Business in Times of Corona: Wise Words from Omaha

[caption id="attachment_14708" align="alignright" width="300"] Sketch: Warren Buffet[/caption]

The life lesson imparted by the Oracle of Omaha does not require much deciphering: Cash is King. Long criticised for hoarding large amounts of readily deployable cash, the third largest publicly listed company in the world, Berkshire Hathaway, stands to profit handsomely from the extreme volatility that has infected global markets. The company’s cash reserves hover around the $130 billion mark which now allows it to scoop up shares at steep discounts and broker highly lucrative preferred stock deals in a repeat performance of Berkshire’s earlier bold move into Goldman Sachs.

At the height of the 2008 banking crisis, and just before the US Congress approved its $700 billion bailout package, Berkshire Hathaway agreed to fork over $5 billion to Goldman Sachs, receiving in return preferred stock with a juicy 10 percent coupon attached, in addition to warrants to purchase another $5 billion-worth of common stock at a strike price of $115 per share. In the years that followed, those warrants were duly exercised. Then, in 2011, the bank also exercised its right to repurchase the preferred stock at a 10 percent premium. In the end, the original $5 billion deal netted Berkshire Hathaway a cool $1.8 billion whilst the company made another $2 billion in book value on the common stock component of the transaction.

The company chaired by Warren Buffett, who in 1964 acquired the then-failing textile mill in a rare fit of anger and transformed it into a corporate conglomerate, usually moves whenever nobody else dares. As such, Berkshire Hathaway is the corporate embodiment of Billy Ocean’s famous hit song When the Going Gets Tough, the Tough Get Going.

Mr Buffett is not just a keen judge of market sentiment but may also be remarkably prescient. In 1987, he discussed ‘super-contagious diseases’ in a letter to investors. He noted that there are ‘occasional outbreaks’ and that these will ‘forever occur’ with unpredictable timing. However, Mr Buffett was not referring to any particular medical condition, but to greed and fear – two ‘epidemics’ that periodically sweep the market. His recipe for dealing with such outbreaks was simple yet elegant as befits a sage: ‘Be fearful when others are greedy and greedy when others are fearful’.

Mr Buffett’s greed is quite different from the ‘greed-is-good’ mantra deployed to devastating effect by the fictional Gordon Gekko in the 1987 blockbuster movie Wall Street: Rooting out reliable long-term winners, sporting sound business models grounded in reality, from amongst the rubble of a shattered market is a Berkshire Hathaway specialty. The company seizes opportunity with an almost uncanny precision but will forego quick riches to focus on medium- to long-term profits – huge ones mostly.

Noting, rather sarcastically, that in a bull market the rewards offered to shareholders become ‘gloriously’ uncoupled from corporate performance, Mr Buffett offered another precious nugget of advice in true oracle-like fashion: “We have no idea – and never have had – whether the market is going to go up, down, or sideways in the near- or intermediate-term future.”

Late February, after he presented Berkshire Hathaway’s annual results, Mr Buffett was asked to shine his light on the then rapidly gathering corona storm. He recommended investors ignore the headlines and focus instead on the underlying metrics which usually do not materially change in the space of a day or two. Mr Buffett went on to explain that as a life-long buyer of stock, he quite likes discounts and thinks that investors should celebrate the moment: “Who doesn’t like to buy at low prices?”

In early March, the near-universally revered investor declared that the twin punches of the plunge in oil prices and the spread of the corona virus will ultimately prove less devastating to markets than the unexpected 1987 crash (Black Monday) and the 2008 financial crisis. Mr Buffett also said that he will wait until the first week of April to evaluate the situation and decide on any changes to the annual Berkshire Hathaway shareholder weekend – aka the Woodstock of Capitalists – set to start on 1 May. He later said that the event will take place ‘irrespective of conditions’ but may take another form.

Remarkably, amongst the companies now clamouring for help are a large number of corporates that have ignored the priceless cash-is-king advice and squandered their reserves on vast stock buyback programmes and generous dividend pay-outs to artificially inflate share prices and placate investors who – blinded by all that glitter – often failed to notice key performance indicators that showed below-average results.

Boeing and the major US airlines that are its main clients claim to need some $110 billion in federal aid to ride out the Corona Recession. Yet the troubled airplane manufacturer, whose flagship 737 Max is still grounded, ploughed some $43 billion back to investors over the past decade. Over that same period, the six major US carriers spent an estimated $47 billion on share buybacks with American Airlines leading the pack. Of the seven companies, six have watched their share prices tumble by 60 percent or more as air travel ground to a near-halt. Only Southwest Airlines managed to limit the damage to minus 37 percent.

In the knowledge that federal authorities will expend massive amounts of cash to ensure the survival of the airline industry, Goldman Sachs earlier this week upgraded Boeing’s stock to a solid ‘buy’ rating. In a rare moment of clarity, President Donald Trump sided with Democrats and warned the industry not to take government money and use it to buy back stock.

Impressed by the unexpected blowback from the White House, the Airlines for America (A4A) lobbying group pledged to limit executive pay, eliminate stock buybacks, scrap dividends, and keep their workforce intact for the life of the requested bailout loans. The industry group seeks $29 billion in grants and another $25 billion in loans and tax breaks.

Hours after the US congress greed on a $2 trillion relief package, its biggest-ever, global markets tentatively bounced back although much of the gain was realised on Tuesday in anticipation of the deal. Seesawing markets continue to demonstrate an exceptionally high degree of volatility with investors wondering if ‘huge’ is enough to break the downward spiral and claw back earlier losses.

Almost across the board, analysts and economists are forecasting an unprecedented decline in business activity with the attendant rise in unemployment numbers. Few share the apparently fact-free optimism displayed by President Trump who earlier in the week predicted that the country and its economy will be up and running, and open for business, by Easter – barely three weeks from now.

The stimulus package that is shortly to be enacted includes a $350 billion lifeline for small businesses and $500 billion in aid for large corporates. In addition, every adult earning less than $75,000 annually, will receive a one-time $1,200 pay-out (plus $500 per child). Economists welcome the measures but fear that it may not prove enough to many of the smaller businesses and household that face an ‘extinction-level’ event. Those were the words used by John Lettieri, head of the Washington-based Economic Innovation Group thinktank, to describe current events.

However, the last word and final judgment on the deal is to the markets. If the $2 trillion cash infusion should manage to put a floor under share prices, the recession’s inverted curve may yet be flattened just enough to inspire a semblance of investor confidence in the ability of governments to not just handle the crisis, but trace and clear a path out of it.


Business in Times of Corona: Pandemic Puts Eurobonds Back on the Table

The leaders of nine Eurozone countries on Wednesday refloated the previously discarded idea of issuing Eurobonds, a collective debt instrument backed by the combined securities of participating countries, as a way of pooling risk and mitigating the economic impact of the corona pandemic. The appeal to revisit this divisive hot-potato topic was released on the eve of a key conference call between the 27 EU heads of government to discuss the steps that need to be taken in order to combat both the virus and the impending recession.

The nine Eurobond-proponents [1] argue that all member states should be able to raise funds on the market under the exact same conditions. They also state that the severity of the current crisis calls for ‘further action’ to buttress economies affected by the pandemic. Moreover, the nine point out that the Eurozone faces a ‘symmetric external shock’ for which no single country bears responsibility but ‘whose consequences are endured by all’.

Whilst none of the 19 Eurozone participants has objected to the lifting of debt ceilings, deficit limits, and fiscal restraints, the mutualisation of sovereign risk remains a ‘phantom discussion’. That is how German economy minister Peter Altmaier described the idea first tabled by Italian Prime Minister Guiseppe Conte who suggested branding the debt paper as ‘corona bonds’. After Ursula von der Leyen, head of the European Commission, commented that Brussels was ready to consider backing the issuance of common debt, the alarm bells instantly went off in both Berlin and The Hague.

Though a confidante of Angela Merkel, Mrs Von der Leyen had clearly failed to coordinate her response with the chancellor. A beginner’s mistake, perhaps, but a serious faux pas, nonetheless. Though only a discrete fifth wheel to the Frugal Four (Austria, Denmark, Sweden, and The Netherlands), an impromptu group of member states that oppose EU largesse, Germany has of course the last word on the introduction of any shared debt instrument. The country may have loosened its own fiscal straitjacket to keep the economy on an even keel, Germany is not about to put its enviable credit rating at the disposal of the less fiscally prudent member states.

In The Hague, Eurobonds top Prime Minister Mark Rutte’s list of taboo topics. He is not only dead set against the idea on a peronal level, but also realises full well that the Dutch parliament would not even contemplate such a dilution of the country’s hard-won top credit rating. Fiscal prudence, and its twin austerity, may have taken a backseat for now, as a concept it remains the guiding principle. Mr Rutte has also voiced his government’s strong opposition to milder derivatives of the Eurobond-idea such as a bundling of stronger (Dutch and German) and weaker (Italian, Greek, and Spanish) sovereign bonds.

The argument used to shoot down any form of mutualised debt remains an almost unaltered version of the Aesop fable featuring thrifty ants and a happy-go-lucky grasshopper: Had the weaker Eurozone member states used the preceding ‘fat’ years to pay down their national debt and balance fiscal accounts, they would now possess the wherewithal needed to meet the emergency.

The Germans and Dutch are not swayed by the arguments of ECB President Christine Lagarde who pleads for a common approach to the pandemic: “Markets are looking for assurances that Eurozone members are willing to support each other.” Ms Lagarde noted that the painfully slow response to the 2008 banking crisis nearly caused countries such as Greece, Portugal, and Cyprus to default on their euro-denominated debt which, she warned, would probably have finished off the common currency altogether.

However, the parliaments of Germany, The Netherlands, Finland, and Austria are in no mood to issue a blank cheque to any government but their own. Even the relaxing of the stringent rules attached to the European Stability Mechanism, the €410 billion emergency fund set up to deal with the banking crisis, is not likely to meet with the approval of lawmakers in those countries.

The corona pandemic shows that there are well-defined limits to cooperation and solidarity within the European Union. Also, when faced with an existential threat, member states put their national interest invariably first and largely ignore Brussels. Some 60 years after the start of the European project, the nation state still trumps the ‘ever-closer union of the peoples of Europe’.

The reason parliaments of ‘stingy’ member states remain almost virulently opposed to collective debt instruments can be traced to the last financial crisis and the way it was tackled. A large number of people vividly remember how banks ‘too big to fail’ were rescued with taxpayer money which was then paid for in austerity and the dismantling of the welfare state. Chief Economist Christian Ondahl of the Berlin-based Centre for European Reform points out that the narrative has not changed: “Most Germans refuse to challenge the austerity dogma and take pride in the fact that past sacrifices now pay off.”

The paymasters of the EU, then, refuse to apply their newfound appreciation of Keynesianism outside their borders. In fact, the Germans and Dutch suspect that more profligate EU member states have probably not read the book [2] in its entirety and skipped over Mr Keynes’ admonition that government debt incurred during a downturn should promptly be paid off when the economy returns to growth. In today’s terminology, it is all about ‘flattening’ the curve by shaving off peaks on both sides of zero.

However understandable, the reluctance to embrace collective solutions poses a threat to the European project inasmuch that it hollows out the EU and condemns its neglected stepchildren in the south to lasting penury – dividing the union into two or more unequal parts and raising questions about the union’s practical uses. Once the present crisis has abated, Eurosceptics in France and Italy may gain still more traction amongst wary constituents. Given the near-complete absence of the European Union in one of the most trying times lived since the end of World War II, a debate will be necessary on the future scope of the project and its long-term goals.

However, the pandemic must not be allowed to undermine the European Union for one of the few certainties currently available is that whatever shape the post-corona world takes, it will still be dominated by raw power politics. No individual European nation, not even Great Britain with its undeniable pluck and brawn, is able to face down the likes of the United States and China. Lest Europe wishes to become a collective of quarrelling rule-takers, coordinated collective action on a wide range of issues remains of vital importance to the interests of the continent. Whilst comprehensible in light of the almost unprecedented threat to public health, reverting to the nation state as the mother of all policy is unwise and short-sighted. However unpalatable to German and Dutch taste, Eurobonds are probably the least painful remedy to a malaise that, in one form or another, ultimately affects all.

[1] Belgium, France, Greece, Italy, Ireland, Luxemburg, Portugal, Slovenia, and Spain.

[2] A Treatise on Money by John Maynard Keynes.


Business in Times of Corona: The Dangerous Fruit of the Magic Money Tree

In one of life’s little ironies, it was not the senator from Vermont but the billionaire businessman from New York who brought social democracy to the United States. The massive federal aid package now working its way through Congress is set to vastly expand and profoundly alter the role of government in the affairs of corporate America. Laissez fair is no more.

In return for offering $2 trillion in life support to households and privately-owned businesses affected by the corona pandemic, the federal government essentially gets a ‘golden share’ that allows it to set the rules and predetermine outcomes. After spending decades denouncing Europe’s addiction to social democracy, and state aid for troubled industries, as toxic and outdated, the US is now using the same prescription to protect society from the worst excesses of the free market. Corporations that accept federal money may no longer fire workers at will, offshore or outsource jobs, and must limit executive pay and stop dividend pay-outs and stock buyback programmes.

It took a virus less than a month to corner a Republican administration into accepting that corporate America has a responsibility that reaches beyond the next quarter and includes others than just shareholders. Though Treasury Secretary Steven Mnuchin, a former hedge fund manager, may repeat, almost ad nauseam, that the federal government is not in the business of running private business, his actions – however reluctantly taken and at odds with his personal convictions – prove otherwise.

Boeing CEO David Calhoun smells a rat and is having none of it: Earlier this week, he vowed to look elsewhere for support for his beleaguered company. Mr Calhoun said that Boeing does not want an equity partner but needs a cash injection to tide the company over. Though the rescue package does not mention Boeing by name, it has tagged some $17 billion for support to aeronautics manufacturers and corporations deemed critical to national defence. On Fox News, Mr Calhoun assured that he has plenty of other options to explore before taking government cash with strings attached.

The size and scope of the intervention is nothing short of phenomenal and can draw on no historical parallels, with the sole exception of the wartime economy. Contrary to popular belief, the US did not become the ‘arsenal of democracy’ by rallying private enterprise, but by commanding it. The number presently being touted – $2 trillion – is only the beginning of a much larger effort to support industry. The rescue package includes $500 billion to shore up larger corporates. Of this money, $454 billion is set aside as a backstop for lending programmes administered by the US Federal Reserve. Considering the usual loan-to-capital ratio of 10 to 1, aka the ‘magic money tree’, this means that the Fed’s total firepower has just been upped by a staggering $4.5 trillion dollars.

Even most economists on the fiscally conservative side of the debate agree that ‘going in big’ is the way to go and may help preserve the broad tax base that will be needed post-corona to rebalance the national accounts. The Congressional Budget Office expects the federal deficit to balloon to $1.1 trillion, or 4.9 percent of GDP. According to William Foster, lead US analyst at Moody’s, that forecast is wildly optimistic: He expects the fiscal deficit to exceed 10 percent whilst his colleague at Fitch Ratings considers 13 percent closer to the mark.

However, the national debt rising in tandem with the deficit should not necessarily pose a problem. Its absolute number is less important than the total cost of servicing the debt. Since the US government can easily tap capital markets without the need to pay a premium to lenders, the debt servicing cost is only expected to rise modestly. Last Thursday, the US Treasury was able to place its 30-year bond at 1.44% interest whereupon Fitch duly reaffirmed the country’s AAA rating, clarifying that recent market illiquidity for T-bills reflect ‘exceptional market conditions only’ and do not signal heightened concern over credit risk. In fact, the US government will always be able to pays its debt since it controls the mint.

That seems to hold true in Europe as well. On Thursday, the European Central Bank (ECB) shook off its last scruples and bravely declared that it will henceforward buy up a limitless amount of government bonds, ditching the proverbial bazooka and deploying its nukes. The bank also ditched its own rules which determine that it can only hold up to one-third of any given Eurozone member’s debt. The bank must also observe proportionality when buying-up government bonds. Since the ECB already could only buy another €10 billion or so of Dutch government debt before reaching its statutory limit, the bank was unable to acquire any additional bonds issued by the hard-pressed governments of Italy and Spain. By binning the rule book all limits have now been removed.

That was the ECB’s response to the refusal of the Dutch prime minister and the German chancellor to greenlight the issue of Eurobonds during an emergency video conference of EU leaders on Thursday. That virtual meeting saw a hard clash between Italian Prime Minister Guiseppe Conte, who pressed for more financial support, and his Dutch counterpart Mark Rutte who was backed by Chancellor Angela Merkel as he flatly refused to discuss the topic. Mr Conte was infuriated that both leaders also shot down his suggestion to relax the rules that govern the €410 billion European Stability Mechanism (ESM). Money from this fund is only disbursed to countries willing to implement often painful reforms.

President Klaas Knot of De Nederlandsche Bank (DNB), the Dutch central bank, and his colleague Jens Weidmann over at the Deutsche Bundesbank – two peas in a pot – expressed fear that removing all restrictions would also remove the last impediments to an uncontrollable spending spree. Both also reminded that earlier in the week the European Commission had already scrapped its European Stability and Growth Pact which limited government debt to 60 percent of GDP and spending deficits to 3 percent. Though they received the support of their Austrian and Finnish counterparts, Messrs Knot and Weidman were outgunned as the ECB rolled out its ultimate weapon.

As caution is thrown to the wind, new questions arise: How will the genie be put back in its bottle once the virus scare has abated, and will inflation be kept at bay? The previous reality dictated that quantitative easing was unable to stoke inflation, leading economists to speculate that perhaps the link between money supply and prices had somehow been broken.

However, those efforts to spur inflation involved hundreds of billions – not the untold trillions currently being pumped into slumped economies. Also, should the beast finally awaken – not so much a question of if, but rather a more ominous when – how will the surplus cash be removed without inflicting considerable pain? Though almost nobody disputes the need to intervene forcefully to prop up businesses and governments as they deal with a crisis that is not of their making, an important truism is being overlooked: There is no such thing as a free lunch. What Messrs Knot and Weidman fear is that they will be asked to pay the bill when it comes due – as it eventually must.


Business in Times of Corona: A Gathering Storm Darkens the Prospects of Africa

[caption id="attachment_14767" align="alignright" width="300"] South African President Cyril Ramaphosa[/caption]

Even before the corona virus made its presence known, market analysts had no need for prescient powers to predict trouble ahead for South Africa. Already in February, consumer and business confidence had approached a 30-year low as the country’s anaemic economy hobbled from one recession to the next. The reforms announced by President Cyril Ramaphosa in 2018 to reboot a state hollowed out by rampant corruption have so far failed to materialise largely due to the reluctance of the ruling ANC to update its dark view of private business.

Insofar as the party still clings to a philosophy, as opposed to naked power, it tends towards a highly regulated, centralised, and nationalist model that favours the state as the primary driver of development. Whilst President Ramaphosa seems aware that previous policy recipes have utterly failed to yield the desired results, and must now be ditched, his administration cannot act decisively until the ANC climbs on board.

The 2020 budget, unveiled mere days before the first corona cases were reported, offered a fig leaf of sorts to the party: Finance Minister Tito Mboweni assured all and sundry that the government will not ‘pursue the path of austerity’ and instead proposes to implement its reform agenda incrementally. As a first step, Mr Mboweni explained that the public sector wage bill is to be cut by $10.5 billion over the next three years. The government will also seek to stem the losses at state-owned South African Airways and power utility Eskom, both long-plagued by mismanagement and haemorrhaging cash.

The absence of bold moves to tackle the crisis, and the expected impact of the corona pandemic, led Moody’s to downgrade the country’s sovereign credit rating to junk status (Ba1 negative). Moody’s was the last of the major rating agencies to do so. It cited the continued deterioration in fiscal strength and structurally weak growth as the prime reasons for depriving South Africa of its prized investment-grade rating. The agency also pointed to the growing debt-to-GDP ratio, fast approaching 90%, as a cause for concern. Finally, Moody’s expects the ‘unprecedented deterioration’ of the global economic outlook to exacerbate South Africa’s fiscal challenges and complicate the emergence of effective policy responses.

Now under a 21-day lockdown, and with its economy grinding to a halt, the country seems at a loss over the next steps to take. Over the weekend, local analysts warned of a gathering storm: “Hold on to your hats,” advised Bianca Botes of Peregrine Treasury Solutions who fears a major selloff of rand-denominated paper that could result in $11 billion leaving the country, subjecting the already strained currency to additional downward pressure.

Business Unity South Africa (BUSA), the largest and arguably most vociferous of the country’s employers’ associations, on Saturday released a statement that deplored the ‘unfortunate’ timing of Moody’s downgrade and warned that higher interest rates will hamper the business ventures that are needed to promote ‘inclusive’ economic growth. BUSA also noted that South Africa is about to embark on a ‘hard journey’ that will take many years to complete.

Meanwhile, trade union federation Cosatu calls for a stimulus package to limit the social damage as the country deals with the pandemic. Cosatu spokesperson Sizwe Pamla said that an ‘economic firestorm’ looms and asked both the government and the private sector to intervene ‘aggressively’.

Nearly all principal actors agree that the present crisis is much more dangerous than the previous one. In 2008, South Africa boasted a budget surplus and registered strong economic growth which allowed the country to avoid a downturn and insulate its economy from the global malaise. Though GDP dipped to minus 1 percent in 2009, it bounced back the next year and kept growing nicely until 2013 when the average pace of 3 percent annually started tapering off.

Whilst growth dissipated, the national debt rose from about 25% of GDP in 2008 to 58% last year. Late February, the National Treasury forecasted a budget deficit of 6.8%, the largest in 28 years, by the end of the fiscal year in March 2021. Disconcertingly, these bleak numbers do not take into account the effects of the corona pandemic. “We’re starting off this crisis in a far worse position than we started off the global financial crisis,” says Chief Economist Johann Els of the Old Mutual Investment Group.

There is, however, a possible silver lining to be found in President Ramaphosa’s renewed determination to use the pandemic to press home the urgent need for structural reform. On Monday, Finance Minister Mboweni was told to go ahead with the reform agenda and do what is necessary to restore investor confidence. Mr Mboweni spoke of a ‘hallelujah moment’ and said that a new unit will immediately be set up – pointedly not at the National Treasury – to prepare the ground and propose a raft of quick and targeted measures to kickstart the economy. Pundits immediately wondered if the president’s newfound determination is shared outside his own faction in the ANC and if the setting up of a commission is enough to allay concerns.

Minister Mboweni suggested that the country may ask the World Bank and International Monetary Fund (IMF) for assistance in meeting the escalating cost of public health interventions. However, he emphasised that the country does not yet need financial support and will not be asking for a wider IMF bailout. Commenting on Moody’s downgrade, Mr Mboweni said that the move provides a renewed impetus to implement the structural reforms he has long been pleading for.

Meanwhile, the IMF has boosted its emergency lending facilities by an additional $50 billion, including $10 billion on generous concessional terms for low-income countries. The fund is particularly worried over the triple threat faced by the countries of Sub-Saharan Africa as the pandemic spreads. Abebe Aemro Selassie, head of the IMF’s African Department, writes that the growth outlook for the region will be significantly lower with government revenues declining just as spending needs mount. Mr Selassie warns that measures to curb the spread of the virus will have a direct impact on local economies. He also expects demand for African exports to fall in tandem with investments. Finally, Mr Selassie points to the sharp drop in oil prices which will severely hurt exporters such as Angola and Nigeria.

So far, the IMF has received requests for emergency financing from 20 countries and expects another 10 to follow shortly. The African Development Bank (ADB) is also ready to offer help and last week successfully placed its largest-ever social bond, raising $3 billion to help fight the corona virus. Bids amounted to $4.6 billion, prompting the ADB to mull additional issues. The bank noted strong interest particularly amongst socially responsible investment funds and central banks. The 3-year bond was offered at a modest 0.75 percent interest rate.


Blessings, Curses, Co-operation and Collaboration – the Virus is Forcing Knowledge upon us

No one was expecting this. No one knows what will happen next. Does that make this a time to hunker down and wait, to stand on something and watch, or to gamely strive for business-as-usual-as-possible?

In that most nebulous and non-committal of comebacks: it all depends.

Hunkering down is kind of a no-brainer in social-isolation terms; it may also have potential as a COVID-19 “emergency business plan”. Rather than swimming against the current to keep the company spark alive, it may be wise to wait this one out – depending on innumerable factors, including industry, sector, and the amount of available fat to live off.

Business-as-usual is already an outdated term; for many, it will never be “usual” again. Companies are going to the wall left and right, and those that aren’t are looking over their shoulders to check that the wall isn’t coming to them. These are times that test mettle, and failure is not a given. The cross-pollination of sectors, the enforced creativity that springs from quarantined and embattled minds, the sheer resilience of individuals, SMEs, companies, corporations and organisations – these are the flags under which survivors fly.

There’s nothing, unfortunately, like chaos and disaster to engender unity and harness initiative. And that paradoxical springboard, coupled with new awareness of the fragility of our apparently immutable society, might just take us to interesting and inspiring places.

Co-operation, Collaboration and Control are the key C-words of 2020. We’re seeing plenty of the first two, and – with enforced constraints on personal and professional agency – are struggling a bit with the last one. No one likes feeling out of control, and no one likes to be controlled either. We have had to get used to both aspects, and quickly.

It’s inspiring to see isolated, ever-busy entrepreneurs and engineers turning a hand – or their factories – to new things. Developments which might otherwise make a splash are relegated to run as footnotes to the disaster stories and grim predictions. Human spirit, invention and business nous can neither be bottled nor repressed. Some things just bubble up, others are cunningly and carefully engineered. Staying operational – and profitable – is the main goal.

The rest may not be cake, but it will be progress. The old “Chinese curse” was often quoted as, “May you live in interesting times”. The phrase has been shown by literary research not to be of Chinese origin – and these interesting times may prove not to entirely be a curse, either.


Harvard Business School on Impact-Weighted Accounts: the Missing Piece in Economy Puzzle

[caption id="attachment_14774" align="alignright" width="300"] Harvard Business School: the north facade of the Baker Library[/caption]

Capitalism is in need of a renaissance. Despite headlines of strong global economic growth, there are signs that all is not well.

Environmental advocates have been leading calls for change before the climate crisis produces irreversible changes to our world. Now, investors, politicians and business leaders are heeding that call, as evidenced by the recent declarations by the World Economic Forum and the Business Roundtable. At Harvard Business School, impact-weighted accounts are seen as the missing piece needed to catalyse change.

Across the world, particularly in capitalist economies, the vast majority of businesses seek continual growth. Most businesses in a competitive market are not considered viable without long-term growth in revenues and/or profits (commonly referred to as performance).

Huge consultancies have emerged to help companies optimise operations, customer-segmentation, and churn-reduction to support revenue and growth. Business schools have designed curricula to provide students with the requisite skills.

In the current accounting-reporting frameworks, and much of corporate law, there are two groups of stakeholders whose rights are held above all others: equity and debt owners. In the course of normal business, debt holders are expected to be paid the contractually defined interest and principle amounts, otherwise they can bankrupt the company, and equity owners are entitled to any profits after earnings.

The maximisation of performance, beyond the amount needed to pay debt service, is for the benefit of equity owners. Employees, societies, and the environment have largely been considered to be the means to generate the payments to the primary stakeholders, rather than stakeholders in their own right.

Laws protecting employees, such as the Employee Retirement Income Security Act (ERISA) in the US, protect against the potential effects of an unbounded performance-focused system — which prioritises corporate owners.

Capitalism and globalisation have, by many measures, been successful. Substantial progress has been made in almost every measure of human wellbeing. But these gains are not without challenges, and the scale of those challenges is becoming unmanageable. The systems which brought growth are also the cause of negative environmental, employment and product impacts.

The planet and its climate are at a tipping point. Employment trends are creating welfare dispersions. Even in the wealthier, developed economies, there are massive disparities that have consequences for health, happiness, and security. The legitimacy of business, and the promise of capitalism, are increasingly called into question.

The legitimacy of a business depends on its ability to create value for society. Companies that create value for investors, workers, customers, suppliers and the larger ecosystem are evidence of businesses’ power to increase wellbeing. Directors and executives who manage companies aim to combine resources (raw materials and labour) in strategic ways that create more value than they consume, represented by quadrants I and II.

Once they have developed a business model that creates significant value, a company’s managers decide how to allocate this among stakeholders. In capital markets, businesses deemed successful by owner-centric measures may destroy value for other stakeholders, represented by quadrant II. Traditional accounting methods that use a single metric to measure firms ignore this.

Businesses seeking to maintain a licence to operate may protect against this non-financial stakeholder value-destruction by measuring the total value delivered. In the same way that accounting standards define which financial transactions to capture, and how to account for them within financial statements, we require a methodology that reveals a firm’s overall value to society. Without such a transformation in business accounting, strategic analysis will continue to ignore negative and positive impacts on non-financial stakeholders.

Impact-weighted accounts are monetary line items on a financial statement — income statement or a balance sheet — to supplement the financial health statement. The aspiration is an integrated view of performance which allows investors and managers to make informed decisions based on private gains and losses, as well as the impact a company has on society and the environment.

Impact-weighted accounts change our intuition. To build an impact economy, all participants must understand that actions have consequences. In the absence of such accounts, we are creating the illusion that most commercial activities have no impact. Investors incorporate existing ESG metrics into their investment decisions today, investing based on inputs or outputs, not impact. This forces the assumption that similar inputs produce equal impacts across funds.

Impact-weighted accounts would allow for a better understanding of the societal and environmental effects of ESG investing. They would provide a scalable, replicable means to compare ESG Funds, reducing diligence and search costs. Allowing informed decisions gives corporate managers new information about costs and benefits.

Currently, impact information is conveyed in the language of the respective disciplines, such as GHGs and Quality Adjusted Life Years. This is challenging for managers unfamiliar with these terms to evaluate the economic benefits of their choices. By converting impact into monetary terms, the full scope of value creation or destruction becomes apparent.

Strengthening Incentives

With impact-weighted accounts, data can be used to create incentives toward the SDGs.

It is appropriate to draw a parallel with the development of modern financial infrastructure. Asset and portfolio risk measurement and quantification, which revolutionised asset allocation and portfolio management, are built on the uniform financial disclosures frameworks.

Monetisation of social and environmental impacts represents the next step in portfolio theory, and will permit the development of effective risk-return-impact optimisation tools and the identification of a new efficient investment frontier.

The potential to systematically model and optimise impact by in similar metrics to those used for risk and returns, versus current market practice of disregarding impact completely or by conducting separate overlay qualitative and quantitative assessments, has the potential to dramatically change capital flows throughout our system.

To catalyse the uptake of impact-weighted accounts, numerous efforts are underway in addition to our research efforts at Harvard Business School. The OECD, SASB and Social Value International are jointly leading a working group to explore how current standards form a larger system for impact measurement and management, the working group for this effort – convened by the IMP - includes, but is not limited to, many members of the auditing and accounting firms. The Value Balancing Alliance, True Price, The Impact Institute, the Capitals Coalition, & ISO, among others, are also working toward building stakeholder support, conducting research, and piloting projects with companies to build the ecosystem around greater impact reporting and monetisation. We believe that even without near-term uptake of impact-weighted accounts by the Financial Accounting Standards Board (FASB) in the United States and the International Accounting Standards Board (IASB), impact-weighted accounts will be adopted by the market through the use of parallel accounting statements. Work with the accounting and audit community to build rigor around the process of gathering data and reporting on and eventual monetisation of impact will be critical to achieving an audit standard for these parallel accounting statements.

Work with the accounting and auditing communities to build rigor around the process of gathering data and reporting on and eventual impact monetisation will be critical to achieving an audit standard for these parallel statements.

About the Author

[caption id="attachment_14775" align="alignleft" width="140"] Author: Robert Zochowski[/caption]

Robert Zochowski is the Director and Senior Researcher for The Impact-Weighted Accounts Project and the Social Impact Collaboratory at Harvard Business School. Previously, Rob was a Vice President at Goldman Sachs where he had roles in Investment Product Innovation, Strategy & Development, Alternative Investment Strategies, and Private Wealth Management. Rob has consulted with the National MS Society and the World Wildlife Fund and was a 2019 Three Cairns Climate Fellow focused on mitigating the environmental effects of charcoal use in Mozambique. Rob received his MBA from Columbia Business School in the Executive Program where he concentrated on Social Enterprise and Impact Investing, graduating Deans Honors with Distinction (top 10%). He was featured in Poets and Quants annual 100 Best & Brightest Executive MBAs list. Rob is the 2019 recipient of the Carson Family Changemaker Award which recognizes commitment to the field of social enterprise. Rob earned his Bachelor’s Degree in Economics from Georgetown University where he graduated Magna Cum Laude.


Business in Times of Corona: The Welfare State May Yet Prove Its Worth

The currently much deplored absence of a social security safety net is a feature – and not necessarily a bug – of the essentially wage-driven growth model that underpins the US economy. However, under the present exceptional circumstances the script normally followed to deal with systemic shocks proves of little use.

At its core, the US response to major downturns has traditionally been to support its outsized financial sector and ensure a continued flow of credit that lets the economy adjust to a new reality via layoffs and other corporate cutbacks. This, in turn, allows for a swift rebalancing of wages and prices and for the effective reallocation of resources (capital and labour).

Such a limited intervention, focussed on a single component of the economic equation, was usually all it took for growth to return. A weak state, low regulatory environment, and large financial sector are all defining characteristics of a nimble yet robust economy that navigates the ups and down of the business cycle with relative ease.

This is also the model that has been exported, with varying degrees of success, to the rest of the world via multilaterals such as the International Monetary Fund whose mantra includes privatisation and deregulation. However, the fact that the admirable success of the US model may also be ascribed to the country’s control of the world’s reserve currency is often overlooked.

Envious of the consistently high growth rates obtained by the US, Europe has tried to buy into this model. Rigid labour markets were duly deregulated, corporate taxes slashed, regulatory burdens lightened, and a reserve currency established. Yet, the transformation ran into trouble when the prized welfare state was put to the axe. Erected in the wake of World War II, the mother of all economic shocks, the ‘nanny state’ is an expression of the deep-seated fears haunting a traumatised continent – and of a collective yearning for security through cooperation and solidarity. The more individualistic US growth model remains alien to most Europeans and clashes with their values.

The welfare state is Europe’s answer to economic shocks. Dependent for their growth and prosperity on international trade, the countries of northern and western Europe use social security safety nets to absorb external shocks where trade is usually the first victim. In general, the more open a country is to cross border trade, the larger its welfare state.

Though not an ironclad rule, it serves to illustrate some fundamental differences between growth models. With a trade-to-GDP ratio of barely 27 percent, the US economy is still largely driven by domestic demand. Contrast that to Belgium (161 percent) and The Netherlands (170 percent), countries where the economy is almost exclusively powered by trade with domestic consumption reduced to a mere afterthought.

The difference in economic growth models helps explain the different responses to the corona pandemic. In Europe, measures to underwrite domestic consumption take a backseat to those aimed at preserving the private sector’s ability to survive the crisis by keeping its workforce in place and protecting its balance sheet. Direct wage support is not needed. Thanks to the welfare state, the unemployed already receive monthly cheques from the government.

The personal security derived from that same welfare state allows European households to carry significantly more debt. Notwithstanding their addiction to credit cards, US households are much less indebted than European ones. In fact, the largest debts are sustained by the Dutch and the Danes who just happen to live in two of the world’s most generous welfare states.

Faced with a crisis of almost unimaginable magnitude, the US growth model is showing cracks as markets remain underwhelmed by the decisive action of the Federal Reserve. Whereas a forceful yank at monetary policy levers used to be enough to put a floor under a jittery market, this time it was largely ignored. The $2 trillion aid package enacted by Congress managed to calm markets for a few days only as it remains quite unclear what that injection of cash aims to accomplish: save consumers, businesses, or both. In the Capitol’s corridors some are already suggesting a massive addendum to the package.

The instinctive urge to rescue the financial sector and ensure the availability of credit may be misplaced when one part of the workforce is laid off and the other part is confined at home. Normal recipes are found wanting when almost the entire economy faces a prolonged shutdown. In light of this, the wish expressed last week by President Donald Trump to ‘restart’ the economy and ignore the pandemic is less absurd than it seems at first.

An epidemiological model developed by the Imperial College London showed that, left unchecked, the corona pandemic’s death toll in the US could exceed 2.2 million. This study, probably more than anything else, galvanised governments into action and decide on lockdowns as the only viable policy option.

However, a competing model presented by Oxford University suggests that a long lockdown would not be necessary, and could possibly even worsen the economic fallout of the pandemic, as a large part of the population – up to 40 percent in the UK – may already have been infected by the virus with most people suffering only mild symptoms or none at all. The statisticians at Oxford explore the tip-of-the-iceberg hypothesis that includes the suggestion that herd immunity is close at hand and may kick in soon.

No responsible government, and that includes the Trump Administration, is willing to take the risk. That puts the US in a particularly difficult bind: going back to work may cause up to 70 percent of the population to become infected with one in ten needing intensive care. Not only would this overwhelm the healthcare system, it would also deprive businesses of labour and thus shut down the economy – again. Moreover, domestic consumption is not likely to pick up when ‘shop till you drop’ suddenly becomes a real possibility.

On the other hand, putting the US economy in cryogenic suspension would tear apart both the country’s social fabric and its growth model. A third option – belatedly embracing the welfare state – is mere wishful thinking: it does not fit the American mindset and cannot be made to dovetail with the broader economic system in the short timeframe available.

That leaves the US to grapple with a hybrid response to the pandemic: preserving the financial system whilst shielding some corporates from irreversible damage and slightly easing the pain for households. It is a conundrum not faced by most European countries as their governments have one mission only: to preserve the capacity of the private sector to spring back to life once the spread of the virus has been checked. The tired welfare state, often ridiculed and dismissed as an anachronism, may yet prove its worth.


Business in Times of Corona: The Lure of Rustbelts When Lean Is No Longer Mean

During their short lifetime, shrimp barely migrate. Aided by a snap of their tail and the tidal currents, the crustaceans may cover a distance of perhaps a few thousand meters in a day. However, once caught, shrimp become a migrating species.

After landing in the nets of a Spanish bottom-trawler working the rich fishing grounds off Morocco, ensnared shrimp embark on a seesawing journey that often takes them first to Breskens in The Netherlands. This rather unremarkable village of barely 5,000 inhabitants at the mouth of the Scheldt – the waterway that links the port of Antwerp to the North Sea and beyond – is home to one of Europe’s largest fish auctions.

Arriving in reefer trailers, the catch is put ‘on the clock’, sold, and shipped back home to Morocco for cleaning and packing before returning to Breskens where it is warehoused. After changing hands a few more times, the shrimp enter the wholesale distribution chain. Every morning, before the break of dawn, hundreds of lorries fan out from Breskens to deliver their cargo all over Europe. Some shrimp may have travelled the length of Europe up to four times before being served in a cocktail.

The plight of shrimp is just a basic example of the many intricate supply chains than span continents, oceans, and the globe. They are powered by economies of scale and the comparative advantages first described by David Ricardo, one of the four great classical economists, in the early 19th century.

In an example perhaps more relevant to the present time, Dutch medical equipment manufacturer Philips was able to avoid an export ban on the respirators it assembles in the United States only after the company reminded federal authorities that European countries such as Czechia and Germany, where Philips sources key components for the device, could respond in kind, breaking an already strained supply chain and interrupting the production process altogether.

In a globalised world, no single country is truly independent. Sovereign prerogatives such as the control of domestic markets have been eroded to a degree that few governments truly grasped – until now. In normal times, almost nobody cares. Goods and services are delivered efficiently and cheaply. Hauling shrimp over vast distances makes perfect sense when the low cost of manual labour in Morocco more than compensates for the extra outlays on logistics. Likewise, Philips assembles its respirators from components sourced on the global marketplace. Their provenance is irrelevant. Today’s ‘lean’ equipment manufacturers are, at most, design studios, assemblers, and marketeers. Most even cut out the middle bit such as Apple did: the company’s engineers design products and its marketing department finds customers for them. All other processes are outsourced and offshored.

The corona pandemic has put a ticking timebomb under this setup. Earlier this week, French president Emmanuel Macron was one of the first heads of state to openly recognise the importance of rebuilding national sovereignty: “The day after will not be like the day before.” President Macron made his remark during a discussion about the need for France to produce the personal protection equipment (PPE) needed by medical professionals locally, instead of buying them from China.

A painful moment ensued when Jean-Luc Mélenchon, a former presidential candidate and leader of the hard-left La France Insoumise (LFI ‘Unbowed France’), reminded President Macron on Twitter that just two years ago the country’s only PPE manufacturer was bought up by the US industrial conglomerate Honeywell which shuttered the factory in Bretagne and moved production offshore – to China. According to Mr Mélenchon, the machines that produced almost a million facemasks each day were subsequently destroyed: “At the time, Mr President, you did nothing to stop that.”

One of the most convincing selling points of globalisation used to be the self-evident affirmation that economic downturns are localised: no matter how overcast the sky, somewhere in the world the sun would still be shining. Over the past 30-odd years that somewhere was usually China which seemed impervious to recession. The country was suspected to have found the magic potion that broke the spell of the business cycle and cleared the path for sustained, if not unstoppable, growth.

This caused a great deal of concern amongst political scientists who feared that the potion’s formula included a mix of authoritarianism and mass surveillance with added elements of a command economy – a concoction potentially lethal to western liberalism. Literati were quick to detect echoes of the warnings dispensed by George Orwell in his dystopian classic 1984.

If there is a silver lining to be found anywhere in the corona pandemic now holding the world hostage, it could very well include the virus’ equalising properties that dim the sun everywhere and involve a re-evaluation of corporate and societal values previously dismissed as outdated and inefficient.

An existential threat tends to focus the mind on that what is most important – individual and national survival. To understand the true nature of that quest, and the role of the private sector in it, light needs to be shed on one of the least studied areas of the economic sciences: the functioning of wartime economies.

Churchill’s Great Britain, Stalin’s Soviet Union, Roosevelt’s United States, but also Ho Chí Min’s North Vietnam, all battled seemingly unsurmountable odds and somehow managed to rally formidable forces to face, and defeat, their foes. They also defied economic logic. That same defiance of logic must again be called upon to offer a way out of our collective predicament.

In a report released yesterday, United Nations Secretary General António Guterres described the corona pandemic as the worst crisis to have hit the global community in the organisation’s history. In Europe, leaders are almost unanimously calling the pandemic the greatest tragedy since World War II. In the United States, President Donald Trump prepared his nation for a death toll in excess of 200,000. Apart from President Jair Bolsonaro of Brazil and, perhaps, the surprisingly lackadaisical prime minister of Sweden Stefan Löfven, nobody is foolish enough to dismiss the corona virus as a slightly more deadly version of the flu.

Returning to supply chains and sovereignty: both need fixing and the path to follow seems already traced. As governments pour untold billions of dollars and euros into ever-larger corporate aid packages, most will eventually want to have their say in how business is conducted. Even before the corona virus struck, some die-hard fans of free trade such as Denmark, Germany, and The Netherlands had already begun to question the wisdom of granting primacy to the global market. Even Great Britain, for all its talk of the magnificent benefits brought by free trade, retreated from the European Union, arguably the freest market of all.

Once the pandemic has subsided there will, of course, still be a global market of sorts. Redesigned and rebuilt supply chains will emerge, applying the lessons learnt with or without government prodding. Expect more eye for resilience and less emphasis on outsourcing offshore production. For future growth, China may want to consider boosting domestic consumption whilst the US and Europe will perhaps need to revisit their industrial past and polish up a few rustbelts.

However, in uncertain times, the futurology is a pursuit fraught with danger. Presently, facts are few and far in between. The only certainty that businesses can count on is that the longer it takes to contain and defeat the virus, the more profound and lasting the changes it will cause.


The Great Equaliser That Was Not

In a macabre spin on the corona pandemic, some sociologists and economists tentatively hail the deadly virus as the great equaliser they had been waiting for: the great event that forces the global community to re-examine its destructive ways. History shows that it takes only one of the four horsemen of the apocalypse to spur his steed in order for a more just world to emerge: the plague heralded the end of feudalism, and two world wars gave rise to the welfare state. In the aftermath of a cataclysm, inequality melts away – only to return once memories fade.

However, this cleansing of privilege carries a heavy price only great wealth can pay – to the detriment of others. Past experience also shows that the global shocks needed to revert inequality cost the lives of many millions. This holds true as much today as it did before. Just try to imagine the scale of human suffering that would result from the corona virus gaining a foothold in the slums of Mumbai, the favelas of Rio de Janeiro, or the townships of Johannesburg. Or picture the virus ravaging rogue states such as North Korea, Eritrea, and Venezuela where famine looms eternal and muzzled masses have little recourse to medical facilities.

Where governments are starved of funds and social distancing is impossible, flattening the pandemic’s curve is not an option. Though since 1990 an estimated 1.1 billion people have strayed above the World Bank’s poverty line, another 750 million or so must carve out a living on less than $1.90 a day and remain stuck below the threshold. Sub-Saharan Africa is home to well over 400 million of the world’s poorest people. Since earlier reports on the corona virus’ supposed dislike of warmer climes seem wildly optimistic, Africa is not likely to escape the brunt of the pandemic.

In a report released earlier this week, United Nations Secretary General António Guterres looks to the world’s ‘leading economies’ to provide ‘coordinated, decisive, inclusive, and innovative’ policy action and maximum financial and technical support for the poorest and most vulnerable peoples and countries. Mr Guterres warns of millions of deaths and reminds world leaders that the global health system is only as strong as its weakest link. He concludes that the world now needs solidarity to defeat the virus and build a better future.

The World Health Organisation (WHO) and the Food and Agriculture Organisation (FAO), two major UN bodies, earlier this week joined the World Trade Organisation (WTO) in an exceptionally strong-worded warning over impending food shortages and the coming of a ‘Great Famine’. According to the three global entities, travel restrictions affect the seasonal migration of farm labourers whilst protectionist measures, such as the ban on wheat exports mulled by the Russian government, can disrupt fragile supply chains. Price gouging and reduced foreign exchange earnings may prevent less developed countries from sourcing the staples needed to keep their population fed.

FAO Senior Economist Abdolreza Abbassian is paying close attention to events unfolding in India. Last week, Prime Minister Narendra Modi put the country’s population under a strict lockdown just as Indian farmers and their labourers were preparing for the start of the harvest season. Mr Abbassian is not just concerned over how people will cope without their meagre daily earnings but also wonders how the government plans to harvest and process the crop that feeds the nation. Mr Abbassian also points out that India has been the world’s fastest-growing food exporter for ten years running and already features amongst the largest suppliers of rice, wheat, and sugar.

Meanwhile, the United Nations Conference on Trade and Development (UNCTAD) projects a downward slide of foreign direct investment flows of up to 40% this year. The International Labour Organisation (ILO) calculated that as many as 25 million jobs may be shed worldwide, resulting in an estimated $3.4 trillion of lost labour income.

Already now, the scope of the pandemic’s impact on the world economy can hardly be overstated, yet the international solidarity UN Secretary General Guterres clamours for seems to head for an all-time low. In the United States, the Trump Administration struggles to hide its disdain for international cooperation whilst the European Union seems for now wholly uninterested in clinging to its status of the world’s preeminent soft power. Since the corona virus infected the EU, its 27 component parts quickly claimed back their sovereign prerogatives, erecting borders and refusing to aid fellow member states.

The Dutch government, discretely supported by Berlin, promptly abandoned the moral high ground and lectured Italy and Spain extensively on the evils of fiscal imprudence before mercilessly shooting down any and all suggestions involving the pooling of risk and resources. Belatedly recognising that he may have gone too far in his display of fiscal rectitude, Dutch Finance Minister Wopke Hoekstra yesterday promised to donate €1 billion to a future emergency fund for member states most affected by the pandemic. However, Mr Hoekstra remained adamant that his government will not greenlight Eurobonds or agree to relax the conditions attached to bailouts from the €410-billion European Stability Mechanism (ESM).

The reluctance of EU member states to help each other deal with crises is, of course, nothing new to Greece and Italy. Notwithstanding a string of promises, both countries were left to face the large influx of refugees from Africa and the Middle East largely on their own. The banking crisis that started in 2008 also failed to spark European solidarity and was only haphazardly addressed after The Hague and Berlin realised that the fallout could possibly undermine the euro – the common currency that had, arguably, proved the single most important factor in ensuring the remarkable success of the northern economies.

With solidarity in short supply, UNCTAD’s call for a massive $2.5 trillion aid package for developing countries went unheard in the global cacophony of voices. It is also likely to go unheeded. UNCTAD has asked for $1 trillion to be made available through IMF special drawing rights and an additional $1 trillion in debt forgiveness. The conference also pleads for a $500 billion Marshall fund to be dispersed in grants to countries with underfunded public healthcare systems.

UNCTAD economists warn that even relatively robust developing economies will struggle as investors recall their money. They found that between February and March portfolio outflows from the main emerging markets amounted to $59 billion, more than double the $26.7 billion that left those same countries in the immediate aftermath of the global financial crisis. Commodity prices are falling almost across the board and have already retreated by an average of 37 percent this year alone.

UNCTAD Secretary General Mukhisa Kituyi said that the speed at which the economic shockwaves of the pandemic has hit developing countries is nothing short of ‘dramatic’. In the preface to the conference’s latest report, Mr Kituyi writes that things will get much worse before they get better. He also points out that the size of the proposed emergency package roughly equals the amount of money – 0.7 percent of GDP – that countries with a Seat on the Development Assistance Committee of the Organisation for Economic Cooperation and Development (OECD) have pledged but not paid out over the last ten years.

Thus, it would seem that so far in times of corona, some are still more equal than others.


Book Review: The Ride of a Lifetime by Robert Iger - Iger’s Wild Ride to the Top of ‘the Happiest Place on Earth’

[caption id="attachment_14806" align="alignright" width="425"] The Ride of a Lifetime by Robert Iger[/caption]

Back in 2005, Robert Iger’s 31-year journey at Disney and ABC looked like it could come to an end.

Pulitzer prize-winner James B Stewart had released his book DisneyWar, an exposé on Michael Eisner’s 20-year reign as CEO of the multimedia giant. Iger was Eisner’s second-in-command at the time. He was portrayed as a man under siege, battling for respect while continually being undermined by Eisner.

“I’m invisible,” he admitted. “No one takes me seriously”. The timing of Stewart’s book was bad. Iger was the sole internal candidate suitable to replace Eisner as CEO. He had seen-off a serious rival in Michael Ovitz, but now had to wrestle with his own demons — and the now-coloured perceptions of the Disney Board.

Fast-forward 14 years, and the release of Iger’s own book shows him as a man at the summit. He stands tall, having presided over megadeals that have made Disney master of the media universe. He has also emerged as an example of values-based leadership, a decent man in a sometimes-nasty industry.

Fittingly titled the The Ride of a Lifetime, the book follows Iger’s journey from small-town Long Island to the high life of Los Angeles. He describes scraping gum from under desks while working his summers as a school janitor, aged 15, his stint as a weatherman after college, buying Listerine for Frank Sinatra as a studio errand boy, listening to David Lynch pitch Twin Peaks at a restaurant, discovering the Jamaican bobsled team at the Calgary Olympics, meeting three presidents of China, haggling with George Lucas for Lucasfilm, and sending Obama an advance copy of Black Panther.

He wrote the book thinking that its publishing would coincide with his retirement — something now delayed by the 21st Century Fox deal. The book is thus partly a memoir, as one of the world’s most powerful CEOs looks back over his career.

But Iger has also written it as a business book. Through his retelling of his life and career, he shares lessons learned and personal and work philosophies. Iger has said that young people often ask him for advice on careers and start-ups. This book is a distillation of that advice. Accordingly, The Ride… is divided into two main sections: “Learning” and “Leading”.

Some memoirs are presented as the rise of a superhero or a genius. Iger’s memoir is not one of those. He admits to the part luck has played, such as when he was appointed senior vice-president for ABC programming at the moment he was about to quit. He is also honest about his failures. He admits his mistake in pushing David Lynch to reveal who killed Laura Palmer in Twin Peaks when he was head of ABC Entertainment. He also describes his insecurity with Eisner, and an angry outburst at the Disney Board when he was interviewed for the CEO’s role.

His vulnerable side emerges with details of his personal life, including his father’s manic depression. He reveals his ability to interpret his dad’s mood by subtle signs, such as how his footfalls sounded on the front steps.

Iger also highlights the importance of humility and respect. “Don’t let your ego get in the way of making the best possible decision,” he advises. He tells the story of how he reconciled with Roy Disney after the “civil war” of the Eisner years. “There was nothing to be gained by making him feel smaller or insulted. He was just someone looking for respect.” Iger’s difficult ascension to Disney CEO played a key part in the development of his humility, and he covers it in detail. “You can’t let ambition get too far ahead of opportunity.”

His pride in Disney is allowed to shine through. When he first became CEO, he saw a company that needed to believe in itself again. Buying Pixar was a key first step. “As animation goes, so goes the company.” At that time, the animation department was the main engine of the business, but it had struggled over the previous decade. Its releases had underwhelmed critics and performed miserably at the box office. In a parade at the opening of Disneyland Hong Kong, Iger saw no characters from the previous 10 years of animated Disney movies. Buying Pixar reinvigorated the company’s soul, and gave it back its swagger. Iger had the audacity to conceive of the idea, and the mettle to convince the board that he was right.

Iger also talks about the responsibility of keeping the company true to its values of creativity and decency. Disney almost bought Twitter, but decided against it. He could see the marketing potential of the social media site but was wary of the vitriol spewing from some users. “I felt they would be corrosive to the Disney brand,” he notes. It did not mesh with Disney’s motto of being “the happiest place on earth”.

The book also works as a primer on the recent changes in the US media industry. It has chapters on the Disney-ABC merger (Iger had started with ABC), the acquisitions of Pixar, Marvel Studios, Lucasfilm (at a lower price than Pixar), and 21st Century Fox (minus Fox Broadcasting, Fox News, and other Fox TV assets). It closes with the development and launch of ESPN+ and Disney+.

Iger describes standing in front of a whiteboard with Steve Jobs as the Apple founder scribbled down the pros and cons of selling Pixar to Disney. He also recalls how Jobs told him that his cancer had retuned — just hours before the deal with Pixar was to be closed.

Rupert Murdoch told Iger, over a glass of wine, that he was willing to sell 21st Century Fox because he could see that technological disruption was rapidly changing things. He believed that Fox no longer had the scale to compete: “The only company that has scale is (Disney).”

Iger also details the move to streaming services. He describes an epiphany that came after writing a list all of Disney’s business units, including those acquired from Fox. His list allowed him to see the relationship between content creation and technology, and focused his mind on the needs of the streaming space. He still has the whiteboard he scrawled on to achieve the breakthrough.

Iger became convinced that Disney needed to get into streaming, even though it required heavy expenditure and the loss of licensing revenue. Courage was needed to see out short-term loss for long-term survival. Iger saw the “innovator’s dilemma” in streaming.

He describes how Disney+ and ESPN+ had their origins in Major League Baseball (MLB). In 2017, Disney took full control of BAMTech. It was a service developed by MLB for streaming baseball games on demand, and provided the base technology for Disney+ and ESPN+. Disney needed only to create user interfaces and add the content.

Iger plans to retire as CEO of Disney in December 2021.

Published by Random House. Reviewed by Brendan Filipovski


2020 UNCTAD World Investment Forum: More Important Than Ever in an Age of Worrying Trends

[caption id="attachment_14828" align="alignright" width="300"] Abu Dhabi[/caption]

In December this year, Abu Dhabi will welcome government leaders, CEOs and investment stakeholders for the seventh biennial UNCTAD World Investment Forum (WIF).

The forum’s mission is to promote investment for sustainable development. And there are worrying trends, as well as signs of hope.

UNCTAD’s latest assessment is that global FDI remained flat in 2019, at $1.39tn, a one percent decline from 2018. But FDI was up in Latin America and the Caribbean, as well as in Africa.

As director of UNCTAD’s Investment and Enterprise Division, and organiser of the forum, I am concerned that global FDI is stagnating. But I see that investors, firms and governments are putting sustainability at the core of their activities.

This makes me optimistic that — through initiatives like the World Investment Forum — we can change investor ehaviour and leverage investment for sustainable development.

"The WIF will continue its mission to provide a universal and inclusive platform for investment stakeholders to address emerging investment issues, to support international investment, and to maximise the contribution of investment to sustainable development."

Private sector innovation and investment can accelerate the world’s shift to a sustainable growth track. Governments need to realign the regulatory and policy environment to increase the share of invested capital driven by sustainability. This requires dialogue between all stakeholders, the sharing of best practices, and the agreement of investment and financing solutions.

Since 2008, the World Investment Forum has been the UN’s leading multi-stakeholder platform to drive investment for sustainable development. It offers participants the opportunity to influence investment policymaking, shape the global investment environment, and network with global leaders in business and politics. It has helped translate initiatives, such as the Sustainable Development Goals (SDGs) and the Paris Climate Change Agreement, into immediate action. It has shaped policies that better address sustainability challenges and promoted the mobilisation of capital for sustainable investment, especially in the developing world.

The WIF was established to fill the need for an international forum on investment policy. The idea was to supersede intergovernmental negotiations by providing a platform for inclusive dialogue for the entire community of investment-development stakeholders. The process led to consensus on policies and norms, a “soft” approach to global investment policymaking.

In its objectives, timing and approach, the establishment of the WIF has proved prescient. The past decade has been one of huge shifts. Digitalisation and automation were barely on the radar at the start of the decade but are now on all policy agendas. These developments have forced a rethink of capitalism itself, underscoring the need for inclusive, action-orientated dialogue between key stakeholders across sectors, civil society, academia and international organisations.

Looking ahead to this years’ WIF in Abu Dhabi, there are three key questions for the global investment-development community:

How can investment stakeholders rapidly integrate sustainability criteria into investment decisions and business operations and create long-term value and sustainable development impact?

How can governments and businesses respond to the consequences of technological change for development, harness its potential, and mitigate the risks of premature de-industrialisation and social change?

What are the implications of increasing fragmentation in international economic policymaking that has led to a rise in protectionism and competition, as well as an emphasis on regionalism and a move away from liberalisation to intervention?

Together, these subjects will have profound consequences for the new era of globalisation and structural transformation, posing challenges and opportunities.

The WIF will continue its mission to provide a universal and inclusive platform for investment stakeholders to address emerging investment issues, to support international investment, and to maximise the contribution of investment to sustainable development.

With the stakes ever higher, and with UNCTAD’s latest forecast for FDI this year looking weak, the World Investment Forum is needed more than ever.

About the Author

[caption id="attachment_11338" align="aligncenter" width="150"] Author: James Zhan[/caption]

Dr James Zhan is senior director of investment and enterprise at the United Nations Conference on Trade and Development and lead editor of the World Investment Report.


Separating the Wheat from the Chaff

[caption id="attachment_14837" align="aligncenter" width="900"] Manhattan, New York - March 30, 2020: USNS Comfort Hospital Ship enters Manhattan[/caption]

Scale, speed, and simplicity. In order to have a discernible effect, measures taken to alleviate the impact of the corona pandemic on people, businesses, and institutions must include these three key elements.

Earlier this week, the US navy became the unlikely star in a possibly deadly tragedy of errors involving its hospital ship USNS Comfort. On the order of President Donald Trump, the vessel was dispatched with great fanfare from Norfolk, Virginia, to New York Harbor where throngs of onlookers ignored social distancing recommendations to watch the ship dock at Pier 90 of the Manhattan Cruise Terminal.

The idea behind the emergency deployment was to help ease the pressure on New York City hospitals by making the ship’s 1,000 beds and battle-hardened medical staff available to non-corona patients needing urgent care. However, the New York Times revealed that by Thursday evening, fully 72 hours after the USNS Comfort slipped into her berth, only about 20 patients had been transferred to the ship. The newspaper quoted Michael Dowling, head of the city’s largest hospital system Northwell Health, who bluntly called the high-profile exercise a ‘joke’.

A slew of military protocols and bureaucratic hurdles had prevented the admittance of patients to the ship. Whilst health professionals in the city worked around the clock, the medical staff of 1,200 aboard the USNS Comfort remained mostly idle. The scene was much the same in Los Angeles where the Comfort’s sistership, the USNS Mercy, also failed to provide solace due to tangled paperwork.

The US Navy this week struggled to keep its reputation afloat after it transpired that the commander of the aircraft carrier USS Theodore Roosevelt had been relieved of his duties for sounding the alarm over corona infections on the ship. Captain Brett Crozier had asked for permission to disembark and quarantine the vessel’s nearly 5,000 crew members on Guam, a US island in the Pacific, reminding his superiors in Washington that the country is not at war and ‘sailors do not need to die’. Though permission was eventually granted, Captain Crozier received his marching orders.

Though there may be many good reasons for the US Navy’s unfortunate failings in a war of a non-military nature, its institutional bumbling illustrates the need for scale, speed, and simplicity. How to properly apply these principles was shown by the UK government. After initially failing to recognise the almost unprecedented scope and impact of the corona pandemic, the cabinet has moved quickly to catch up with events and improve the effectiveness of its response.

This has largely been the work of Chancellor of the Exchequer Rishi Sunak who promptly and admiringly shed all ideological baggage to rally whatever might was left in the hollowed-out state to forcefully intervene and save the nation from an economic meltdown. Earlier this week, Chancellor Sunak proved up to the monumental task thrust upon him by circumstance and rapidly adjusted the terms of his £330 billion Corona Business Interruption Loan Scheme (CBILS). Mr Sunak was visibly upset after he noted that some commercial banks refused to ‘play their part’ and were offering affected small businesses regular loans at higher interest rates, and with more strings attached, instead of the cheaper and less cumbersome credit facilities made available through the government-backed scheme.

Yesterday, Mr Sunak banned banks from demanding personal guarantees on loans not exceeding £250,000. He also expanded the CBILS to include all small- and medium-sized businesses. Previously, the facility was only available to companies unable to access regular funding. Mr Sunak also said that the scheme may be expanded as dictated by the needs of the business community and promised to ensure the quick and hassle-free disbursement of credit. At betting emporium Ladbrokes, the stylish, dashing, smart, and energetic chancellor is already being tipped as a hot favourite to become the next occupant of Number 10. Crises do have a tendency to separate the wheat from the chaff – and expose political fluff for what it is.

Slow in coming, but quick to spread after it gains a foothold, the corona virus poses a threat that is almost impossible to overstate. Indices across the board paint a harrowing picture that inspires both fear and a measure of desperation. Quoted in The Guardian, Chief Eurozone Economist Claus Vistesen of Pantheon Macroeconomics is at a loss for words: “We are struggling to come up with words to describe the numbers which are now so far out of any reasonable range that they are difficult to interpret.”

The Eurozone composite purchasing managers’ index (PMI) compiled by IHS Markit plunged to an all-time low of 29.7 in the space of a single month. In February, on the eve of the pandemic, the index stood at 51.6, indicating a modest degree of confidence in economic prospects. On the PMI scale, 50 marks the difference between optimism and pessimism. In the US, almost 6.7 million people filed for unemployment benefits last week, the highest number by far ever recorded.

With the 3.3 million who had put in claims in the week before, the US economy lost a staggering 10 million jobs in a fortnight. Former Labor Department economist William Rodgers fears that unemployment has shot up from 3.5 percent in February to almost 17 percent now. The actual numbers for March will only be ready for release in early May due to the time lag between data gathering and processing. The employment data scheduled for publication today by the Bureau of Labor Statistics include only the first few days of the pandemic.

Economies the world over have now entered unchartered choppy waters and rely on the vagaries of dead reckoning to plot a course. It becomes clear that the speed and ferocity with which the recession hits have no parallel in modern history. Events that usually take a year or longer to unfold are compressed in days, catching everybody off guard.

Comparisons to wartime economies are unhelpful and fail to consider the sudden and near-total disappearance of demand. Countries readying for battle usually retool their economy to deliver the weapons of war, spurring supply to meet the demand for military hardware.

Battling the corona virus involves sizeable outlays of cash on the supply of medical equipment, research, and staff. That effort, however heroic, major, and necessary, is not enough to sustain entire economies. Absent strong consumer demand, other ways need to be found to keep production lines humming, albeit at a lower pitch, during and after the pandemic.

Once the virus has been contained, governments must find an equilibrium between the need to rebalance their now severely distorted national accounts and the need to return to growth. Without the latter, the former becomes a hopeless pursuit.

A failure to destroy the trillions of fiat money issued to offer a lifeline to the economy entails the risk of spurring inflation – the market’s implacable way of eroding the money supply when central banks are reluctant, or too slow, to act. However, removing those trillions – helpful now but toxic later – from the economy inevitably depresses demand, involves austerity, and lengthens the recession.

So far, both the Federal Reserve and the European Central Bank have been able to inject vast amounts of cash into the economy without being penalised. QE (quantitative easing) in its various guises has been a fixture of economic life since the financial crisis of 2008. All that time, inflation has remained dormant. When governments start to grapple with the long-term consequences of the corona pandemic, they will face a conundrum: opt for a long recessionary tail or risk awakening inflation from hibernation. This pandemic has no winners, few silver linings, and is not over when the virus has been defeated.


Smoke and Mirrors Line the Fringes of the Pandemic

[caption id="attachment_14852" align="alignright" width="300"] Luigi di Maio[/caption]

Luigi di Maio owes his rapid ascendancy in Italian politics to an almost virulent display of Euroscepticism. It propelled the former drinks vendor at the Naples San Paolo football stadium to a top spot in his country’s notoriously vicious political arena as the power behind the throne of Beppe Grillo, the clownish leader of the Five Star Movement. Though Mr Di Maio left the party in January to halt infighting and stop desertions to the far-right Northern League, he retained his position as foreign affairs minister in the coalition government of Prime Minister Guiseppe Conte.

From that perch, Mr Di Maio now emits a stream of passionate appeals for European solidarity as Italy battles to corona virus and counts its dead. He is also beside himself with anger over the refusal of Germany, The Netherlands, and a few other frugal EU member states to consider raising vast amounts of cash through the emission of Eurobonds. Minister Di Maio considers the attitude ‘deplorable, self-serving, and short-sighted’ and did not shirk from drawing parallels with post-war Germany that, he was happy to remind readers of the Frankfurter Allgemeine newspaper, had part of its national debt cancelled in order to help with the rebuilding of the country.

So far, Minister Di Maio’s words have fallen on deaf ears. Berlin and The Hague have not forgotten his shenanigans during the 2018 election campaign when Mr Di Maio vowed to show Brussels his middle finger and ignore any and all budgetary restrictions imposed by the European Growth and Stability Pact – the deal that underwrites the euro. Once in power and installed as deputy prime minister, Mr Di Maio promptly cobbled together a €37 billion spending package to revive Italy’s dormant economy, tacking yet a few more points on to the country’s already worrisome 138 percent debt-to-GDP ratio, after Greece (181%) the second highest in the Eurozone.

Though considered one of the more pragmatic, and therefore least popular, leaders of the Five Star Movement, Mr Di Maio proved a master of grandiose theatrics when he dismissed the rejection of his government’s proposed budget by the European Commission as merely a minor irritant: “It doesn’t at all surprise me for this was the first Italian move that has been decided in Rome and not in Brussels.” Though a pandemic is certainly not the time to settle scores, Mr Di Maio has now perhaps fallen on his own sword.

Whilst the pandemic has clearly marked the boundaries of European solidarity, the government of Italy should perhaps not be baffled by the reluctance of some member states to fast-track the issuance of Eurobonds or scrap the conditions attached to the release of funds from the €410 billion European Stability Mechanism (ESM). Both Eurobonds and ESM-funds have become rather superfluous after the European Central Bank (ECB) last month in removed all limits from its bond-buying programme, promising to scoop up any amount of state debt issued by Eurozone member states. The surprise move was the bank’s way of bypassing national sensitivities and spreading sovereign risk without involving politicians.

Instead of showing a semblance of appreciation, the Italian government turned to Russia and China for salvation – making a public display, if not spectacle, of its undying gratitude to those two faraway countries for their token gestures of help. Sensing an opportunity, both Russia and China dispatched a few cargo planes with medical supplies to Milan. However, after unpacking, most of the kit proved to be subpar or faulty. That did not prevent the involved parties from laying on a great display of international solidarity that generated the expected headlines.

China in particular has been quick to exploit its perceived edge in containing the spread of the corona virus. Pandas have given way to facemasks as the preferred diplomatic lever of Beijing. The Chinese ministry of Foreign Affairs seems on full tilt as it seeks fill the void left on the world stage by the United States. The government of President Xi Jinping is determined to establish China as a trusted partner whilst driving a wedge in the European Union. Brussels had earlier displeased the Chinese government after it expressed reservations about the geopolitical undertones and implications of Beijing’s flagship Belt and Road Initiative.

Chinese diplomats eagerly play to existing vulnerabilities and have chosen Eurosceptic populists as their preferred allies in a re-enactment of the Grand Game. Mr Di Maio makes great fanfare of Chinese assistance but chose to ignore the arrival of much larger shipments of medical supplies from Germany and France.

In Hungary, Prime Minister Viktor Orbán defiantly declared that his government has so far refrained from asking for help in Brussels, “because that doesn’t work.” He did, however, use the pandemic to tighten his already strong grip on the country by donning his office with far-reaching emergency powers that include the muzzling of the media.

Prime Minister Orbán considers China a partner much better aligned with his own convictions and aspirations as a would-be strongman. Meanwhile, the Chinese top diplomat in France, ambassador Lu Shaye, was unable to curb his enthusiasm and waxed lyrical over the fact the already more than 80 countries have appealed to Beijing – ‘Not Washington’, as he wrote on his mission’s website – for assistance and expertise in fighting the corona virus.

If anything, the pandemic has stoked geopolitical rivalries. Even the French got caught up in the jockeying for a top position in the post-corona world. Last Thursday, Finance Minister Bruno Le Maire urged the European Union to seize the moment and cement its ‘rightful place’ as a political and economic superpower holding the balance between the United States and China.

A key battle ground, Italy offers Russia a toehold in the European Union as the country seeks to ingratiate itself with Rome in barely veiled attempt to solicit Italian support for the relaxation of the crippling economic sanctions imposed by the EU following the annexation of Crimea in 2014 and the subsequent war-by-proxy in Ukraine. A curious novelty ensued: whilst Italian forces in the Baltics man the border to thwart Russian aggression, Russian specialists in nuclear, biological, and chemical warfare disinfect the streets in downtown Bergamo.

The fact remains that none of the major powers has been particularly apt in dealing with the pandemic. The US was late to respond, Europe fell apart into quibbling nation states, and China seems to have grossly overstated the effectiveness of its containment policy. As a sense of normalcy slowly returns to Wuhan, the first epicentre of the disease, eyewitness reports begin to emerge that seem to indicate a far higher death toll than the one officially claimed.

China has somewhat of a reputation when it comes to spreading alt-truths – newspeak for propaganda. Even in the face of overwhelming evidence, including official documents, the country’s government still denies the existence of a vast gulag of internment camps in the restive Xinjiang Region. Beijing has also come under fire over the political repression in Hong Kong.

The corona pandemic has offered China a chance to clean the slate and project the country as a humanitarian superpower. However, much like Italy’s flippant attitude towards the European Union, China’s diplomatic offensive represents but a show of smoke and mirrors at a time when nations stand in need of real solidarity. Whilst the post-corona future remains fraught with uncertainties, the great leaders waiting in the wings better not count their chickens yet.


Deflation, Inflation, and the Disappearance of Deficit Phobia

Inflation is, essentially, the expression of excess demand or, on its flip side, a sign of depressed supply. The trillions of freshly ‘minted’ dollars and euros that seek to maintain an equilibrium of sorts between supply and demand whilst the corona pandemic throws economies into disarray, are for now unlikely to stoke the fires of inflation. Most economists agree that the vast sums being spent in an attempt to put a floor under sagging markets merely replace lost revenue and income. The idea behind the largesse displayed by central banks and governments is to keep the economy ‘in situ’ on life support, ready to be revived once the pandemic has abated.

Curiously, some economists fear that over the coming weeks and months, the spectre of deflation poses a more serious threat. Demand, they argue, has all but evaporated in a number of crucial sectors such as construction, retail, and travel and leisure. This places a downward pressure on prices. Cheap oil only reinforces this trend.

Chief Economist Joseph Lupton of JP Morgan Chase expects a ‘colossal’ deflationary shock and points out that the prices of key commodities such as oil and copper are heading south. He also notes that large chunks of the services sector are unable to attract business without offering sizeable discounts: “Falling prices – deflation – makes it harder for companies to honour their financial commitments. Some may survive by cutting back on investments and payrolls, others will face bankruptcy.”

Former Chairman Bill Dudley of the New York Federal Reserve Bank agrees but cautions that in the medium term the rescue packages may cause inflation to return. Mr Dudley argues that the price correction now taking place will prove to be of a passing nature. In this scenario, timing is of the essence: monies pumped into the economy must be removed before demand spirals out of control. Both short-term deflation and medium-term inflation are capable of prolonging the recession now taking shape. Hence, central banks need to rediscover their traditional role of ensuring price stability. They must do so without the benefit of classical monetary policy instruments such as signalling their intentions via interest rates. When rates hover close to zero, monetary policy is only meaningful as a tool to rein in a galloping economy. In the foreseeable future, no major economy seems likely to require such a brake on growth.

As the first numbers trickle in, deflation already appears to have taken hold in China where producer prices retreated by 0.4 percent in February. In the UK, the British Retail Consortium last Wednesday reported that high street prices dropped by an average of 0.8 percent in March. In the US, airline ticket prices fell by 14 percent in the second week of March whilst average revenues per hotel room plummeted by a staggering 80 percent in the closing days of last month.

Professor Charles Goodhart of the London School of Economics is not surprised or impressed by reports of deflation. He is, however, concerned on what follows once the corona virus has been successfully contained and the economy is revived: “The answer, as in the aftermath of wars, will be a surge in inflation, quite likely more than 5 percent and even in the order of 10 percent in 2021.”

Some economists would welcome such an elevated level of inflation as a clear sign that demand has been fully restored and business is booming. However, markets in Europe and the United States do not think a return of inflation likely. The US swap rate, indicative of inflationary expectation five years down the line, has only climbed to 1.49 percent – up from an all-time low of 1.09 percent two weeks ago. The 10-year ‘break-even’ rate derived from government bonds with a built-in price correction, crept up to a paltry 0.96 percent. In Europe, the swap rate actually dropped from 1.15 percent in early March to 0.72 percent this week even though the European Central Bank ditched all limits on bond purchases and injected another €750 billion into its asset-buying programme.

Though central banks and governments may have binned the rulebook, the performance of economies still depends on a mysterious mix of market sentiment and rationale. Murphy has a role to play, as do less fickle forces. Conventional logic dictates that a measure of pent-up demand, vast amounts of cheap credit, and the wishful thinking of diehard optimists cannot possibly fail to deliver economic buoyancy once the pandemic has receded. Quoted in the Financial Times, Chief Global Strategist David Kelly of JP Morgan Asset Management predicts an economic surge – a tsunami of sorts – on the back of the virus’ demise. He warns investors to keep an eye out for inflation and says that expectations are kept artificially low by investors abandoning illiquid instruments with build-in price correction: “A few years down the road there is a significant chance of more inflation.”

The impending conundrum gets slightly worse when factoring in the ultimate fate of the trillions now being created and disbursed – ballooning already bloated balance sheets of central banks and dipping both countries and businesses ever deeper in debt. Sooner or later, this money needs to be removed from the economy. Inflation may help with that, forcing central banks to jack up interest rates and governments to curtail spending.

That last bit may prove hard as deficit phobia was counted amongst the first victims of the pandemic. Even the most fiscally prudent governments swiftly removed nearly all spending constraints and are orchestrating bailouts on a scale unimaginable a few short weeks ago. Both Germany and The Netherlands, two notorious budget hawks, have vowed to protect vital sectors of their economy, even considering the nationalisation of iconic corporations. Dutch Finance Minister Wopke Hoekstra refused to rule out a takeover by the state of flag carrier KLM in order to preserve the gateway function of Schiphol Airport and the 150,000 or so jobs associated with it.

As such, the corona pandemic may well turn out to be the ultimate black swan event, changing the underlying fundamentals of economic policy. It may be a bitter pill for liberals to swallow, but once the distaste for state intervention has been overcome, it may prove difficult to return to the laissez faire ways of old.

The problem is, of course, that not all states are created equal and some may be better in handling the added responsibilities than others. In Europe, the strong opposition in the north to the mutualising of risk via Eurobonds originates in a deep-seated distrust of the ability of some Eurozone member states to manage state finances properly. Vastly expanding the role of the state in the management of the economy opens the door to a dangerous relaxation of basic governance and accountancy rules. Still, there is no reason, other than an ideological one, why a state cannot run an airline, or some other major corporate, profitably. If in doubt, or in need of real-life examples, please take a look at Ethiopian Airlines or, on the opposite end of the scale, Alitalia.