already are cutting) is marketing. Even Google and Facebook, virtual monopolies, have dropped more than 30%. Most Australian media companies like Nine, Seven or HT&E are down by 50% or more.
Retailers: Those which rely on discretionary spend, like fashion or electronics will most likely be forced to the wall. The only exception would be online retailers, which have a far lower cost base and will likely do better when people aren’t able to leave their house as easily.
Professional services: The businesses of lawyers, bankers, accountants and consultants may survive by drastically cutting costs bases (read: sacking swathes of employees) and probably merging.
Banks: They’re probably too big to fail due to years of government stupidity, but may need to be nationalised following an eventual property collapse, forcing future generations to pick up the tab.
Weaker businesses without a cash buffer, or with a high financial or operating leverage collapse, will cascade to skyrocketing unemployment. That will exacerbate the demand shock and cause relatively strong businesses to suffer, potentially forcing them to insolvency. The vicious cycle continues.
Ultimately, the only businesses that will survive are those which service human needs (like supermarkets, doctors, pharmacies, essential services) and businesses with very significant cash buffers, extremely strong market positions and a more flexible cost base (low financial leverage).
China showed that drastic and urgent measures, which Australian governments have inexplicably still not put in place, can allow a domestic economy to recover in as little as six weeks.
Fail to enforce a strict lockdown and it’s feasible that we will see unemployment rates of upwards of 40% (unemployment hit 25% during the depression, but that was when most women didn’t participate in the labour force) and a sharemarket drop of more than 80% (bearing in mind the Dow Jones dropped by around 70% between 1966 and 1982).
Now isn’t the time to focus on stimulus (that time will come, later) — stimulus largely alleviates the symptoms. It’s a like using a garden hose on a bushfire. Instead, governments need to do everything in their power to stop the cause. We need a mass lockdown.
Adam Schwab is a company director and angel investor, and is the author of Pigs of the Trough: Lessons from Australia’s Decade of Corporate Greed.
So it’s not a good idea to privatise the ABC then…?
How vigorously are “we” testing? We don’t even know the full extent of the outbreak – having to wait for someone to present with symptoms.
How do you know, when someone you’ve had passing contact with, has been carrying it, and put your health at risk?
Without a strict lock-down (gambling a couple of hard weeks against lingering hard months), pockets of infection will continue to exist as A infects B who infects C who passes it on to D who hands it on the E and so on – how long will the unaffected have to “self-isolate”, to avoid it, if there’s a good chance that they’ll come into contact with someone who has it as soon as they come out of self-imposed social hibernation?
…… But that ad-hoc approach is what Morrison’s putting all our hard-earned on?
…. If there was an outbreak of dengue fever, foot-and-mouth, Creutzfeldt–Jakob Disease – what would government do to “control” vectors?
Qld Health website today 23/03
“There is evidence that COVID-19 has started to spread in Australian communities.
We are unable to do widespread COVID-19 testing so it’s important to apply other measures at this early stage.”
Not to mention the previous (or possibly still current?) strict criteria for testing, must have been overseas or in contact with a confirmed case. How is it possible to find community transmission when you are only testing for overseas cases and those in contact with confirmed cases? Doesn’t seem logical to me.
Not inspiring confidence.
Or how do you know that YOU’re not passing it on?
Exactly.
We’re all yous.
“Airlines: Many will be nationalised. The extent of job losses will depend on governments, but it likely won’t be pretty.”
If the airlines are not nationalised the job losses will, undoubtedly, be worse.
“Banks: They’re probably too big to fail due to years of government stupidity, but may need to be nationalised following an eventual property collapse, forcing future generations to pick up the tab.”
At least one should be nationalised. The one that should never have been privatised.
“Future generations will pick up the tab” for what? The cost of nationalisation. Or the cost of overpriced property coming back to a sensible value?
Or the cost of this stimulation?
RIDDING AUSTRALIA OF THE COVID 19 VIRUS IN ONE HIT
Let us try and address the Covid 19 virus problem in cybernetic terms. We cannot do this yet but we may be able to do it soon and we should prepare.
Shutting down positive feedback
The Covid 19 virus spread is a positive feedback mechanism. In this instance the feedback gain can be very high, 1 to 44 in one Uruguayan case and this magnitude of gain can be very hard to dampen. This is particularly so where there is a feedback delay caused by the time lag between capacity to infect others and symptoms. To shut down this kind of aggressive positive feedback it is best to cut the feedback loop. This is preferable to trying to dampen the system as this takes too much time which extends economic and social disruption and costs more lives.
Ability to test
To cut the positive feedback loop we have to test everyone at the same time and isolate those who are positive until they are no longer infectious.
This means we must have testing kits. In the case of Australia with a population of about 24.5 million the requisite variety is 25 million kits. We want to test twice so the requisite variety becomes 50 million. This sounds a lot until you think of how many doses of various vaccines we produce for Australians each year. Preferably we want testing kits that use swabs and produce a quick result. False positives, within reason, are not a problem.
There are a number of testing kits already developed (at least nine on a quick website search) so the technology is feasible and advancing rapidly. Even if the tests generate false positives to the ‘flu, this is not really a problem as these people should self-exclude anyway. And test kits, unlike vaccines and medications, do not have to be checked for safety in humans. To accelerate the development and production of test kits, governments should act immediately to fund laboratories where required, indemnify laboratories against intellectual property litigation (compensation can be sorted out later) and also should request courts to refrain from issuing injunctions. This will enable laboratories to use all the available knowledge and techniques in the development of their products. It will enable cross-fertilization of ideas and technologies and manufacture by many producers large and small.
Testing
Whilst we are developing and producing the testing kits we need a system to assemble 24.5 million people for testing in one day. We need to develop this system in parallel with test kit development so it is on-line when the test kits are available.
Rather than set up a new testing system from scratch, it is quicker, cheaper and safer to adapt an existing system. We have a system with the requisite variety to assemble Australian citizens at convenient sites in one day. It is the electoral system, and this is the natural choice. But it will take time to add additional variety and adapt it and this process should begin without delay. The electoral system can be adapted by adding non-citizens to the database and arranging for medical staff or temporary medical staff to attend the polling booth sites to administer tests, process results and feed the results back to the database.
So, on a specified date, probably a Saturday, all persons residing in Australia, citizens and non-citizens, will attend polling booth sites but instead of voting they will be tested for the virus.
Segregation/Enforcement
If they are found positive, they must self-exclude until given the all-clear by a subsequent test. Each person is given a lanyard with photo-id and notification of their status – green for negative and red for positive. They must wear the lanyard when away from home, i.e. in public. Nobody will be allowed in public places without a green lanyard. Those wearing a red lanyard must keep away from others and use it only to attend necessary secured appointments such as driving to a testing site. The requisite variety for enforcement will come from the variety constituted by the public itself including supermarket personnel, storekeepers and the public generally; this will match the variety of any transgressors.
One week later the process will be repeated to pick up any strays and test the efficacy of the first testing/segregation. If necessary, the process can be repeated. High-risk persons, e.g. living in households with an infected person, or living in nursing homes can also be subjected to longer-term targeted screenings.
Assuming a successful outcome, the lanyards can be discarded after five weeks from the first test date.
Naturally, testing and quarantine measures must be maintained at airports and ports. In all other respects, business can get back to normal in Australia.
This one-day testing and segregation process can be carried out in parallel with other measures designed to dampen the positive feedback and mitigate damage, measures such as the development of vaccines, increase of hospital facilities, medications etc.
Kind regards
Tim Falkiner
Adam, why are you playing into “their” hands?