Understanding Our Pandemic – Economy Predicament

The world’s number one problem today is that the world’s population is too large for its resource base. Some people have called this situation overshoot. The world economy is ripe for a major change, such as the current pandemic, to bring the situation into balance. The change doesn’t necessarily come from the coronavirus itself. Instead, it is likely to come from the whole chain reaction that has been started by the coronavirus and the response of governments around the world to the coronavirus.

Let me explain more about what is happening.

[1] The world economy is reaching Limits to Growth, as described in the book with a similar title.

One way of seeing the predicament we are in is the modeling of resource consumption and population growth described in the 1972 book, The Limits to Growth, by Donella Meadows et al. Its base scenario seems to suggest that the world will reach limits about now. Chart 1 shows the base forecast from that book, together with a line I added giving my impression of where the economy really was in 2019, relative to resource availability.

Figure 1. Base scenario from 1972 Limits to Growth, printed using today’s graphics by Charles Hall and John Day in “Revisiting Limits to Growth After Peak Oil,” with dotted line added corresponding to where the world economy seems to be in 2019.

In 2019, the world economy seemed to be very close to starting a downhill trajectory. Now, it appears to me that we have reached the turning point and are on our way down. The pandemic is the catalyst for this change to a downward trend. It certainly is not the whole cause of the change. If the underlying dynamics had not been in place, the impact of the virus would likely have been much less.

The 1972 model leaves out two important parts of the economy that probably make the downhill trajectory steeper than shown in Figure 1. First, the model leaves out debt and, in fact, the whole financial system. After the 2008 crisis, many people strongly suspected that the financial system would play an important role as we reach the limits of a finite world because debt defaults are likely to disturb the worldwide financial system.

The model also leaves out humans’ continual battle with pathogens. The problem with pathogens becomes greater as world population becomes denser, facilitating transmission. The problem also becomes greater as a larger share of the population becomes more susceptible, either because they are elderly or because they have underlying health conditions that have been hidden by an increasingly complex and expensive medical system.

As a result, we cannot really believe the part of Figure 1 that is after 2020. The future downslopes of population, industrial production per capita, and food per capita all seem likely to be steeper than shown on the chart because both the debt and pathogen problems are likely to increase the speed at which the economy declines.

[2] It is far more than the population that has overshot limits.

The issue isn’t simply that there are too many people relative to resources. The world seems to have

  • Too many shopping malls and stores
  • Too many businesses of all kinds, with many not very profitable for their owners
  • Governments with too extensive programs, which taxpayers cannot really afford
  • Too much debt
  • An unaffordable amount of pension promises
  • Too low interest rates
  • Too many people with low wages or no wages at all
  • Too expensive a healthcare system
  • Too expensive an educational system

The world economy needs to shrink back in many ways at once, simultaneously, to manage within its resource limits. It is not clear how much of an economy (or multiple smaller economies) will be left after this shrinkage occurs.

[3] The economy is in many ways like the human body. In physics terms, both are dissipative structures. They are both self-organizing systems powered by energy (food for humans; a mixture of energy products including oil, coal, natural gas, burned biomass and electricity for the economy).

The human body will try to fix minor problems. For example, if someone’s hand is cut, blood will tend to clot to prevent too much blood loss, and skin will tend to grow to substitute for the missing skin. Similarly, if businesses in an area disappear because of a tornado, the prior owners will either tend to rebuild them or new businesses will tend to come in to replace them, as long as adequate resources are available.

In both systems, there is a point beyond which problems cannot be fixed, however. We know that many people die in car accidents if injuries are too serious, for example. Similarly, the world economy may “collapse” if conditions deviate too far from what is necessary for economic growth to continue. In fact, at this point, the world economy may be so close to the edge with respect to resources, particularly energy resources, that even a minor pandemic could push the world economy into a permanent cycle of contraction.

[4] World governments are in a poor position to fix the current resource and pandemic crisis.

In our networked economy, too low a resource base relative to population manifests itself in a strange way: It appears as an affordability crisis that leads to very low prices for oil. It also appears as terribly low prices for many other commodities, including copper, lithium, coal and even wholesale electricity. These low prices occur because too large a share of the population cannot afford finished goods, such as cars and homes, made with these commodities. Recent shutdowns have suddenly increased the number of people with low income or no income, pushing commodity prices even lower.

If resources were more plentiful and very inexpensive to produce, as they were 50 or 70 years ago, wages of workers could be much higher, relative to the cost of resources. Factory workers would be able to afford to buy vehicles, for example, and thus help keep the demand for automobiles up. If we look more deeply into this, we find that energy resources of many kinds (fossil fuel energy, nuclear energy, burned biomass and other renewable energy) must be extraordinarily cheap and abundant to keep the system growing. Without “surplus energy” from many sources, which grows with population, the whole system tends to collapse.

World governments cannot print resources. What they can print is debt. Debt can be viewed as a promise of future goods and services, whether or not it is reasonable to believe that these future goods and services will actually materialize, given resource constraints.

We are finding that using shutdowns to solve COVID-19 problems causes a huge amount of economic damage. The cost of mitigating this damage seems to be unreasonably high. For example, in the United States, antibody studies suggest that roughly 5% of the population has been infected with COVID-19. The total number of deaths associated with this 5% infection level is perhaps 100,000, assuming that reported deaths to date (about 80,000) need to be increased somewhat, to match the approximately 5% of the population that has, knowingly or unknowingly, already experienced the infection.

If we estimate that the mean number of years of life lost is 13 years per person, then the total years of life lost would be about 1,300,000. If we estimate that the US treasury needed to borrow $3 trillion dollars to mitigate this damage, the cost per year of life lost is $3 trillion divided by 1.3 million, or $2.3 million per year of life lost. This amount is utterly absurd.

This approach is clearly not something the United States can scale up, as the share of the population affected by COVID-19 relentlessly rises from 5% to something like 70% or 80%, in the absence of a vaccine. We have no choice but to use a different approach.

[5] COVID-19 would have the least impact on the world economy if people could pay little attention to the pandemic and just “let it run.” Of course, even without mitigation attempts, COVID-19 might bring the world economy down, given the distressed level of today’s economy and the shutdowns experienced to date.

Shutting down an economy has a huge adverse impact on that economy because quite a few workers who are in good health are no longer able to make goods and services. As a result, they have no wages, so their “demand” goes way down. If the economy was already having an affordability crisis for goods made with commodities, shutting down the economy tends to greatly add to the affordability crisis. Prices of commodities tend to fall even lower than they were before the crisis.

Back in 1957-1958, the Asian pandemic, which also started in China, hit the world. The number of deaths was up in the range of the current pandemic, relative to population. The estimated worldwide death rate was 0.67%.  This is not too dissimilar from a death rate of 0.61% for COVID-19, which can be calculated using my estimate above (100,000 deaths relative to 5% of the US population of 33o million).

Virtually nothing was shut down in the US for the 1957-58 pandemic. When doctors or nurses became sick themselves, wards were simply closed. Would-be patients were told to stay at home and take aspirin, unless a severe case developed. With this approach, the US still faced a short recession, but the economy was soon growing again. Populations seemed to reach herd immunity quite quickly.

If the world could somehow have adopted a similar approach this time, there still would have been some adverse impact on the economy. A small percentage of the population would have died. Some businesses might have needed to be closed for a short time when too many workers were out sick. But the huge burden of job loss by a substantial share of the economy could have been avoided. The economy would have had at least a small chance of rebounding quickly.

[6] The virus that causes COVID-19 looks a great deal like a laboratory cross between SARS and HIV, making the likelihood of a quick vaccine low.

In fact, Professor Luc Montagnier, co-discoverer of the AIDS virus and winner of a Nobel Prize in Medicine, claims that the new coronavirus is the result of an attempt to manufacture a vaccine against the AIDS virus. He believes that the accidental release of this virus is what is causing today’s pandemic.

If COVID-19 were simply another influenza virus, similar to many we have seen, then getting a vaccine that would work passably well would be a relatively easy exercise. At least one of the vaccine trials that have been started could be reasonably expected to work, and a solution would not be far away.

Unfortunately, SARS and HIV are fairly different from influenza viruses. We have never found a vaccine for either one. If a person has had SARS once, and is later exposed to a slightly mutated version of SARS, the symptoms of the second infection seem to be worse than the first. This characteristic interferes with finding a suitable vaccine. We don’t know whether the virus causing COVID-19 will have a similar characteristic.

We know that scientists from a number of countries have been working on so-called “gain of function” experiments with viruses. These very risky experiments are aimed at making viruses either more virulent, or more transmissible, or both. In fact, experiments were going on in Wuhan, in two different laboratories, with viruses that seem to be not too different from the virus causing COVID-19.

We don’t know for certain whether there was an accident that caused the release of one of these gain of function viruses in Wuhan. We do know, however, that China has been doing a lot of cover-up activity to deter others from finding out what actually happened in Wuhan.

We also know that Dr. Fauci, a well-known COVID-19 advisor, had his hand in this Chinese research activity. Fauci’s organization, the National Institute for Allergy and Infectious Diseases, provided partial funding for the gain of function experiments on bat coronaviruses in Wuhan. While the intent of the experiments seems to have been for the good of mankind, it would seem that Dr. Fauci’s judgment erred in the direction of allowing too much risk for the world’s population.

[7] We are probably kidding ourselves about ever being able to contain the virus that causes COVID-19. 

We are gradually learning that the virus causing COVID-19 is easily spread, even by people who do not show any symptoms of the disease. The virus can spread long distances through the air. Tests to see if people are ill tend to produce a lot of false negatives; because of this, it is close to impossible to know whether a particular person has the illness or not.

China is finding that it cannot really contain the virus that causes COVID-19. A recent South China Morning Post article indicates that roughly 14 million people are to be tested in the Wuhan area in the next ten days to try to control a new outbreak of the virus.

It is becoming clear, as well, that even within China, the lockdowns have had a very negative impact on the economy. The Wall Street Journal reports, China Economic Data Indicate V-Shaped Recovery Is Unlikely. Supply chains were broken; wholesale commodity prices (excluding food) have tended to fall. Joblessness is increasingly a problem.

[8] If we look at deaths per million by country, it is difficult to see that lockdowns are very helpful in reducing the spread of disease. Masks seem to be more beneficial.

If we compare death rates for mask-wearing East Asian countries to death rates elsewhere, we see that death rates in mask-wearing East Asian countries are dramatically lower.

Figure 2. Death rates per million population of selected countries with long-term exposure to the virus causing COVID-19, based on Johns Hopkins death data as of May 11, 2020.

Looking at the chart, a person almost wonders whether lockdowns are a response to requests from citizens to “do something” in response to an already evident surge in cases. The countries known for their severe lockdowns are at the top of the chart, not the bottom.

In fact, a preprint academic paper by Thomas Meunier is titled, “Full lockdown policies in Western Europe countries have no evident impacts on the COVID-19 epidemic.” The abstract says, “Comparing the trajectory of the epidemic before and after the lockdown, we find no evidence of any discontinuity in the growth rate, doubling time, or reproduction number trends.  .  . We also show that neighboring countries applying less restrictive social distancing measures (as opposed to police-enforced home containment) experience a very similar time evolution of the epidemic.”

It appears to me that lockdowns have been popular with governments around the world for a whole host of reasons that have little to do with the spread of COVID-19:

  • Lockdowns give an excuse for closing borders to visitors and goods from outside. This was a direction in which many countries were already headed, in an attempt to raise the wages of local workers.
  • Lockdowns can be used to hide the fact that factories need to be closed because of breaks in supply lines elsewhere in the world.
  • Many countries have been faced with governmental protests because of low wages compared to the prices of basic services. Lockdowns tend to keep protesters inside.
  • Lockdowns give the appearance of protecting the elderly. Since there are many elderly voters, politicians need to court these voters.

[9] A person wonders whether Dr. Fauci and members of the World Health Organization are influenced by the wishes of vaccine and big pharmaceutical companies.

The recommendation to try to “flatten the curve” is, in part, an attempt to give vaccine and pharmaceutical makers more time to work on their products. Is this really the best recommendation? Perhaps I am being overly suspicious, but we recently have been dealing with an opioid epidemic which was encouraged by manufacturers of Oxycontin and other opioids. We don’t need another similar experience, this time sponsored by vaccine and other pharmaceutical makers.

The temptation of researchers is to choose solutions that would be best from the point of their own business interests. If a researcher gets much of his funding from vaccine and big pharmaceutical interests, the temptation will be to “push” solutions that are beneficial to these interests. In some cases, researchers are able to patent approaches, even when the research is paid for by governmental grants. In this case they can directly benefit from a new vaccine or drug.

When potential solutions are discussed by Dr. Fauci and the World Health Organization, no one brings up improving people’s immunity so that they can better fight off the novel coronavirus. Few bring up masks. Instead, we keep being warned about “opening up too soon.” In a way, this sounds like, “Please leave us lots of customers who might be willing to pay a high price for our vaccine.”

[10] One way the combination of (a) the activity of the virus and (b) our responses to the virus may play out is as a slow-motion, controlled demolition of the world economy. 

I think of what we are experiencing as being somewhat similar to a toggle bolt going around and around, moving down a screw. As the toggle bolt moves around, I picture it as being similar to the virus and our responses to the viruses hitting different parts of the world economy.

Figure 3. Image of how the author sees COVID-19 as being able to hit the economy multiple times, in multiple ways, as its impact keeps impacting different parts of the world.

If we look back, the virus and reactions to the virus first hit China. China’s recovery is moving slowly, in part because of reduced demand from outside of China now that the virus is hitting other parts of the world. In fact, additional layoffs occurred after Chinese shutdowns ended, because it then became clear that some employers needed to permanently scale back operations to meet the new lower demand for their product.

Commodity prices, including oil prices, are now depressed because of low demand around the world. These low prices can be expected to gradually lead to closures of wells and mines extracting these commodities. Processing centers will also close, making these commodities less available even if demand temporarily rises.

As one country is hit by illnesses and/or shutdowns, we can expect supply lines for manufacturing around the world to be disrupted. This will lead to yet more business closures, some of them permanent. Debt defaults tend to happen as businesses close and layoffs occur.

With all of the layoffs, governments will find that their tax collections are lower. The resulting governmental funding issues can be expected to lead to new rounds of layoffs.

Natural disasters such as hurricanes, tornadoes, floods, earthquakes and forest fires can be expected to continue to happen. Social distancing requirements, inadequate tax revenue and broken supply lines will make mitigation of all of these disasters more difficult. Electrical lines that fall down may stay down permanently; bridges that are damaged may never be repaired.

Initially, rich countries can be expected to try to help as many laid-off workers as possible with loans and temporary stipends. But, after a few months, even with this approach, many individual citizens and businesses will likely not be able to pay their rent. Default rates on home mortgages and auto loans can be expected to rise for a similar reason.

We can expect to see round after round of business failures and layoffs of employees. Financial systems will become more and more stressed. Pensions are likely to default. Death rates will rise, in part from epidemics of various kinds and in part from growing problems with starvation. In fact, in some poor countries, lower-income citizens are already having difficulty being able to afford adequate food. Eventually we can expect collapsing governments (similar to the collapse of the central government of the Soviet Union) and overthrown governments.

Longer-term, after this demolition ends, there may be some surviving pieces of economies. These new economies will be much smaller and less dependent upon each other, however. Currencies are likely to be less interchangeable. The remaining people will need to learn to make do with many fewer goods than are available today. It will be a very different world.

This entry was posted in Financial Implications and tagged , , , , by Gail Tverberg. Bookmark the permalink.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.

3,868 thoughts on “Understanding Our Pandemic – Economy Predicament

  1. “The COVID-19 pandemic is a blow to an already fragile global economic outlook.

    “The health crisis, sharp downturn in activity, and turmoil in global financial markets caught emerging market and developing economies at a bad moment. The past decade has seen the largest, fastest, and most broad-based increase in debt in these economies in the past 50 years.”

    https://www.imf.org/external/pubs/ft/fandd/2020/06/COVID19-and-debt-in-developing-economies-kose.htm

  2. “Earnings for North American coal miners may plunge by more than half this year as the coronavirus pandemic makes a weak market even worse, according to Moody’s Investors Service.

    ““Coal consumption will be crushed in 2020,” analysts led by Benjamin Nelson wrote in a report Sunday. “We expect a sharp and sustained slowdown in economic activity will result in lower economic growth, reduced demand for electricity and reduced demand for steel.””

    https://www.bnnbloomberg.ca/coal-earnings-set-to-plunge-50-in-north-america-moody-s-says-1.1444014

    • Coal miners have had difficulties as their employers became bankrupt before. Wages have fallen, and pensions have disappeared. Coal mining towns likely have few other jobs available, either. Wages of coal miners fell in Britain before WWI. This is what happens with peak coal.

    • Against rioters and looters, police should not be using tear gas and rubber bullets. They should be using lethal force. Salus populi suprema lex.

      • This strikes me as a naive comment.

        Law enforcement (formerly “peace officers”) should never use lethal force unless their lives, or the lives of civilians, are clearly in danger.

        The attitude that police forces should be able to monopolize and apply violence (particularly that which is lethal) with next to no consequence is a large part of the reason we see such animosity towards our modern day police forces.

        And while this isn’t a defense of those foolish individuals who choose to loot and riot, it may be worth considering that when so many citizens across a nation rise up in revolt, the problem might not lie with the citizens themselves but with those that govern them.

        Cheers,
        -GBV

        • First, rioters and looters clearly do threaten the lives of civilians, so I’m not sure where we disagree. Secondly, I agree that the police should not have a monopoly of force; that is why the US has a Second Amendment. But when the people are disarmed, and the police refuse to defend them, then indeed we have a collapsing polity.

  3. I know people here at OFW read a lot. Can anyone give me any good news, especially economic, social and cultural?

    1. COVID19 numbers going down is not good news.
    2. Numbers going from “disastrous” to “horrible” is not considered as good news.
    3. Easily manipulated numbers going back to normal when the overall situation does not is not good news
    4. Stock market is not the economy. It is not good news that stock goes up
    5. Gasoline/petrol prices cheaper is good news for consumers but bad news for the producers

    Anyone can help to cheer up the mood here? If not, the timeline for collapse is pulled forward.

    • Good news? Perhaps most out there were sold an above average flu which targets a certain segment of the population (elderly, chronic illnesses, obese) that was turned into the Black Plague II.

      • Blacks are definitely over-represented in the death statistics. I am sure they are over-represented in the number of illnesses as well. They tend not to have as good health insurance. If they are off work, they generally do not have “sick days” that they can take, either.

        • I think Rodster was referring to The Black Death II, not to a plague that targeted ethnically black people. Of course, poverty, obesity, poor health awareness and poor health care are all probably positively correlated with COVID-19. The US black population probably has disproportionately high levels of all these things.

          And then there’s the vitamin D disparity because people with very dark skin require eight times as much exposure to sunlight to synthesize the same amount of this vitamin.

          It’s also interesting that Asian Americans are significantly less prone to obesity than the rest of the nation.

    • Social distancing and the other COVID-19 requirements amount to mandated inefficiency. It is hard to get any good news out of mandated inefficiency. In theory, people will be somewhat less likely to get COVID-19 now, but they may still get it later. If they go out and participate in demonstrations when they are not at work, it negates the benefits of the COVID-19 restrictions.

      Distance learning is the most detrimental to poor, single parent families. This pushes the gulf between the rich and the poor farther. Also, the rich can often work from home, while the poor cannot.

    • CTG,

      Everything here in Japan is back to the “new” normal. It’s the same as the old normal except that 90% of people are wearing masks. In Tokyo, all the department stores are now back open so women who can’t live without their Chanel or their Prada, can breathe easy again. Tens of trillions of helicopter money is flooding into the system and it is hoped that this will kick start the economy.

      For some reason, butter and full cream milk have disappeared from our local supermarkets recently, but I’m hoping this is just a temporary glitch and not an attempt to force us to embrace margarine.

      The virus is going to mutate, as RNA viruses are wont to do, and those mutations are going to render it less deadly and dangerous over time. Until that happens, keep optimizing your vitamin D and vitamin C intake and keep wearing a mask, even if only for reasons of etiquette or superstition. Once the virus has weakened, throw away the mask but keeping taking the vitamins.

      Is collapse inevitable or are we all going to just slow down and take it easy from now on? Are our rulers intent on a controlled demolition? And if so, how much of the old normal is going to be blown away? Can a new paradigm save us? Do we deserve saving? If I had a crystal ball that could show me the answers, I don’t think I’d want to look.

    • Depends on how hopeful you are for a possible recovery. These will seem wildly optimistic to many here:
      1) Electric Cessna can go 100 miles on $6, compared to ~$200 for gasoline: https://www.youtube.com/watch?v=vUI3ZjCq11A

      So even if we have half the energy, if we can use it much more efficiently, we can do more work with less.

      2) SpaceX first commercial manned spaceflight: https://www.youtube.com/watch?v=XinU9iuUBwM

      3) ITER gets its cryogenic base installed: https://www.youtube.com/watch?v=S0ewQR2rJak
      Fusion would be a game changer, combined with electric vehicles.

      4) Tesla getting closer to solid state batteries, which are a proven thing that exists that other companies like Dyson have working versions of:

    • It is not possible for businesses to take money, when they are forced to operate at half-capacity or lower, especially if their rent charges stay the same. It is pretty clear that rent charges have to drop; if they drop, the value of the building drops. Debt defaults are much more likely.

      The whole social distancing scheme is terribly disruptive for businesses. It will be almost impossible for them to make money. It is only fair if the pain spreads to the owners of the buildings as well. It will also spread to the banks and others owning the debt.

  4. Joke of the Day..
    Wall St. set for higher open on prospects of economic recover
    June 2, 2020, 6:43 AM Est
    (Reuters) – Wall Street’s main indexes were set to hit fresh three-month highs on Tuesday as optimism over reopening businesses overshadowed fears of more disruptions from protests in the country over the death of a black man while in police custody.
    Some of the worst-hit stocks in the travel sector, including American Airlines Group Inc , United Airlines , Norwegian Cruise Line and Carnival Corp , rose between 1.3% and 2.9% in premarket trading.
    Improving economic data, trillions of dollars in stimulus and a restart of business have helped the S&P 500 climb about 38% from its March lows, leaving it only about 11% below its Feb. 19 record high.
    Investors, however, are keeping a close eye on Sino-U.S. tensions and anti-police brutality marches and rallies that have often turned violent in many cities.
    Yep, us investors are keeping an eye out…our banker, The Fed, is investing our money in the market

Comments are closed.