Paul Buckingham - Blog Philosophy and life in general

It seems that the Americans have now decided to sign up to the idea of Universal Income, at least for the time being. As part of the $1.8 trillion stimulus package, $250 billion has been allocated to enhanced unemployment benefit. In this country, we have the government agreeing to pay 80% of salaries of those not working as a result of Coronavirus. The government has now also said that it will pay the self-employed 80% of their normal net profit (subject to a limit of £2,500 per month) during the time they cannot work. But we expect that, in the short-term, the amount of financial hardship which will result from the virus close-down will be minimised. No-one should go hungry and no-one should be thrown out of their home as a result of inability to pay the mortgage or the rent. We even have and extra 6 months in which to take our cars for an MOT.

But there have already been significant effects and there will undoubtedly be even more significant effects in the aftermath of all this. An immediate effect was that the stock-markets around the globe dropped precipitously, although following the announcement of the US aid package, the stock-markets have rebounded quite a lot. They are though currently still substantially down from their pre-coronavirus peak. This is in part a reaction to the fact that the listed companies will not be able to make the profits they were used to making, but it also reflects the fact that a number of companies will simply not survive, regardless of the assistance given to them by governments.

Part of the reason for this is that massive amounts have been taken out of companies by way of dividends, leaving them relying on borrowing. Easyjet for example has been seeking taxpayer support to tide it over but has now gone ahead with a £174 million dividend payout to shareholders, including £60 million to Stelios, the founder of the airline. Heathrow has paid out £2.15billion in dividends since 2015. In the same period, Gatwick – which was owned by a number of sovereign wealth funds during those years – paid out £1.1billion. British Airways owner IAG has paid out €2.4billion (£2.2billion) in dividends since 2015, and has also completed share buybacks worth €1.7billion in this time. Ryanair bought back €3.2billion of shares in the period and paid out €918million of dividends. This is perhaps why the government has decided not to offer general support to the sector at the moment, despite the clamour from these companies.

Of course, President Trump has added to the uncertainty which exists in these strange times. He has added to it by virtue of the seeming certainties which only he apparently knows of. He is telling us, based on information from Fox News that a drug which used to be used to combat malaria is going to work well against Covid 19 and that everything should be back to normal by Easter, so that the great USA can go back to work. His much-respected medical chief, Dr Fauci, has not been seen at this side since giving an interview to Science magazine in which he admitted that the Trump occasionally misspoke at press conferences, meaning that his statements had to be corrected afterwards.

Meanwhile, in the real world, the ‘war’ continues on three fronts. Obviously they are trying to find out if any of our existing drugs would work against the virus and, yes, the hydroxychloroquine which Fox News and then Trump were bigging up is one of the candidates. And somewhat ironically it is long-since out of patent and so no-one’s going to be able to make lots of money out of it. Then there is the prospect of a vaccine, within a few months according to Trump, and perhaps within a year if we’re very lucky, according to Dr Fauci and everyone else.

And the third front is our social distancing, which is what is causing the immense financial downturn. It is here that the Trumpean way is again somewhat different to that of ordinary folk. I’m sure that he’s right when he says road accidents kill more people in the USA in a year (42,000) than Covid 19 has – so far. And, as he said, there is no suggestion that all traffic should be banned. But with the virus, the number of American deaths could well get into the hundreds of thousands.

Strangely, though, a professor of risk management at Bristol University was quoted today as saying that a fall in GDP of more than 6.4%, would mean that more years of life would be lost through beating the virus than by letting it win. There is, it seems, a link globally between GDP and life expectancy, in part because richer countries can afford to spend more on health care, safety and environmental regulation. He has looked at the lives saved versus the effect on the economy of a year’s lock-down (to allow a vaccine to be developed). According to his modelling, in the absence of an effective drug in the meantime, just under a million Britons would die prematurely. Most of these would be elderly and so, in terms of years of life lost, the lives lost would equate to the deaths of 400,000 average age adults – roughly comparable to the toll in the Second World War. He takes the view that beyond the -6.4% point, crushing the economy in order to save lives would actually mean that we lost more lives that we saved. I’m not sure that his modelling is really that reliable and there is a view amongst some of his colleagues that he may be inverting cause and effect. They suggest that greater longevity leads to greater economic growth rather than the other way around. So then, we shall have to hope that we do not provide the test bed needed by the Professor to properly test his hypothesis.

But, in the meantime, it seems that all the major economies are shaking the fruit from the magic money tree. I find this quite encouraging. But although I understand double-entry book-keeping, the theory of money has always seemed a bit opaque to me. We know that governments via their central banks now control the supply of money in ways which were impossible in the days of the gold standard. In those days, there was a general feeling that the value of a currency could broadly be determined by how much gold was in the vaults to back it up. Now, no longer. And if we have all turned our printing presses on at the same time and to a similar extent, then all of our currencies ought roughly to depreciate together, meaning that none of them ought to significantly depreciate against the others.

Will it mean that a world recession is nonetheless inevitable? Many are saying yes, but, as we have never encountered a situation like this before, there is no reason to believe any particular economic hypothesis. As I see it, governments have it in their grasp to effect the putting into hibernation of their countries economies by giving individuals and businesses the cash they need to survive during the lock-down. And the UK government is indeed doing this.

It can be done in two ways, however. The first is by borrowing money on the bond markets at historically low rates of interest, but with an obligation for future generations to repay. The second way involves printing money which, from an inflationary point of view, is not normally to be welcomed, but if we can start to come out of hibernation in the next few months, then the inflationary effect ought not to be overwhelming. I don’t think it would be like Venezuela or Zimbabwe. Even less so, I think, if every major economy did the same thing.

And if we don’t inject cash into the system then the end result will indeed be the bankruptcies and recession/depression that we all want to avoid. So then giving both to businesses and individuals whatever amounts of money it takes, should be the priority for the politicians. As countries we should all, in one way or another, pay people to do nothing for a time, trying also to prevent them getting into significant debt or losing their homes. If we can bring this to an end earlier rather than later, why is it that we should not then be able more or less to pick up from where we left off?

Just showing off the unplumbed depths of my ignorance.

Paul Buckingham

25 March 2020

	Coronavirus – the financial effects

	It seems that the Americans have now decided to sign up to the idea of Universal Income, at least for the time being. As part of the $1.8 trillion stimulus package, $250 billion has been allocated to enhanced unemployment benefit. In this country, we have the government agreeing to pay 80% of salaries of those not working as a result of Coronavirus. The government has now also said that it will pay the self-employed 80% of their normal net profit (subject to a limit of £2,500 per month) during the time they cannot work. But we expect that, in the short-term, the amount of financial hardship which will result from the virus close-down will be minimised. No-one should go hungry and no-one should be thrown out of their home as a result of inability to pay the mortgage or the rent. We even have and extra 6 months in which to take our cars for an MOT. But there have already been significant effects and there will undoubtedly be even more significant effects in the aftermath of all this. An immediate effect was that the stock-markets around the globe dropped precipitously, although following the announcement of the US aid package, the stock-markets have rebounded quite a lot. They are though currently still substantially down from their pre-coronavirus peak. This is in part a reaction to the fact that the listed companies will not be able to make the profits they were used to making, but it also reflects the fact that a number of companies will simply not survive, regardless of the assistance given to them by governments. Part of the reason for this is that massive amounts have been taken out of companies by way of dividends, leaving them relying on borrowing. Easyjet for example has been seeking taxpayer support to tide it over but has now gone ahead with a £174 million dividend payout to shareholders, including £60 million to Stelios, the founder of the airline. Heathrow has paid out £2.15billion in dividends since 2015. In the same period, Gatwick – which was owned by a number of sovereign wealth funds during those years – paid out £1.1billion. British Airways owner IAG has paid out €2.4billion (£2.2billion) in dividends since 2015, and has also completed share buybacks worth €1.7billion in this time. Ryanair bought back €3.2billion of shares in the period and paid out €918million of dividends. This is perhaps why the government has decided not to offer general support to the sector at the moment, despite the clamour from these companies. Of course, President Trump has added to the uncertainty which exists in these strange times. He has added to it by virtue of the seeming certainties which only he apparently knows of. He is telling us, based on information from Fox News that a drug which used to be used to combat malaria is going to work well against Covid 19 and that everything should be back to normal by Easter, so that the great USA can go back to work. His much-respected medical chief, Dr Fauci, has not been seen at this side since giving an interview to Science magazine in which he admitted that the Trump occasionally misspoke at press conferences, meaning that his statements had to be corrected afterwards. Meanwhile, in the real world, the ‘war’ continues on three fronts. Obviously they are trying to find out if any of our existing drugs would work against the virus and, yes, the hydroxychloroquine which Fox News and then Trump were bigging up is one of the candidates. And somewhat ironically it is long-since out of patent and so no-one’s going to be able to make lots of money out of it. Then there is the prospect of a vaccine, within a few months according to Trump, and perhaps within a year if we’re very lucky, according to Dr Fauci and everyone else. And the third front is our social distancing, which is what is causing the immense financial downturn. It is here that the Trumpean way is again somewhat different to that of ordinary folk. I’m sure that he’s right when he says road accidents kill more people in the USA in a year (42,000) than Covid 19 has – so far. And, as he said, there is no suggestion that all traffic should be banned. But with the virus, the number of American deaths could well get into the hundreds of thousands. Strangely, though, a professor of risk management at Bristol University was quoted today as saying that a fall in GDP of more than 6.4%, would mean that more years of life would be lost through beating the virus than by letting it win. There is, it seems, a link globally between GDP and life expectancy, in part because richer countries can afford to spend more on health care, safety and environmental regulation. He has looked at the lives saved versus the effect on the economy of a year’s lock-down (to allow a vaccine to be developed). According to his modelling, in the absence of an effective drug in the meantime, just under a million Britons would die prematurely. Most of these would be elderly and so, in terms of years of life lost, the lives lost would equate to the deaths of 400,000 average age adults – roughly comparable to the toll in the Second World War. He takes the view that beyond the -6.4% point, crushing the economy in order to save lives would actually mean that we lost more lives that we saved. I’m not sure that his modelling is really that reliable and there is a view amongst some of his colleagues that he may be inverting cause and effect. They suggest that greater longevity leads to greater economic growth rather than the other way around. So then, we shall have to hope that we do not provide the test bed needed by the Professor to properly test his hypothesis. But, in the meantime, it seems that all the major economies are shaking the fruit from the magic money tree. I find this quite encouraging. But although I understand double-entry book-keeping, the theory of money has always seemed a bit opaque to me. We know that governments via their central banks now control the supply of money in ways which were impossible in the days of the gold standard. In those days, there was a general feeling that the value of a currency could broadly be determined by how much gold was in the vaults to back it up. Now, no longer. And if we have all turned our printing presses on at the same time and to a similar extent, then all of our currencies ought roughly to depreciate together, meaning that none of them ought to significantly depreciate against the others. Will it mean that a world recession is nonetheless inevitable? Many are saying yes, but, as we have never encountered a situation like this before, there is no reason to believe any particular economic hypothesis. As I see it, governments have it in their grasp to effect the putting into hibernation of their countries economies by giving individuals and businesses the cash they need to survive during the lock-down. And the UK government is indeed doing this. It can be done in two ways, however. The first is by borrowing money on the bond markets at historically low rates of interest, but with an obligation for future generations to repay. The second way involves printing money which, from an inflationary point of view, is not normally to be welcomed, but if we can start to come out of hibernation in the next few months, then the inflationary effect ought not to be overwhelming. I don’t think it would be like Venezuela or Zimbabwe. Even less so, I think, if every major economy did the same thing. And if we don’t inject cash into the system then the end result will indeed be the bankruptcies and recession/depression that we all want to avoid. So then giving both to businesses and individuals whatever amounts of money it takes, should be the priority for the politicians. As countries we should all, in one way or another, pay people to do nothing for a time, trying also to prevent them getting into significant debt or losing their homes. If we can bring this to an end earlier rather than later, why is it that we should not then be able more or less to pick up from where we left off? Just showing off the unplumbed depths of my ignorance. Paul Buckingham 25 March 2020
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