The number of global COVID-19 cases is growing exponentially. And humans have zero intuition for exponential growth. While it is hard to predict what the future will look like, it is safe to say that society will change drastically over the next 24 weeks.
If we continue at this pace, there will come a time when many of us will know someone who has been a victim of the virus. That is a powerful motivator. With major elections this year, such as the American presidential race, these emotions will turn political.
I don’t know much about epidemiology. So this post won’t have real predictions about the progression of the disease. But, here are a set of predictions about the world’s economic and political systems.
These ideas are a mix of data-driven, history-based, or whimsical flights of fancy. So I’ve left a confidence score by each one. Consider these as fun, Sapiens-style, bizarre yet plausible thought exercises.
1-2 weeks: Numbers, and fear, still growing.
USA will issue household debt moratoriums.
US household debt now stands at about 76% of GDP. Non-housing debt represents $4.2 trillion, of the $14.15 total household debt.
To prevent households from going underwater, the government will halt all interest payments for government originated student loans and government originated mortgages. Eventually, this will be expanded to credit cards and auto loans. The Fed will step in to backstop all consumer credit, mandate be damned.
Millennial America will grow frustrated with shelter in place.
The extent of the American economic damage, caused by shelter-in-place, will become clear. Jobless claims have hit an unprecedented all time high, and will continue to rise.
Younger generations, already burdened with debt, will grow frustrated at their economic prospects. They’ll begin to push back against measures to curb a disease that appears to disproportionately affect older generations. OK Boomer returns, but with a more vicious angle.
Research will re-emerge about the costs of loneliness, and mental illness due to isolation. Younger Americans will be the first to seriously push for creating a parallel economy for those who are at-risk.
2-4 weeks: Virus taking over the world, but hitting an apex.
The US Government will bail out shale oil producers.
Big Shale is critical for the long term health of the American economy. With oil prices dropping, they’re in trouble.
Trump knows this, and the folks lobbying him know this. Big oil will get more bailouts; perhaps hidden in the bylines of Congress’ stimulus packages.
The US will instigate regime change in Venezuela.
No more oil revenue, and large-scale sanctions, as well as a terrible coronavirus outbreak, will cause Venezuelan society to suffer greatly. Cuba will send in doctors to fix it, but there just won’t be enough hospital beds. Foreign oil producers will sell Venezuelan assets and exit the country. Colombia will overflow with Venezuelan refugees.
The US will seize the opportunity for regime change, either through covert or overt means, and install Juan Guaido as President.
US will begin debt forgiveness.
After attempting to stimulate the economy through cash transfers, the US government will realize that the fiscal spending multiplier doesn’t exist when the economy is shut down. So the only way to prevent household balance sheets from being permanently distressed will be to eliminate the possibility of insolvency. They’ll do so, by forgiving debt.
The government will start with forgiving student loans. Aside from mortgages, these are the largest liability on household balance sheets. Most are government guaranteed, and are relatively easy to forgive. The government will eventually move on though to auto loans and credit cards too. While mortgages won’t be forgiven outright, there might be large scale restructuring, with lenders taking haircuts. This movement will turn political, starting from a re-energized American left.
When needed, the Treasury and the Fed will step in to make lenders whole and prevent chaos in the financial system. Every society goes through periods of debt forgiveness. This is the first one with fiat currency. Fiscal hawks will scream loudly about inflationary risks. Modern Monetary Theorists will celebrate their day in the sun. One of them will be incorrect, and their movement will end.
Tech and telecom will attempt to become corporate heroes.
As society works remotely, big tech and big telecom will take advantage of the opportunity to shore up their public image. Telecom companies will increase speeds and data limits. They’ll allow late payments. Big tech will give out plenty more freebies. The world will lap it up, not realizing that most of these measures have 0 marginal cost, and aren’t that hard to provide.
Every tech company, big or small, will send a sad yet optimistic yet unnecessary email about how they’re coping with COVID-19, even if it’s an internet startup, with a few techbros in sweatshirts, working remotely, who can now stay at home vaping all day, without ever wearing pants, while still getting paid, who weren’t in much economic danger anyway.
India will declare a financial emergency.
India’s three-week lockdown will cause deep social unrest, similar to what was seen during demonetization. The government will begin large scale basic income to quell the unrest, as well as ensure that all workers can get food supplies.
The pre-existing malaise in the financial system will worsen. Asset prices will continue to fall, and the RBI will have limited room to ease monetary policy.
Eventually, the government will be forced to declare a financial emergency for the first time in the history of the republic. The central government will take control of states’ spending. Budgets will be shifted around. Various loss-making government businesses, such as the Indian railways or Air India, will be temporarily halted, allowing their working capital to be used elsewhere. Massive spending on procurement of goods for public distribution, will begin.
6 – 12 Weeks (the tail end of the virus):
Emerging market debt crises will begin, as dollar denominated debt gets in trouble.
The US dollar will strengthen. Countries with dollar denominated debt will suffer greatly. Developing countries that are at risk of being hit by the virus, such as India, will suffer even more. Balance of payments crises will emerge in countries with current account deficits, such as Pakistan. The IMF will need to step in again. They will once again, “rescue” countries with neoliberalism, leading to unhappiness and more economic malaise.
The developed financial world learnt its lessons from the 1997 Asian financial crisis though, and won’t be badly hit this time.
Reserve Bank of India will begin to monetize Indian government debt.
India will commit the cardinal sin of preventing domestic economic turmoil by just printing money. Combined with a possible balance-of-payments crisis, India will become a future IMF basket case.
As the dollar strengthens, the RBI will try to fight it. They have enough room to stabilize the rupee for a while. However, they’ll run out of foreign exchange eventually, and the rupee will start to collapse. Oil prices will pick up in dollar terms as demand comes back. In rupee terms, oil will become significantly more expensive. The Indian economy will take a massive hit. Inflation make will a comeback due to higher oil. Combined with the RBI printing money, the risks of hyperinflation will set in.
Nassim Taleb will start a cult, and name it the Church of Extremistan.
A 2𝛔 event.
Intellectual aethists, formerly Pastafarians, all join Taleb in worshipping the Black Swan. Readers of Zero Hedge and Ribbonfarm will make for strange bedfellows. Two will meet, fall in love, and recoil in horror when they discover each others’ blogs of choice.
Big tech will emerge stronger
Plenty of cash, an increased need for cloud and productivity software, greater e-commerce spending as everyone gets accustomed to working from home, and so on. Amazon, Google and Microsoft will continue to grow. They’ll somehow manage to be growth stocks, that are defensive plays at the same time. Anti-trust action against them will be halted, at least for the next year or two.
Everyone will (temporarily) forget about Climate Change.
After the 2008 crisis, the world forgot about climate change for a little while. Interest picked back up 10 years later. Expect the same to happen, especially as the world spends heavily on post-crisis economic stimulation.
America’s coal-country will be suffering as a result of the GDP distress. Republicans won’t want to worsen their condition, and Democrats won’t be up for this fight, so expect further easing of EPA norms, and the continued American retreat from environmental leadership.
At least one, high-profile leveraged hedge fund will fail.
A few popular trading strategies, that proliferated in times of low volatility, will unwind. It might be risk parity, or perhaps CLOs on top of the leveraged loan market.
The financial turmoil will create a few victims. Quant hedge fund with high levels of leverage will be in trouble. If it’s small, it’ll fail with a small WSJ obituary and a Matt Levine joke.
If it’s large, the Fed will attempt to secretly organize a bailout. They won’t want to repeat what they did in 2008 by bailing out the fund directly. They’ll repeat what happened in 1997 with Long Term Capital Management. They NY Fed will gather bigwigs in a room, and organize a bailout. Warren Buffett will become the equity-provider of last resort again. Fortunately, this time there’s less chance he will be in Antarctica, and out of reach due to a solar flare.
12 – 24 weeks (after the virus):
The Euro Crisis will return (again)
As clichéd as it is inevitable.
Aside from Greece, Italy has the highest sovereign debt to GDP ratio in Europe. By gross levels, they have over $2 trillion in government debt outstanding.
Italy will need to spend heavily on recovery after this disease and the economic shutdown the country has been in. This will require lifting the caps on Eurozone budget deficits. The Spanish will do the same. Southern Europe will push for Germany to spend more, and save less, to prevent the Euro from strengthening. The Germans will complain.
Populist Euroseceptic movements, such as the Five star movement, will gain more steam. Macron, and a revitalized France will try to step in and save the Euro.
However, Italy will struggle to pay back its public debt. Once Italy’s sovereign bonds get into trouble, nothing will be able to help the euro hold. Italy is too large to bail out.
The Democratic presidential candidate will push for a ban on stock buybacks.
The American airline industry spent years making heady profits, and spent it all on stock buybacks. The democratic left will turn the banning of buybacks an election issue.
In all crises, we deal with moral hazard once everything is over. At the end of the 2008 crisis, Dodd Frank was passed to punish the banks. Something similar will happen to punish the companies that enriched shareholders in lieu of saving up for a rainy day.
National infrastructure will become a political plank on the right.
Low interest rates and the need for fiscal stimulus means that the time is right for a US national infrastructure plan. The American right-wing will take up the call, asking for the roads, bridges and railways to be rebuilt. Calls for creating a national broadband network will grow louder. The 2020 Presidential election will see Republicans aligning behind large scale infrastructure spending, and Democrats aligning behind a larger social safety net.
Growth in blogs prophesying about the future.
We’re stuck inside without much to do. That’s a much better place to be than the victims who’re suffering, or the healthcare workers who’re sacrificing. Stay safe and stay inside!