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Thinking 2020

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

Entry 3 – Covid 19

11 April 2020

Before continuing with the “story” that I had in mind, I would like to make some comments on opinions that I have received from some of my friends about the 2 previous entries. Opinions that I appreciate, and I ask you, because they help me to focus ideas, and can make this little exercise a little more useful for everyone.

Comments on feedback received:

Corruption.

A friend of mine tells me that we must put an end to it, because it is a great scourge. He is not lying, but we must understand that corruption, like drugs or whores, is something impossible to eliminate. It has existed since the beginning of time, and it will exist until the end.

What we can do (and this is something that all civilizations have done, with greater or lesser success) is to try to minimize its effects. 

A country in which the corrupt control all the institutions is not the same as one in which there is some corruption, but it is harassed by the institutions.

It would be very nice to eliminate it, but perfection in this is not possible.

It should also be clear that, although corruption has always been a problem, it is by no means the main cause of Covid 19 or of the economic and social crisis we are facing.

Black money.

I am also told that the whole current situation is likely to increase the displacement of many people into the underground economy. 

This can occur to avoid taxes, under the justification that tax money is spent by governments on profound stupidities (they are not wrong). Or, it can also happen to make the “war” economy more viable, as would be the case of paying salaries in black and avoiding social security expenses (the employer spends less, and the worker earns more).

The risk is certain. And it will generate a lot of tensions. The parties involved will look for ways to do it. And governments will look for ways to avoid it (with their traditional ineffectiveness).

Historically, black money has moved around 20% of the economy (a little more or a little less, depending on the country and the moment). Which is not only not little, but rather a lot. But I don’t see that changing. I say that because there are human factors at play here (greed versus risk-taking), and these human attitudes have nothing to do with the crisis, but are eternal. 

Surely the need will encourage more than one to take a risk they would not take without it. But governments also have more tools today than ever before (precisely after the Internet) to monitor this. 

I think the game will be a “draw”. And things will remain more or less the same.

Debt forgiveness.

I am also told that the only way out is a debt “reset” (in its many variants). 

I am not saying that they are not trying and studying it, in all versions. In fact, I think they are doing it, or is it not something like that what was done in Spain with the SAREB?

But, in order to do something like this on a large scale, it must be taken into account that a forgiven debt means that someone does not get paid. Of course, the “forgiven” person improves his balance sheet, but the “forgiving” person ruins it. 

The question is: do banks and states have room to take massive losses on forgiven debts? I think the answer is no.

Someone (rather many) can ask that banks write off, with state aid to assume those losses (even being previously nationalized). And that the governments take the money for these aids out of “the banknote printing machine”. It sounds nice, in fact, they are going to do it as far as they can. But those things have a limit that we are going to exceed. Then there is hyperinflation, loss of world confidence in that country, …..

What can happen is something similar to what happens in company mergers. When a company merges with another company with which it has a debt, when the creditor and the debtor remain on the same balance sheet, the debt disappears (as if by magic). However, when such things happen, it is usually the creditor who takes control of the new company, with all its assets. That is to say, it ends up being something similar to a dation in payment (I give you what I have left, and with that I no longer owe you anything).

Thus, the concept of “merger of countries” may appear (isn’t that what is being discussed in Europe under the name of “mutualization of debt”?) In this case, the country that stops collecting is the one in charge (it is its payment).

Or, there is another way for countries to “forgive” their debt, which is direct payment in kind. This would be the case of handing over public assets to whoever puts up the necessary money. An exaggerated but descriptive example would be for Spain to hand over ownership of the Prado Museum, or the Royal Palace, or its many other properties to whoever gives it the money it needs. And, if someone says that this is stupid, I remind him that the Marshall Plan in Spain (little, as Berlanga made clear in the film), cost us to hand over the sovereignty of the American bases to the USA (and it seemed to them an acceptable consideration at the time).

Summary: Yes, there will be some of that, but it is not so easy. Those of Pablo Iglesias simplify it in “we will take it away from the rich” and, it may be ideologically viable, but it is not at all clear to apply, because there are workers who have their savings in that place to which they want to charge the costs.

I am more inclined to a “merger of countries”, or a dation in payment, than to a direct cancellation of debts.

Obsolete charts of accounts.

Another interesting comment received says that, in the modern world, nothing is amortized in 10 years, that times have accelerated, and that this makes balance sheets more false (by obligation of the law).

It is completely true. But that is not the cause of today, nor of the internet (a little bit yes, specifically the part that everything has been accelerated). The cause is that bureaucrats always want to use the same rules (accounting plan, for example) for very different things. And, just as you can’t use a screwdriver to turn a nut (a wrench is better for that), you can’t use the same chart of accounts for very different activities. 

The clear example is that, if a company works with products with a production cycle of 15 days (those that sell lettuce, for example), its balance sheet should not be annual, but biweekly, which is the production cycle. And if a company works with products with a production cycle of several years (real estate development, for example), the annual balance sheet does not provide any useful information (a ten-year balance sheet would provide much more information).

In short, it is true that the official accounting information is little more than garbage. But that does not come from this crisis, but from always. 

A different thing is that there are experts in taking advantage of these stupidities of obligation by Law. If someone knows that, although the official balance sheets are ugly, in that company there are assets that have not been disclosed, and the company has difficulties due to accounting law, it is time to “attack” it.

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I continue now with the “story”, although not much, because I have been extended with the previous comments.

Covid 19 and “stop the bike”.

Our society already had some previous problems, with an ultimate cause (Internet), and with some weaknesses that I have already mentioned.

Covid 19 is doing a real stress test to the system. And it will most likely give us the heart attack (of the system, not of the health of each one, although someone will also get the other one).

We have half of the world’s population “confined” (another buzzword). I know that those who do not comply are many more than what the media say (the fools, the smart people, the thieves, the drug dealers, …). But billions of people stopping their activity for months is something never seen before (and all at the same time). One thing is a strike in a sector, or in a country, for a few days, and another thing is this.

The fact is that we are not consuming (or much less); we are not producing; we will not generate profits, which means that we will not pay taxes next month (the case of the self-employed is more bleeding); …

We have stopped the bicycle. And we all know that, if you don’t pedal, and you don’t put your legs on, the consequence is to fall off. It is a silly example, but very descriptive, and it is what is going to happen (with little remedy).

A slightly more serious example than that of the bicycle is that of blast furnaces. If you stop the furnace with the vats full of liquid steel and let it cool, the steel solidifies. In that case it is not at all easy to “open store” the next day. The vat has been rendered unusable, and a new facility has to be built (with a large investment). Moreover, if that happens, and if there is the money for the new facilities (which will not be the case), it is time to rethink if the old facilities were the most adequate for the current demand, or if something different has to be built again. I think that is the situation we find ourselves in.

The world has stopped (that old joke saying: “stop the world and I’ll get off” has come true, and … it’s not so funny). The machines have broken down. Not just the social elevator, but almost all the machines. Getting it up and running again involves a lot of investments (with money we don’t have), and decisions about what new machines we need now.

Downtime costs.

The stoppage in economic activity will generate two types of costs. The direct ones, which are those of unpaid wages, unmade sales, and ungenerated taxes. And the indirect ones, which are those of future investments in “fixing the machine”.

I don’t think almost anyone can accurately estimate these costs today (data is lacking). But it is easy to make some big numbers to get an idea of the order of magnitude. And, since that is what matters (the order of magnitude), it does not affect at all to have errors of 20-30 %. That’s why I’m going to make those fat numbers with data almost from memory, since looking for exact data in Google is easy, but it would consume unnecessary time.

In short, the State will have much less revenue than expected, and much more expenditure than expected (aid to individuals and companies, in addition to the financial ones). More than 50 billion may be missing if the “standstill” lasts two months. Moreover, even if the total standstill is two months, the reactivation will not be 100% from one day to the next. There will be many months of low activity, which will mean the need for more money.

To this must be added the costs of “fixing the machine”, which will be new investments, or the hackneyed “Marshall Plan”. This will have to be higher than the previous one.

Where is Spain going to get that money from? If someone leaves it to them, they will impose their rules. And if they can’t find it, the way out is starvation.

For now they are going to dissimulate, and to put patches. For example, the pacts of two days ago with Europe say that 400,000 million will be activated for the whole of Europe. If they are distributed proportionally to the population, Spain will get 10%, which is about 40,000 million. And, … we have already seen that this figure is not enough for the immediate costs.

Here I am reminded of a sentence I read recently. It went something like this: “the result of the geopolitical war between the USA and China, which has accelerated with Covid 19, is that the spoils for the winner will be Europe”.

Another way of looking at the issue is that similar numbers can be made for all countries. The result will be the same: bankruptcy of almost all of them. This could lead us to think of something similar to the fall of the Roman Empire.

I will continue, … . But not everything is so pessimistic. There may be solutions by creating a New Order.

If you have any feedback or comments on what I’ve written, feel free to send me an email at pgonzalez@ie3.org.

You are allowed to use part of these writings. There’s no property rights. Please do it mentioning this websitte.

You can read another writings of Pablo here:

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