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  • Writer's picturePete Jonson

Effects of the Covid-19

Updated: May 16, 2020

We are living through the scariest global event since the Spanish Influenza pandemic 100 years ago. No-one alive then recalls the event. Interested readers can click on the address here to read an account of Australia's treatment when the Spanish flu arrived here in 1919.

The report was written by J.H.L. Cumston, Director of Quarantine. (Thanks to Bruce Pertzel for referal to this presentation.)

Interestingly, compared to results in other countries, deaths in Australia in 1919 were relatively low, as indicated now for modern Australia. The Flu supposedly arrived in 1912, so perhaps 1919 was a 'second (and worse)' experience. Or is there some other reason for comparing 1919 with 2020?

Major scary events since then are: the Great Depression 1929 - 38 or so; World War II; the oil crisis of the 1970s; the share market crash of 1987; the recession of 1990-91; the Global Financial Crisis of 2007-09.

While all these events were scary, none of these touched the Spanish Influenza pandemic of 1919-20. Weakened by the events of World War I and in many cases lack of adequate food and shelter, an estimated 50 million people died. Here is the first paragraph of an account of the Smallpox virus over the historical stretch from the time of the first agricultural settlements 12,000 years ago.

'Smallpox [another powerful pandemic] is believed to have first infected humans around the time of the earliest agricultural settlements some 12,000 years ago. No surviving evidence of it, however, predates the so-called New Kingdom of Egypt, which lasted from about 1570 B.C. to 1085 B.C. A few mummies from that era contain familiar-looking skin lesions. Ramses V, for example, who ruled for roughly four years in the 12th century B.C., looks to have had the raised bumps on his face and body for which smallpox is named (it’s derived from the Latin word for “spotted”). Moreover, an ancient Egyptian papyrus scroll briefly describes what could be smallpox, as do Hittite clay tablets. The Hittites, who lived in the Middle East, even accused the Egyptians of infecting them during a war between the two empires.'

The Great Depression of the 1930s was also a global event and produced much misery and record rates of unemployment everywhere. Keynes in his great book of 1936 proposed the use of government stimulus to provide some relief, but many readers failed to understand his approach, and most western politicians felt his plans smelled of socialism.

World War II killed, wounded or made ill many troops, but fortunately there was no smallpox or powerful influenza type of pandemic. Following the aftermath of the war came a resource boom that cheered producers. The oil crisis produced high unemployment combined with damaging inflation.

image: US Central Bank Chief Paul A Volker

Goods inflation was smashed by US central bank chief Paul Volcker in the early 1980s.

Gradually goods inflation was fixed in most well-run countries, often after consistent failed attempts. In Australia, relatively feeble attempts brought goods inflation down in fits and starts until accidental overly tight monetary policy smashed goods inflation and drove unemployment to 11 per cent, far higher if allowance is made for people who had only small amounts of work. The age of Asset inflation replaced goods inflation, and monetary economists and central bankers have not yet agreed on what to do to control this feature of modern economies.

Asset inflation - in fact 'mad asset inflation' - has been seen from 1636 in the Dutch Tulip Boom. England and France suffered more or less regular asset booms and busts from 1820. But in the nineteenth century the USA of America became the champion of Asset boom and bust. (Still the central bankers remained puzzled.) Here is a nice discussion by economist Michael Bordo, covering UK and USA experience.

Since monetary policy has been more professional, for the USA from the time of Paul Volcker in the 1980s, goods inflation has become far lower and Asset inflation stronger. The Bank of England was increasingly professional from the middle of the nineteenth century but shared the demise of goods inflation and strength of asset inflation - following the US Fed it seems to me. With goods inflation restrained by the shade of Paul Volcker, the rapid growth of cheap goods in developing nations and (I believe) workers in developed nations with weak 'Animal Spirits' due to the two main factors noted earlier in the current sentence.

The latest US expansion has been the longest in America's economic history. Monetary policy stoked asset inflation with easy money - with weak 'Animal Spirits' of workers, investors were quick to adopt strong 'Animal Spirits'. (I hasten to assert that this hypothesis is not yet proven.) What seems obvious is the easy money has to go somewhere, and my recent research supports that hypothesis. It seems to me the strong 'Animal Spirits' of investors will come to an end now that the Covid-19 virus has taken hold in the USA. Curiously, asset inflation, notably US share prices which fell sharply when the virus was known but has largely recovered since then. It seems that a majority of investors still believe that the US Federal Reserve Bank (the 'Fed') will keep the markets strong.

Take care, fellow investors.

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