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.

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

3,000 Responses to Understanding Our Pandemic – Economy Predicament

  1. Covidinamonthorayearoradecade says:

    https://www.breitbart.com/health/2020/05/22/study-20-of-students-may-not-return-to-college-in-fall/

    “Let’s look at it the other way around: About 80% of students say they plan on enrolling in the fall. They’re planning on enrolling in the same institution and continuing with their education. I think that students get it. Families get it,” Mitchell said.

    families must be planning on all of their newly unemployed adults getting their jobs back by September…

    good luck with that…

    • When you go back to the original study, one of the authors says,

      “When you look at current college students, there’s always attrition especially between freshman and sophomore year. So that’s usually around 8%-10% so add on top of that another 10%.”

      So the change is not quite as dreadful as the 20% headline would suggest. But it still means smaller enrollments and a likely need to lay off staff at universities.

      • beidawei says:

        On the other hand, an entering freshman who failed to enroll would not automatically be admitted for a later semester, as a returning sophomore probably would. Some unknown percentage of sophomores, juniors, and seniors will probably decide to wait until they can attend class in-person–certainly in the case of majors like music or art, which can’t effectively be taught at a distance.

      • beidawei says:

        And remember, even a small decline in enrollment can have a huge impact on university budgets. A 20 percent drop (which I think is realistic) would be huge, and result in the closure of hundreds of US colleges.

  2. Fast Eddy says:

    Don and Tim are best mates…..

  3. “Covid-19 is unique in how it hijacks cells
    “The result is essentially no brake on the virus’s ability to replicate itself.”
    https://www.statnews.com/2020/05/21/coronavirus-hijacks-cells-in-unique-ways/

    • Xabier says:

      It’s all getting rather weird.

      The latest ‘scientific’ report on COVID in the UK states that it can’t really be caught if you sit next to (!!!) an infected person or back-to-back with them, for instance on a train or bus.

      You need to do fairly direct ‘plume’ inhalation, or, one supposes, French kiss them.

      This directly contradicts earlier tracing studies which showed how one infected person spread it to everyone they had a meal with over an hour or two, or half the passengers in a bus (one assumes no kissing on the bus). Maybe those US meat packers who fell sick and died are gay, who knows?

      Estimates of contagiousness, lethality, etc, are now all over the place, but there is clearly a drive to down-play things so that restrictions can be relaxed. Stand 1.5 or 1 m apart, not 2, etc. Simply laughable.

      The only thing to do is wait for the re-opening and see just what transpires in real life.

      I may get a badge ready: ‘Kiss me if you’ve already had it!’ -in the pure spirit of British double-entendres. Until then, the visor stays down.

      • SomeoneInAsia says:

        There are just so many contradicting claims about the stupid virus nowadays — where it came from, what can protect against it, etc etc.The whole trouble is that so many of the people who are supposed to give us the answers just have a big, fat axe to grind.

    • This is a strange phenomenon. The article seems to be arguing for giving people a particular type of interferon in advance of catching COVID-19. I wonder whether Vitamin C and Vitamin D might not work almost as well.

      Interferon seems to already be in use, in treating hepatitis, AIDS, and some kinds of cancer. https://www.webmd.com/drug-medication/interferons-guide#1

      • Duncan Idaho says:

        “I wonder whether Vitamin C and Vitamin D might not work almost as well.”
        It doesn’t.
        Interferon?
        It may in early stages– but nothing significant.
        In stage 2, probably harmful.
        A least that is what my virology comrades have discovered.

  4. Harry McGibbs says:

    “The beaten-down banking sector will remain under pressure through 2025 even as the economy recovers, the International Monetary Fund said Friday.

    “In its latest “Global Financial Stability Report,” the IMF found banks across nine advanced economies will struggle to generate profits over the next five years as the coronavirus pandemic causes a sustained period of low interest rates.”

    https://www.cnbc.com/2020/05/22/imf-says-banks-will-struggle-to-be-profitable-through-2025.html

  5. Fast Eddy says:

    Paris:

    • Xabier says:

      Argenteuil?! The setting of some of Monet’s loveliest paintings. Well, there’s a change to be appreciated…..

    • Nope.avi says:

      In America, no-go zones are called warzones. They’re like no-go zones but with more guns.

      What else is happening? Is there arson?
      Are thugs looting the abandoned and boarded up stores?

      I thought riots were a right-wing phenomenon in France. What are the immigrants in no-go zones rioting about? Europe has a lot more social welfare than Europe. They should be content.

    • Let up on “stay at home” orders and there seems to be more riots. We start understanding the real reason for these orders. What tourist would really like to visit an area such as this?

  6. Fast Eddy says:

    The police are a lot less heavy handed when they enter these neighbourhoods… no doubt they are aware that if they take out an eye of an Algerian immigrant …. that would spark complete and utter mayhem…

    Paris is a a massive powerkeg….

  7. Harry McGibbs says:

    “Nouriel Roubini does expect things to get better before they get worse: He foresees a slow, lackluster (i.e., “U-shaped”) economic rebound in the pandemic’s immediate aftermath. But he insists that this recovery will quickly collapse beneath the weight of the global economy’s accumulated debts.

    “Specifically, Roubini argues that the massive private debts accrued during both the 2008 crash and COVID-19 crisis will durably depress consumption and weaken the short-lived recovery.”

    https://nymag.com/intelligencer/2020/05/why-the-economy-is-headed-for-a-post-coronavirus-depression-nouriel-roubini.html

  8. SomeoneInAsia says:

    Thought I’d share with you fellas a bit of classical music I came across which seems a very apt depiction of our times.

    The Growing Darkness

    Chaos, Confusion and Everything Turning Upside Down

    After the Collapse

    • SomeoneInAsia says:

      And after enduring the harrowing experience of listening to the above (assuming anyone here has), you want a little something more gentle and calming.

  9. Harry McGibbs says:

    “With the international travel picture looking unclear, and tourists a little skittish about booking flights in the midst of a pandemic, savvy countries are working to offer incentives to bring visitors back to their shores. First, Sicily offered to pay half of your flight costs to go visit, and now Japan is working on a similar scheme to entice travellers to the Land of the Rising Sun.”

    https://secretmanchester.com/japan-pay-half-of-travel-expenses/

    • Fast Eddy says:

      Are they offering to pay for the 14 day quarantine stay on arrival – with a free covid test at the end?

      • Matthew Krajcik says:

        Probably have to do like in the Caribbean and have walled off tourist zones. The workers will have to live inside it, and have the quarantine period for workers entering and exiting, rather than for tourists.

        • But the tourists will likely bring COVID-19 also. So will the workers on airlines, whether flying cargo or passengers.

        • Fast Eddy says:

          That will be an attractive option for many tourists…. because most of them are really only travelling so they can post photos on social media and brag about their ‘great adventures’

          Most prefer to have as little interaction with the locals as possible while they enjoy hamburgers and chicken pot pie meals….

          This is why cruise ships are so popular…. you get all the comforts of home + a shopping mall…

  10. Harry McGibbs says:

    “Record borrowing and an unprecedented collapse in retail sales have laid bare the devastating impact of the lockdown after Britain reported its worst ever week of economic data.

    “The Treasury borrowed £62.1bn in April, the biggest single monthly figure in history, as tax revenues crashed and spending surged.

    “It left a deficit far bigger than at the height of the financial crisis and without equal in peacetime – giving weight to Chancellor Rishi Sunak’s warning earlier this week that the country is gripped by a “severe recession the likes of which we have not seen”.”

    https://www.telegraph.co.uk/business/2020/05/22/worst-week-ever-uk-economy-deficit-soars-retail-sales-collapse/

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.