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Thinking 2020

Written by Pablo González and Pedro Nonay trying to understand Covid 19’s consequences.

Entry 2 – covid 19

10 April 2020

I know that I said, at the end of my previous entry, that I would now talk about possible decisions in each of the potential future scenarios, but I have realized that other issues must be touched upon first, which are those that create the “boundary conditions” of the equation (an extremely important concept in mathematics, … and in real life).

So, I try it now.

Problems prior to covid 19.

It’s easy to say it now, but that doesn’t take away from the importance of remembering it:

• before covid 19, many system stability problems were being detected. Those problems, of course, were related to the ultimate cause, which I have already said is the post-internet technological revolution.

Long books can be written about it (in fact, many very interesting ones have been written, such as those by Roubini, Friedman, Piketty, Harari, …). Regardless of the ideological origin of each writer, all of them focused on explaining new vulnerabilities of the system (of the Social Contract, in the end), which appeared after the technological revolution.

Without detail, and without pompous language (which makes it difficult to understand), I will try to summarize the weaknesses of the system detected (always in my opinion). They are the following:

• Increasing social inequality in the West.
  
  There is no need to develop it (because everyone is clear about it), but before all this, for economic issues, only what happened in the West (the former OECD countries, and the USA in particular) mattered.
  
  Nor do we have to prove, as it is an obvious fact, that in those countries (not so in the others), we have been “annihilating” the concept of middle class for some time now, and almost all the former members of that middle class are now lower class (or lower-middle class, to be more precise).
  
  This is the leftist discourse on “cutbacks”. I am not suspected of being a leftist, but it must be clear that they are right that this change of social classes is taking place.
  
  The cause of this is, again, the Internet (under the pseudonym of “globalization”). As technology allowed, we told workers one of the following things:
  
  
  • If you don’t do the intellectual work (an engineer, for example) at a competitive price, I order it from an Indian, who makes the plans cheaper than you, and sends them to me over the Internet.
    
    
  • If you don’t do the manual and face-to-face work here, at a competitive price (picking fruit, for example), I give it to an immigrant, who, if he hasn’t come yet, will come.

• The truth is that, with these attitudes, however logical they may be, and however necessary they may be to compete on an equal footing with our competitors (which is certainly necessary):

• • We have broken what they call the “social elevator”.
    
    Today, if a young person decides to study medicine (something very necessary and applauded in the pandemic), he will find that society rewards his 10-year study effort with a contract of 1,000 euros per month, in addition to an unstable job.
    
    Not to mention what is happening in the USA with college credit.
    
    
  • We have created a great anger of the lower classes.
    
    Regardless of whether what happened was logical, necessary, or even fair, what is certain is that nobody likes to live worse than before. And that is what has happened in almost all the former middle classes of the West (not in the other countries).
    
    This is fertile ground for populism. Above all, for the uneducated people, who are not all of the new lower classes, but there are many.

• Degeneration of the democratic system.
  
  Closely related to the previous point, if the majority of people in the former West (I repeat, this is not the case of the former poor countries) have “fallen down the social class” and are pissed off, and if democracy promotes the ideas of the majority (all votes are equal), and if the poor are many more than the rich, … it is clear that they will elect governments that support those ideas of the “unclassed”, even if their politicians cheat them (which is easy, because they are not that smart, neither the voters, nor the politicians).
  
  This is a very big threat to democracy in the former rich countries (we are seeing it continuously with the facts, as is the case of Spain, UK, USA, …).
  
  The only solution to the issue is: either to give a better quality of life to the “unclassified” (such as the minimum income issue), or to encourage dictatorships. It is hard, but that is how it is.

• Progress of former poor countries.
  
  Contrary to what has been happening in the former rich countries (the West), in poor countries, although per capita income is still lower than ours, most people today live a little better than yesterday.
  
  That makes them believe in the “social elevator” and support their government (even if it is dictatorial). In this, we older Spaniards have a clear example in Franco: the truth is that his way of guaranteeing his continuity was to have taken half of Spain from the lower class to the middle class (and it was a success, at least economically, and in his personal tranquility to be able to die in bed).
  
  And these former poor countries are today a great competitor of the former rich countries (China is a very clear example). This increases the geopolitical tensions of the proxy war (a very important issue, but I will deal with it elsewhere).

• Divorce between the financial and real economy.
  
  This has been going on for a long time.
  
  In history there has always been the ultimate control of someone outside the real economy (in the past it was kings, in another era it was religion, and now it is “high finance”).
  
  But, it is one thing if there is an “ultimate controller”, but it is quite another if that controller does not stick to its objective, which is the strategic manipulation of society, leaving normal life to flow.
  
  At the present time, there are very few possibilities of doing anything important outside the financial economy. And, it must be remembered, that economy produces nothing.
  
  Besides (or maybe because of that?), the balance sheets of the financial economy (banks, central banks, governments, investment funds, …) do not “hold a blow”, and are more false than Judas.
  
  An example of these false balance sheets is that they tell us that the banks have already overcome the problems of 2007. They do so with the argument that they have fewer toxic real estate assets on their balance sheets. They say that, with that, the stress tests are going well. But what they do not say is that, in these stress tests, public debt is not considered as a problematic asset. Everyone knows that the banks have a lot of public debt on their balance sheets. Does anyone believe that the states will be able to pay their debt, especially with their new cash needs after the virus? Won’t all those banks that pass the stress tests today be bankrupt at that time?
  
  No matter how much power they still have, once people have the impression that they do not contribute anything (which is almost certain after the famous bailouts after 2007), the power of the old financial economy is mortally wounded.
  
  New structures will emerge to fill the gap. And that is one of the great unknowns for decision-makers: Who will now be in ultimate strategic control?

• Ineffectiveness of many companies in the post-internet world.
  
  This issue may be less well understood by the friends to whom these entries are addressed, but it is very important.
  
  The truth is that, until recently, people tended to consider that the relevant companies were the old and famous ones (oil companies, cars, banks, electricity companies, …).
  
  But the Internet has changed everything. Among many other things, it has changed the way almost anything or any service is produced.
  
  Therefore, there are many companies (almost all the old ones) that have very high infrastructure costs that are completely unnecessary for their work after the existence of the Internet. This is the case of the network of offices and employees of the old banks (any online bank provides the same service with much lower costs), or many other examples.
  
  In addition (and somewhat based on the same problem), these companies have huge costs in assuming the debt they acquired to pay for their inefficient operating costs (what we call, in English, “shit on the balance sheet”).
  
  I don’t think these companies have any long term viability. They will all go bankrupt, and their service will be offered by new companies that have lower infrastructure costs, better use of post-internet tools, and do not have large debts originated by “sustaining and disguising shit from the past”.
  
  Until such time as these companies go bankrupt, as they were very powerful in the past, and maintain some power, what they will do is try to defend themselves. They will do it to the death (and they will die), but that war does a lot of damage to the economy.

It will continue, … (or not. We’ll see).