The Economic Damage of Uncertainty (w/ Lenore Elle Hawkins)
ED HARRISON: When you think about the economic and the political impacts of the coronavirus, what comes to mind first for you where you are right now? LENORE HAWKINS: Well, there's a couple of things. To start with, one of the big challenges right now, the US is talking about this, Spain's talking about it. Italy's a little bit further ahead on the curve, having been hit harder earlier. The problem we're facing, it's akin to having a bunch of people-- you've got like Italy's population, about 60 million people. Well, you got 60 million people sitting on a plane on the tarmac going when the hell do we get off? It drives you nuts when they don't tell you, when no one says anything about when you're going to get off the damn plane? That's what we're having right now. We're really struggling with getting some decent communication on what the plan is? How are we going to start to open up the economy? What's the timeline? They started getting a little bit better about it, because without that, how to businesses plan? If you know you're going to be locked down for a month versus four months, a couple of weeks, you're going to handle the situation differently. One of the things that really needs to happen everywhere is governments need to do a better job of communicating and that will help the economy as well because people can have in their head, all right, here's what I need to do to get through this. We've had a couple of different things as well here with some that are a little bit funny. Yesterday, April 1st, and it's fun that it was on April Fool's Day. April Fool's Day was the first day in Italy that you could apply to get a 600 euro a month aid for those people who-- they're out of work, they need to make ends meet. About 4 million people went to the website to try and do this. The website kept crashing and on top of crashing, it was also occasionally popping up other people's personal information. That's par for the course for the Italian government now, can't really knock that because the US had some similar issues with the launch of Obamacare, but that's some of the frustrations but a little bit of a humorous note with somebody tweeted out about how it's why they prefer the private sector to the public sector, because like 4 million hits to the Italian help website and it crashes. 400 million people going to Pornhub no problem. Pornhub, of course, then tweeted to the Italians that they would be willing to help the government with their servers, so got that [indiscernible]. So far, we haven't had some really great data on what the actual unemployment hit has been. Italy doesn't do the weekly the way the US does and right in the US, we've seen just absolutely astronomical record increases in the first claim, first initial filings for unemployment. Italy, we will get that in a couple days, because they just do it by month and February's data, starting out, it wasn't that great. It was great in Italy terms, but it wasn't great compared to where you'd like it to be. Because unemployment was already at like 9.7% so it's not like we're starting off at a really good point. ED HARRISON: What do you make of those numbers? Because we were talking about this just before you came on, you had a 3.2 that became a 3.3. Then you had a 6.6. By the way, these are seasonally adjusted, now these seasonal adjustments don't really matter because the magnitude is so large that it swamps any seasonal adjustments, the real number was 5.8. Still, nonetheless, that's an enormous number. In the market, futures sold off a little bit in the US in the wake of this, but generally speaking, the market tone is relatively positive. How do you reconcile that? LENORE HAWKINS: I think a good part of that is what's going on with Trump tweeting about the oil market. I think the market's in for a big disappointment because looking at his numbers, he's implying that Russia and Saudi Arabia are going to cut their production roughly in half and the US isn't going to do anything. I don't really see Russia and Saudi Arabia basically agreeing to subsidize the American shale oil sector, so I don't think we're going to get the numbers that he's talking about. I can't imagine that Saudi Arabia and Russia are not at some point going to go, all right, we both need to blink, this hurts. This is hurting all of us. We're hitting the point with oil where there's literally no place to put it. It's not like these are things that you can just go turn on, I don't know, you're going to turn it off for a couple of hours. This is big commitment to increasing capacity or decreasing capacity. I think that the market got all excited about that. Plus, I think the market still has this belief that if it's really, really bad, the government can come in and do something. That, to me is the most terrifying belief. You have that belief in Italy as well, although it's not really directed exactly at the Italian government that the Italian government is going to save the day, it's more that the European Union will come and save the day. The degree to which that is possible is decidedly suspect, to say the least. Let's take a look at where Italy's situation at the moment and just to give Italy a little bit of credit, it's not like Italy's economy is about 1/10 the size of the US, so its GDP about 1/10 of the US where it has about 1/5 of the population. That's pretty weak. That doesn't sound so good. On the plus side, Italy actually, their labor participation rate is higher than the US. It's 65.5%, where the US is 63.4%. There's actually more people in Italy looking to work. The unemployment rate here is much higher at 9.7%, but the real problem here is the amount that the government is already involved in the economy, government spending actually counts for 48.4% of the economy. That's half of the economy comes from the government spending. One of the dirty little secrets about that is that government spending gets counted whether the company-- so the government hires a company to do something, so build a bridge. We've had a problem, we got some problems with bridges lately. They don't actually give the cash to the company, they give an IOU, but the spending gets counted even though the company hasn't received it. There's actually a huge market in Italy for companies to go to the banks and say, okay, I have this payable from the government. They've owed me for like a year. Can the bank please lend me the money? Okay, well, then the length, the government's like, yes, you should lend the money. The banks lend the money and you get into this spiral. That's a really bad situation to be in. We're already-- so we're already dealing with a country that almost half of the economy is government spending, and they're not even paying to run a business. Pay your employees, have your employees be able to buy stuff and have the economy going when they're not getting paid. ED HARRISON: Oh, they are. They're being paid in fiat money if you think about it, because isn't that what fiat money is, it's just an IOU? LENORE HAWKINS: Yeah. This is even worse, this is all fiat. ED HARRISON: As you were speaking, I was thinking to myself that redenomination risk. Redenomination risk. That's the word that came into-- or the phrase that came into my head. I was thinking to myself, how long has this been going on with these IOUs? Because at the end of the day, that's how you redenominate is you redenominate via an IOU that allows you to therefore say, these are now lira. These are real money. We're going to move from the Euro to these IOUs. LENORE HAWKINS: That is definitely the threat. Because Italy can look at the Eurozone, it's one thing the Eurozone has already been rocked by Brexit. That was pretty ugly. The UK had been part of the European Union, not the Eurozone with the unified currency but part of the European Union for decades. This is a massive, massive rejection and to have Italy then fall out, it's a pretty good threat. Europe's not going to-- it's really not going to want that. Let's look at how good the Eurozone has actually been for Italy. Now, I'm not saying that it's the Eurozone doing this but while Italy's been in the Eurozone, things haven't gone that well. We've all heard about how Greece, we had the Grexit because Greece was a complete disaster. Well, since the start of the Eurozone, Greece's per capita GDP in constant currency has gone up 3.1%. That's pretty bad, like 20 years and with GDP per capita has gone up 3, that's like over 20 years, your pay increased 3%, not per year, but totally so that's ugly. Well, 3.1 looks pretty damn good when you're looking at Italy, which has seen its per capita GDP drop by 2.1%. No other country in the Eurozone, no other major country has seen anything like that. For comparison over that same time period, you've got the US per capita GDP up 24.6%. Ireland knocked it out of the ballpark, they're up nearly 80%. Germany, who's the one that does a lot of the finger wagging, they hold the purse strings, they're at 24.6%. Around the same as the US, and yet Italy has gone down. Now, part of that is argued to be because the Eurozone with the stronger northern economies, you create a currency that is stronger than it would be if it was just the southern guys that are less productive. Italy's exchange rate is higher than it should be. It exports less and its imports are more difficult like it's tough on the economy when your currency is valued too high. That's what you do when you want to get your economy going, devalue your currency against everyone else and suddenly, your stuff's cheap. Well, Italy's been facing that headwind but there's more to it than that. That's a pretty easy answer. Right now, the pushes for the floating of Euro bonds. You float these euro bonds and then you give more money to the Italian government to spend, so what? The Italian government is going to account for like 60 70% of GDP, because we're already almost at 50%? How is that going to work out, and how can the private sector-- because it's the private sector that has to generate the wealth to pay those bonds. It's not the public sector, public sector creates no wealth. It just takes wealth from other places and spends it. You have to have the private sector, oh, the private sector is down to like, 30%, 40%, how the hell is this going to possibly work? Those people are thinking, oh, well, we'll borrow money, we'll euro bonds, that'll be fine. We'll just keep doing this, same old, same old, it isn't going to work.