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Poetic truths from a leading economist: ‘from crisis stems great renewal’

James Nason, May 20, 2020

Alltech president and CEO Dr Mark Lyons (left) and Irish economist David McWilliams discussing currency and confidence in an uncertain narket during the Alltech One virtual experience on Tuesday night (Australian time).

 

ECONOMISTS typically favour graphs, charts and statistics to convey the key messages of a presentation to their audience.

Not Irish economist David McWilliams who chose, instead, a book of classical poetry.

In a keynote address to the Alltech One virtual global conference on Tuesday night Australian-time, Mr McWilliams, an internationally renowned speaker and one of the world’s most influential economists, drew from the work of his countryman WB Yeats to illustrate how previous periods of crisis have historically led to great renewal.

Exactly 100 years ago during the Spanish Flu pandemic Yeats wrote “The Second Coming” (below), a poem describing anarchy being loosed, things falling apart, and a centre that cannot hold because “the best lack all conviction, while the worst are full of passionate intensity”.

Previous events where the global economy has been in a tailspin, as it is now, have resulted in “massive shifts in thinking”, Mr McWilliams explained, but that first relies on “the best in society” being bold and taking a stand, and not leaving it others to dictate the future.

“What (Yeats) is saying is if we allow these events to dictate the future, because we, the best people in society say ‘you know what, it’s not my problem, it’s somebody else’s to fix’, then the worst people will come through and capitalise on it,” Mr McWilliams said.

“What he is saying is if you want to actually preserve the liberal order, preserve the economy, preserve democracy, and all those big things which were all clearly under threat in 1920, you’ve got to actually stand up, and you’ve got to drive the agenda.

“When I look around Europe, I look around this neck of the woods, what I see is if we can show leadership at this moment, and if we can analyse clearly what’s going on, and if we can provide an alternative to the chaos and the Armageddon that people are worried about, then you pass through it.

“I’ve always thought that literature, science, and history add to our collective understanding of the economy. And sometimes, the words of the great man Yeats are far more interesting and apposite than the words of many of the Nobel Prize winner for economics.”

In an in-depth 120 minute livestreamed conversation with Alltech CEO Mark Lyons, Mr McWilliamsoffered several insights on lasting changes he sees emanating from the Covid-19 pandemic.

Some of his observations and supporting comments included:

Post Covid-19 era could see signficant changes in Central Banking monetary policy: “When I worked in the Central Bank in Ireland, if you’d told me that the Federal Reserve was going to buy government bonds directly, was then going to buy corporate bonds directly, and then last Thursday, it says we’re going to buy junk bonds and we’re going to take those off the balance sheets of the banking system and we’re going to give the banking system cash and the banks can lend out that, I would have said, that ‘ain’t going to happen’.

“And the funniest thing is it’s happened in the last two weeks and nobody said a word.

“Why? Because everybody realises that this shift is coming.”

‘Modern monetary theory’ gaining momentum: Faced with a choice between abandoning their dogma or moving into another Great Depression, monetary authorities in the United States and Europe were choosing to spend their way out by underwriting incomes and bailing out industries, and electing to worry about potential inflationary consequences in the future.

The US and Europe were in “a sort of a deflationary death spiral” that could potentially “drag us all into a depression” which could go on for a long time if monetary authorities don’t actually step up to the plate. However Mr McWilliams said he believed they are stepping up.

In the United States which has full monetary autonomy and its own currency and is facing a Presidential election later this year, the Democratic side of politics is coalescing around support for modern monetary theory, the notion of printing money to solve a country’s problem (a concept that many traditional economists have issues with).

2020 opened with the expectation the US would experience a presidential election against a backdrop of lowest level of unemployment ever. It will now be held against a backdrop of the highest unemployment ever, currently standing at 28 percent. “That is the only story” Mr McWilliams said. “Once your unemployment goes to that level, then all bets are off. All ideology’s out the window, and you’ve got to get folk back to work.”

Mr McWilliams said it would be critical for the US under this approach to protect its “productive capacity” to avoid hyperinflation, such as that which beset Germany after World War I and Zimbabwe when productive farming land was taken from farmers under the Mugabe regime.

In order to achieve aim that he said key MMT proponents such as economist Stephanie Kelton, a senior Democratic economic advisor, are promoting the idea of using Government money now to build and expand the capacity of the US economy to reduce the chances of having inflation.

“I would agree with that, simply because I think we’re moving into a deflationary world. If rates of unemployment in certain states are as high as they seem to be ticking up every day, that’s not an environment where prices rise. That’s an environment where prices fall.”

‘Economic scarring’ catalyst for fundamental change: “Unemployment destroys people psychologically, emotionally, the financial side is only one manifestation. And long term unemployment destroys even more,” he said.

“My sense is the story that America will tell itself over the course of the next six months is a story that borrows heavily from the Great Depression (When President Franklin D. Roosevelt enacted a series programs, public work projects and financial reforms between 1933 and 1939 to provide relief, reform and recovery from the Great Depression).

”Sometimes, like the FDR situation, you can’t leave it to its own devices. You need to help it, the economy needs help. And my sense is that the economy in the early 2020s will not be dissimilar from the economy in the mid 1930s, early to mid 1930s.”

“Europe is always forged in crisis”: On Europe, Mr McWilliams recalled the statement of French Politician and former European Commission President Jacques Delors Europe is always “forged in crisis” – that is it moves ahead because it is in crisis.

Autocratic states not necessarily the long term winners: While China has been viewed as a likely winner from the Covid-19 experience, Mr McWilliams said there was also a possibility that autocratic states could experience a “Chernobyl-type reaction” characterised by cover ups and emerging evidence that the scientific prowess of the State is not as good or strong as it was perhaps thought to be. “I think in the end of Covid-19, we’re going to be negotiating a very different world. But my sense is that the autocratic systems are not as coherent or cogent as they seem to be.”

In a crisis what was radical becomes mainstream: After a shock the world does not simply revert back to the way it was, Mr McWilliams said. In a crisis “what was radical becomes mainstream, and what was mainstream becomes redundant”.

Just one year after being the celebrated leader who defeated Hitler and won the Second World War, Winston Churchill was roundly defeated in the polls. The war had changed the mentality of the British people and imbued them with a desire for change, but Churchill presented an election platform that suggested going back to 1939.

“And the people said, no, we’re not going back to anything. We’re looking forward. And what we want, after our sacrifice, we want free health care for our parents, we want free education for our kids. We want free universities. We want our kids to be the first people in living memory in our families to go to universities. And we want pensions, we want a new world.

“That’s a great example of how an event, the Second World War, doesn’t simply happen and then the world reverts back as if a pendulum swings back to where it was. An event happens, and Covid 19 could easily be the same type of event, and the world says we’re not going back, we’re going forward. And the world is going to look very different.”

– “Trust will trump price”: Mr McWilliams suggests we will see profound changes to global business and the extended and efficient supply chains created during the globalisation era.

“Now all I can say is when I see the United States or Germany or France or Britain queuing up looking for personal protection equipment (PPE) equipment from China, that will never happen again. That will never, ever happen again where big Western countries, strong Western countries, are on the end of the phone pleading with manufacturers in China to release equipment to prevent their people from dying.

“What I think what’s going to happen is that the more extended the supply chain, the more likely you’ll see people will come back and begin to manufacture in countries that they really, really want to do business with, they trust, they understand, they feel comfortable there.

“And I think that maybe price, which had been the dominant vector for many, many years in the supply chain management, will probably be elbowed out by security, by perceptions of security. Can we keep this plant open? Do we know what we’re actually dealing with?”

“A huge opportunity for smaller countries”: Mr McWilliams said Ireland went from having the last of its blue collar industries decimated by the first phase of globalisation after the Second World to experiencing four decades of extraordinary economic and social growth, based precisely on being a cog in a global supply chain, and giving people a tax incentive for deploying their capital in the country.

“Now I think there’s a huge opportunity for small countries like Ireland, and it might not be Ireland, it could be Israel, it could be other countries… where the workforce is very sophisticated, the legal system is watertight, the relationships are incredibly strong.

“And it comes back to that idea of relationships. When I see American executives in Ireland, they’re just like they’re kind of in Connecticut with worse weather. But it feels like America, you know? Because they know it.

“So I think small cogs in the global supply chain, countries that position themselves, could do extremely well. I think there’s a huge opportunity, because I do think supply chains will contract. And I think that relationships will trump price, I think trust will trump competitive edge.”

“Soft power will become as crucial as hard power”: Geopolitical discussions differentiate between ‘hard power’ and ‘soft power’. Hard power is the power of a nation’s military, its population, its industrial base. “That’s one power, and that was the dominant power for thousands of years. So the toughest guy on the block, with the biggest army and the heaviest heavies, the kind of Tony Soprano approach to economics”.

Soft power on the other hands is “a more interesting power”, he contended. “It’s the power of the imagination. It’s the power to get into somebody’s mind and get them to do what you want without them even knowing that you’re there. The power of branding, it’s the power of advertising, it’s the power of literature, it’s the power of all these soft skills. And I think that in the course of the next 10 years, as the supply chain contracts from the less risky parts of the world, soft power will become as crucial as hard power. And countries with soft power could take this opportunity, I think we should, to do very well. And say, we’re open for business, you know us, let’s come and do a deal.”

“The elevation of the old fashioned”: Another trend Mr McWilliams pointed for is the “elevation of the old fashioned”: “If you used to watch those farmers doing business with each other, selling cattle, there was a handshake. If you were good for your word, you’d spit in the hand, you’d leave a lucky penny for people at the end of the deal, so nobody scalped everybody else. But there was a network, and it was based on relationships. And your reputation was everything. Nothing else mattered.

“I think those sort of basic human interactions will come back to the core in a world of anxiety. Because what happens when you get anxious, it’s like everything, when you get anxious in a social situation or in a business situation, you revert back to who you know.

“…You do business with people you know. And you usually do business with people you like. And that’s based on relationships. And I think this COVID crisis will re-energize the relationship side of things, I can really see that.”

A fire sale and consolidation: Periods of economic contraction as we’re seeing now lead to consolidation.

“In every industry, as you know, now there’s a fire sale on. Assets are going to be sold cheaply. And that’s going to lead to consolidation.”

While this would lead to barriers for some and tightness of funding, it will also provide opportunity. “If your product is good and if your energy levels are sufficiently high, usually, you can find an opportunity.”

Citing his “favourite economist”, Austrian Joseph Schumpeter, Mr McWilliams said the world is currently seeing the “relentless gale of creative destruction. Which is basically that deep in the DNA of the entrepreneur is this yearning to do things better.”

‘All crises lead to great renewal’

“My sense is that these opportunities emerge in crises and you just have to have the self-confidence and belief in yourself to keep ploughing on. And I think, as I said before, all these crises lead to great renewal.”

“And great renewal stems from people taking a risk because things have changed and normality has changed.”

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Comments

  1. Rob Baines, May 21, 2020

    This was an excellent read James thanks.

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