This is another mini-series of three posts looking at contingency planning for the Covid-19 pandemic should the health, socio-economic and geopolitical situations deteriorate. This first post describes what could be a Covid-19 worst-case scenario. The second post will look at the positive side of the pandemic and how our quality of life could conceivably be a lot better once the Covid-19 dust has settled – if we wanted to pursue a different sort of happiness to that offered by globalised consumerism. The third and final post in this series will propose a contingency plan for mitigating the effects of a Covid-19 worst-case scenario. Where do you stand on this at the moment? Do you think we’re through the worst of it and heading out of the tunnel? Do you think we’re heading into the tunnel? Do you think there’s not enough data to decide one way or the other? I don’t envy our politicians for one minute trying to lead us through this crisis.
A Month of Sundays
In a previous post I posited that we’re not heading out of the Covid-19 crisis; rather, we’re heading into it on three fronts: health, economic and social. I accept that I could be quite wrong, of course. A fair amount of mainstream comment is along the lines of, ‘this is bad, but before you know it, we’ll be back to normal’. A typical example would be analysis published by The EY ITEM Club on 9 April in which their economists said that the UK economy would contract by less than 7% during 2020 as a consequence of the Covid-19 pandemic. If you were earning, say, £29,000 per year, this would be like you taking a £2,030 cut in your salary. A recession, yes, and unwelcome of course; but not the end of the world.
The EY ITEM Club goes on to tell us that the UK economy would then grow by 4.5% in 2021. So, your reduced 2020 income of £26,970 would grow back to £28,184 by December 2021. The EY ITEM Club calculates that by early 2023, ie about a year later, everything would be back to as it was in December 2019 – immediately prior to half the world’s population having been put into lockdown. No big deal. So, less than three years’ worth of an economic challenge and then, Bob’s your Uncle, off we go again: consumerism steaming ahead, globalisation back in full swing, infinite economic growth reinstated.
Clearly, as far as the highly respected EY ITEM Club is concerned, Covid-19 will be challenging but not earth-shattering. Indeed, if you tend to subscribe to The EY ITEM Club’s world view, read no further. Pour yourself another glass of Pinot Grigio, head back into the garden, enjoy the rest of the lockdown and perhaps say to yourself, ‘Now I know what a month of Sundays feels like. Cheers to Covid-19!’
Is There a Problem, or Isn’t There?
Meantime, over at her Our Finite World blog, Gail Tverberg published a post on 31 March in which she said, ‘[her] analysis indicates that now, in 2020, the world economy cannot withstand long shutdowns. One very serious problem is the fact that the prices of many commodities (including oil, copper and lithium) will fall far too low for producers, leading to disruption in supplies. Broken supply chains can be expected to lead to the loss of many products previously available. Ultimately, the world economy may be headed for collapse’. So, from The EY ITEM Club we get under three years of moderate hardship. On the other hand, from Gail the Actuary (as she’s sometimes known) we get the world economy may be headed for collapse. They can’t both be right.
But there’s more. In the year to October 2020 the US government will borrow some $3.8 trillion fighting Covid-19, and will borrow another $2 trillion or so during 2021: say, $6 trillion of additional borrowing over two years. That’s equivalent to total US borrowing over the previous 243 years and 43 presidents – which is how long it took America to get to the first $6 trillion of US national debt. That looks significant to me, and not in the normal run of things vis-à-vis economics and economic activity. Over at the Zero Hedge blog, a post on 24 April declared, ‘Fitch warns of record US loan defaults in April as the economy implodes’. Not just a few loan defaults, but ‘record’ loan defaults as the economy implodes (rather than experiences a downturn).
Peak Prosperity’s Adam Taggart pointed out in a blog post on 24 April that, ‘the world is experiencing one of the worst demand shocks in history. In America, more than 26 million workers have lost their jobs in 5 weeks’.
The End of Industrial Age Economic Growth
And there’s more. Over at his Surplus Energy Economics blog, Dr Tim Morgan put up a post on 19 April in which he stated, ‘the reality, then, is that an ending of growth – and a consequent destabilising of the financial system – were lying in wait for us, needing only a catalyst, which the coronavirus has now supplied. What this means is that “de-growth” has now arrived’.
As I write, Sky News is on the TV in the background reporting that 135 million people in developing countries around the world are now going hungry (in ‘Crisis’) on the back of the Covid-19 pandemic. The fourth annual Global Report on Food Crises (2020) confirms this fact and goes on to report that a further 185 million people in 47 other countries around the world are classified as being in ‘Stressed’ conditions, at risk of slipping into ‘Crisis’ or worse if confronted by an additional shock or stressor. Cue Covid-19. In an article on 21 April the Financial Times reported, ‘Warnings of social unrest mount as coronavirus hits food availability’.
In a leading article in The Economist on 20 April it was explained how certain governments were exploiting Covid-19 to increase disproportionately control over their citizens (to wit, in China, Russia, Hungary, Serbia, Togo, Bolivia, Guinea, Azerbaijan, India, Cambodia, Libya, Zimbabwe, Jordan, Yemen, Oman and UAE, to name a few). The Economist observed that, ‘unscrupulous autocrats are exploiting the pandemic to do what they always do: grab power at the expense of the people they govern’. The Economist reported that, ‘Covid-19 will make people poorer, sicker and angrier … In countries where families are hungry, where baton-happy police enforce lockdowns and where cronies’ pickings from the abuse of office dwindle along with the economy, that may eventually cause some regimes to lose control’.
The Foundation for the Economics of Sustainability (feasta) published a report in 2012, ‘Trade-Off – Financial System Supply-Chain Cross-Contagion: A Study in Global Systemic Collapse’. In the report, David Korowicz argued that, ‘in order to understand systemic risk in the globalised economy, account must be taken of how growing complexity (interconnectedness, interdependence and the speed of processes), the de-localisation of production and its concentration within key pillars of the globalised economy have magnified global vulnerability opening up the possibility of a rapid and large-scale collapse. “Collapse” in this sense means the irreversible loss of socio-economic complexity which fundamentally transforms the nature of the economy. These crucial issues have not been recognised by policy-makers, nor are they reflected in economic thinking or modelling’.
One does wonder, therefore, to what extent The EY ITEM Club’s economic thinking and modelling considers the kind of observations I’ve made above? Perhaps they do factor in all this extraordinary turmoil and still conclude that by early 2023 the UK economy will be back to where it was in December 2019. However, I hae ma doots (Scots dialect for ‘I have my doubts’).
This Could Be Challenging
My point is this: it’s all very well for organisations like The EY ITEM Club to publish relatively benign forecasts declaring Covid-19 to be no big deal really and that in under three years or so life in the UK will be back to where it was in December 2019; however, there’s something going on here which makes me wonder which Ivory Tower do these economists inhabit? I accept that the men and women of The EY ITEM Club are dead clever and all that, and they do this stuff for a living, but honestly: the UK economy back to normal by early 2023? Seriously?
So, I’m not accepting at face value The EY ITEM Club’s prediction of ‘back to where we were within three years’. I’m looking at the risks associated with disintegrating globalisation; public and political hostility towards China with socio-economic implications in the third-party states (not to mention in China itself); surreal levels of global debt, becoming more surreal by the day (just spend a moment or two looking at the US Debt Clock); commodities’ prices cratering; tens if not hundreds of millions of people going hungry (which usually signals civil unrest and/or mass migration); thug-governments exploiting Covid-19 for their own ends; and the end of ‘infinite’ Industrial Age economic growth (economic growth being the economists’ panacea).
I’m also looking at the microeconomics of Covid-19 and assuming that people’s behaviour post-lockdown will bear little relation to their behaviour pre-lockdown. So, the idea that the UK will be back to December 2019 normality by early 2023 – according to The EY ITEM Club anyway – just doesn’t cut it for me. To be fair to EY, other mainstream economic institutions are publishing similar analyses and forecasts along the lines of ‘nothing to see here; move along; back to normal in a few years’ time’. The worrying thing is that politicians tend to buy into this kind of orthodox economics thinking because they’re made aware of little or nothing else. It would be great if one or two politicians would read a blog like this (I think my Member of Parliament does, to be fair), or better still, Gail Tverberg’s, or Tim Morgan’s, or Chris Martenson’s blogs if only to realise there could be alternative views to the likes of those espoused by The EY ITEM Club and their ilk.
At this point it’s a case of you pays your money and you takes your choice. I said earlier that if, by and large, you subscribe to the notion that Covid-19 is indeed a bit of a problem, but it’s far from being a socio-economic or geopolitical game-changer, then get back to the Pinot Grigio; enjoy the lockdown. If, on the other hand, you’re interested in joining me in some worst-case analysis – if only to dismiss it in the end – then read on. My guess is that, notwithstanding my dig at the politicians above, British government departments like the Foreign & Commonwealth Office and the Ministry of Defence will now be modelling scenarios in the range best-case to worst-case vis-à-vis where the Covid-19 pandemic could be taking us. Whether Her Majesty’s Treasury is doing this, other than reading reports from the likes of The EY ITEM Club, is another matter; I’m only partly joking. I say this as an ex-military man with twenty years’ commissioned service and some prior knowledge of how Whitehall works.
Let’s assume for the purpose of this post that The EY ITEM Club’s analysis and economic forecast is a tad wide of the mark, God bless them. Let’s assume, by contrast, that the global socio-economic impact of the Covid-19 pandemic will be more towards the serious end of the spectrum. The question is what would be the leading indicators of trouble ahead? What would suggest to us that Covid-19 was more than just a little local difficulty and that perhaps some individual contingency planning might be in order?
This is important: worst-case planning does not mean worst-case expected or predicted. The worst-case scenario is simply the basis for a contingency plan. Below, I’ll set out a worst-case scenario which might make you shudder. I’m not doom-mongering. I’ve done some desktop research into what various organisations with expertise in health, economic and social matters have been forecasting could happen under certain circumstances. The point about conducting worst-case analysis is to develop a contingency plan for the time if (not when) the worst-case scenario comes to pass. Some people have no interest in the worst-case, still less contingency planning to mitigate its effects. If that’s you, then this is another break point to get back to the Pinot Grigio.
As I intimated above, I served for twenty years as a commissioned officer in the British armed forces. I saw operational service in Northern Ireland during ‘The Troubles’; I saw action during the Falklands War in a unit attached to 5 Infantry Brigade; I was deployed to the Middle-East to serve on US General Norman Schwarzkopf’s staff during the first Gulf War (1991). One of the characteristics of military culture is worst-case planning. For this reason, and others, the British armed forces have been assigned to assist the National Health Service (NHS) and other public services in coping with the Covid-19 pandemic.
One of the reasons that the NHS has struggled to cope with preparing for Covid-19 is that it normally operates at near-100% capacity. I don’t want to knock the heroic efforts of NHS frontline staff, some of whom include my family and friends. However, as a state institution, the NHS was probably never going to be able to cope with a pandemic, even though in policy terms it should have been able to. The NHS lacks sufficient resources for, and its managers struggle to manage anything other than the status quo – and even that’s questioned by some. It’s already a matter of public record that the readiness (lack of) and (under) performance of Public Health England has been little short of a disgrace. Perhaps I can say these things as someone who spent two years as a director of an NHS regional health board in Scotland and with an NHS doctor-wife.
In the armed forces, we’re taught in the first days and weeks of our training to worst-case plan and to hold resources in reserve. Indeed, it’s not unusual for a commander to assign as much as one-third of his resources in reserve in the knowledge that no plan survives first contact with the enemy. As soon as you cross the Start Line, anything can happen. To have nothing in reserve is to consign your command to almost certain defeat. The NHS holds virtually nothing in reserve and its Covid-19 warriors are now paying the price.
I’ve digressed somewhat. For this and previous coronavirus posts, I’ve adopted the stance that we’re at the leading edge and not the trailing edge of the Covid-19 crisis. If I’m right, then the question is this: what might we see happening to indicate that from the perspectives of health, economics and the functioning of society, it would make sense to contingency plan for the worst-case?
Based on my desktop research, here’s a worst-case scenario for which I think some personal contingency planning wouldn’t go amiss. I’ve a hunch that a scenario something like this will be one of several being considered by the British government somewhere in the bowels of Whitehall. I shall cover the scenario under four headings: health; the global economy; social and societies, and geopolitics.
Billions of people will be infected by Covid-19. Global deaths will be in the region of 150 million human beings (up to 2.0% of the global population). Most of these deaths – perhaps over 100 million – will occur outside of the First World. In the UK, this could translate into as many as 325,000 Covid-19-related deaths occurring in several epidemic waves. Normally, about 600,000 people die every year in the UK, so Covid-19 could result in a circa 50% increase in the death rate. We’re already at over 20,000 UK Covid-19 deaths as I draft this post. On this scenario alone, one can understand why the British government is reticent about lifting the lockdown. There’s an issue too relating to the latent demand now building up behind Covid-19 as other serious health conditions are not being addressed in order to ‘Protect the NHS’. The question is, will there be a tsunami of non-Covid-19 cases presenting to the NHS in the coming months as the Covid-19 situation is perceived to be easing (but isn’t)?
The global economy will go into a deep recession. Global GDP will decline by 15% which would be equivalent to the economic impact of The Great Depression. Indeed, on 6 April, the World Economic Forum stated that, ‘the shock to the global economy from Covid-19 has been both faster and more severe than the 2008 global financial crisis and even The Great Depression’. On 8 April, Oxford Economics stated that, ‘such is the uncertainty over the outlook that we’re continuing to update our downside simulations to show how, under plausible assumptions, the outlook could materially worsen’. Here, The Economist considers how bad Covid-19 could be for the economy:
Social and Societies
The worst-case health and economic impacts on society will be profound. Unemployment will be very high. People will behave differently, partly for economic reasons and partly through fear of the coronavirus itself. In the short-term, people are behaving differently already because they must do so by law: staying at home, working from home, not working at all, social distancing, increased personal hygiene and so on. I touched on the individual behaviour aspect of the pandemic in my previous post.
In the wider sense, there will be a changed relationship between the individual and the state; the workplace environment will change; the educational environment will change; the healthcare environment will change; the nature of travel will change nationally and internationally; leisure activities will change; nationalism will become a threatening issue in some countries. Indeed, the overall look and feel of society will change significantly, not least because we’ve bred a generation which expects to live in a largely risk-free world.
Despite some evidence in the UK of The Blitz Spirit in confronting Covid-19 to date, there’s scope for a certain societal ugliness to develop looking forward (this is a worst-case scenario, after all). It’s a fact that The Great Depression involved a decade of hardship culminating in a world war. I’m not suggesting we’re on a trajectory to world war now. However, there is significant uncertainty and, therefore, risk associated with the impact of Covid-19 on how we shall live our lives and relate to each other intra-nationally and internationally in the coming decade and quite possibly beyond that timescale – which leads us neatly into the geopolitical perspective.
According to the financial historian, Adam Tooze, there are four sources of geopolitical risk associated with Covid-19: the eurozone and Italy’s situation in particular (which could trigger the worst-case wildcard described below); China, its economy and global role in future; emerging markets; and the OPEC complex (oil – the ‘black gold’ of the global economy). There’s a general risk that the leaders of the G7/G20 countries will fail to cooperate effectively in responding to the global impact of Covid-19. The so-called ‘rules based international order’ will come under pressure, and the US’s global role and its relationships with China and Russia will be critical.
The worst-case scenario I’ve described above would unfold over time; say, over weeks and months and into a year and more. However, there’s a wildcard component to the worst-case. There could conceivably be a global financial crisis associated with the related effects of cascading debt defaults and currencies coming under strain and potentially collapsing which no central bank nor any amount of money printing would prevent if the dominos started to fall. Such a crisis would appear to come out of nowhere, has a relatively low probability of occurring but is a risk, nonetheless.
On 13 April, Brink stated that, ‘if the number of “fallen angels” increases significantly due to Covid-19, it would have important implications for a wide range of investors and financial institutions, creating a potentially destabilising dynamic in the system … the $2 trillion stimulus package passed by the US government is one step in this direction. But will it be enough to prevent fallen angels and zombies from infecting financial markets and the broader economy? We believe this is a headline that needs to garner more attention’.
This is another break point. If you’ve read the Covid-19 pandemic worst-case as I’ve described it above and decided, ‘No chance’, then it’s back to the Pinot Grigio for you. If, on the other hand, you’re thinking, ‘So what?’ then that is the standard military procedure for what was called in my day the ‘Combat Appreciation’. You’ve looked at the situation and you’re now turning to the development of your plan in the face of the threat. Your plan needs to hedge against the worst-case scenario coming to pass.
‘Oh, ye of little faith!’ some will cry. Yes, I know human beings are both resilient and ingenious and there will be life after, or at least life living with Covid-19. It goes without saying that Covid-19 doesn’t herald the end of mankind, nothing like it of course. However, for me it’s difficult to survey the facts of the matter – the virulence of the disease itself; the extraordinary self-imposed global economic shutdown (depth, scope and speed of change); the impact on human behaviour and, therefore, the wider social impact; the geopolitical impact – and not conclude that things are going to change. So, maybe you and I need to prepare for change?
Clearly, some of you will think otherwise. Just the other day a buddy of mine (TH) posted on social media, ‘people say that society will not be the same again, it will change completely. I don’t believe this; people and governments forget very quickly’. TH may well be right of course, and you may subscribe to the general idea that, give it a year or three and we’ll all be wondering what the Covid-19 fuss was about? There’s the Pinot Grigio calling again.
The next post in this mini-series of three will reflect the optimist in me – yes, there definitely is one (I’m a defensive-pessimist by nature, in case you hadn’t already guessed). In Part 2 I shall reflect on the upside of the pandemic in terms of the good things that have arisen because of it, and how and why we should try to hang on to the positives. Our quality of life could conceivably be much better after the Covid-19 dust has settled. The challenge will be how to consolidate and build upon the upside. Finally, in Part 3 of this series I’ll draw on my decade and more of taking a pastime interest in how best to plan and prepare for a shock to the normal workings of society: a contingency plan for the Covid-19 worst-case scenario coming to pass. Meantime, don’t panic …
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See you down the pub … eventually.