Part II of Freehand Circle's conversation with Eric Lammertsma. Eric is not only a marketing technologist, but in a previous life he had a very strong scientific background.
Part I focused on Coronavirus based on Eric's extensive knowledge of virology.
Part II is focused on the economic impact of a global pandemic.
Think of Part I as a conversation about the virus and Part II is a conversation about the human reaction to the pandemic. (Click here to read Part I and see Eric's bio)
March 11th, 2020:
Dave Donars (DD): Can we discuss the economic implications of Coronavirus? Eric, I do not have your extensive scientific background and I'm nowhere near as experienced as you about how pandemics occur. But one thing that is clear, even to me. A global pandemic is one thing and viral infections will spread at a certain rate, but fear and panic are far more contagious. There are tangible consequences to responding to a crisis with panic.
Eric Lammertsma (EL): Absolutely. I think there is a massive overreaction and some of that is fueled by the media. Viruses are great news fodder: there are new developments every day. It's just this endless pit of material for them. Politicians are just people and our leaders are seeing the same newscycle. They have gut reactions to the news and can become fearful. In my opinion, that is more harmful. What's harming the economy are these kinds of alarmist reactions.
Mike Lichter (ML): So, I have a slightly different take. You spoke about an onus on the media to help keep things calm. In general I feel like the media is not set up to provide larger context. News organizations just report on development after development after development, like whatever's new. It's really the government and the leadership's job to provide context, especially now. That is why we had-- at least until Trump came in and did away with it--White House daily briefings. There is a lack of clarity and information coming from the top So the responsibility sits there. I don't think it's misplaced for the blame of what's happening--at least as far as shaky markets and other things that are happening--to rest with politicians who are poorly doing their job.
DD: Whether a country's leadership sprouts happy talk or decrees a full bore shelter-in-place quarantine on the whole country--Eric is stating this virus will still spread regardless of how humans react. So we should mitigate the disease and also mitigate a fearful overreaction. I'm not trying to make this an analogy, but recessions do cause deaths. Global Depressions certainly cause deaths. Panic absolutely causes deaths.
ML: Panic is not wholly created by the media.
Jon Lorenzini (JL): The agenda setting theory of news goes if you create panic, you create demand for news. When you think it might rain today, you check the weather forecast more frequently. The News knows when there's panic, people check the news a lot more. There is a whole bunch of analysis about which forecasters are ‘more wet.’ They're more likely to say it’ll rain so audiences check in more often. ‘Wet’ forecasters get more impressions and drive business. By agenda setting the News does not tell people what to think--whether or not to panic. But by talking about this crisis consistently, people cannot escape the pandemic narrative. Frequency alone builds further panic. Along with that narrative there are obviously real deaths and implications.
DD: Whether it is panic or whatever, it is certainly volatile. One of the things that shocked me over the last two weeks was the VIX--the volatility index for the stock market. The VIX is normally around 20. When things are so stable that it's almost too stable it's around 12. On Monday (March 9th, 2020) it closed at 55.
There's so much uncertainty and uncertainty leads to fear which leads to panic. When the VIX spikes, recessions usually follow. In fact the VIX hasn’t really hit these numbers since 2008 so a certain level of panic is already setting into markets. Bankers are not biologists or epidemiologists, it is not their job to understand public health. But because so many supply chains originate in China, over and over again we hear this narrative that the worst of the virus’s impact has already passed and markets already priced-in all the bad news. There have been less than 50 deaths so far in the US, things will get much worse. This virus isn’t a one month time frame either--it will come in waves over the course of this year. There is no way these companies are already through the rough patch. No way the market has hit bottom yet.
JL: The one thing I want to discuss is monetary policy. Imagine you take a pie and keep dividing into smaller pieces. That's what's happened with Quantitative Easing with the printing of the money and cutting basis points. Monetary policy makes everything cheaper, but it's still the same pie. All the Fed is doing is dividing up the same pie because no one is in growth mode. So, for example, debt will worsen across the globe.
DD: Look, the Coronavirus is bad. It is going to kill people and that is terrible. Nevertheless roughly 150,000 people die across the globe every day. We are a mortal species and life is tragic, unfair, illogical and scary. But that does not mean we should panic. My major concern is about panic creeping into not just the markets but government policy. There are tremendous implications of countries overreacting in this moment. For example, Sovereign Debt (sovereign debt is the debt that a country incurs).
In China, Europe and America governments basically solved the financial crisis by incurring unsustainable amounts of sovereign debt. That was a short-term liquidity fix to get ahead of the 2007-2008 financial crisis. We saw some other measures; like austerity in the EU when Greece had their own sovereign debt crisis. Incurring never-ending debt is not sound monetary policy. At some point it will become unsustainable. Now we have a global pandemic so governments will go deeper into debt to fix this new crisis. I worry that the worst outcome of Coronavirus won’t be a quarantine-induced recession or the tragic deaths that will occur. The most severe outcome is going to be an unprecedented sovereign debt crisis which Adam Tooze predicted in his book “Crashed.” A sovereign debt crisis has the potential to turn a potential recession into a worldwide depression. I think we are already facing a crisis that goes beyond 2008, and gets back to something akin to The Great Depression of the 1920s.
Greece is a relatively small economy, yet it took the entire EU almost a decade to recover from something pretty small and relatively contained. By some measures the EU fell into a recessionary slide twice during the Greek crisis. If the US or China try solving this pandemic with huge government spending, they could hit a sovereign debt crisis. NOt now but in the upcoming decade. Now multiply Greece by well over 100. At some point the US or China will run out of ammunition for an dealing with crisis because of terrible monetary and fiscal policy.
EL: There are some really ridiculous proposals flying out there, and they do not even address the root of the problem. Temporarily pausing the payroll tax is a tool not a solution. The enormous economic impact of those types of decisions for, you know, a bad flu is just absolutely disproportionate.
ML: Well the economy is now lacking some basic drivers. We do not have supply and we do not have demand. How do you stimulate an economy under quarantine? Even with Fiscal policy, how do we get people together in groups to build a bridge?
DD: The response to the 2008 financial crisis was an incredibly irresponsible monetary policy. It postponed rather than rectified any of the underlying issues. In the dozen years since there has been a total lack of meaningful fiscal policy about building infrastructure, reducing inequality or preparing for events like a pandemic. Now these things are starting to happen and we are essentially unprepared to deal with an actual crisis. This was just an incredibly narrow tightrope walk--as long as nothing went wrong, the well-to-do were okay. One single large scale problem like Coronavirus or a major terrorist attack like 9/11 derails everything. However the fundamental underpinnings that created the 2008 crisis are still here. Now there is just a massive new amount of debt out there. You also have a decaying infrastructure that is 12 years older than it was before the last recession because nothing has been fixed. This was a recipe for a systemic disaster with the potential for unnecessary deaths much higher than Coronavirus’s 1% mortality rate.
EL: People can mitigate that 1% mortality by protecting vulnerable populations. So just focus our efforts there. It's like we’re racing towards the edge of a cliff, trying to outrun the rising sun. Economically that's kind of what we're doing, we're just like doing all kinds of stupid shit.
DD: The global mentality needs to become: We Move Forward. Life is tough and bad things will occur but we move forward. These policy decisions are so systematically bad that no one understands the long term consequences. Families can proactively do small things to protect themselves against this virus. But no one can just wash their hands for 20 seconds to eliminate 40 years of unbalanced fiscal policy.
EL: Science fiction movies have skewed people's perceptions on threats to humanity. I mean, this is a virus infection. This is not a good one. People's imaginations run wild on what's actually gonna happen. And the reactions are proportionate to their imaginations versus what's actually going on.