“Looking forward to catching up with @GretaThunberg next week to discuss imminent threats to human existence.” Tweet from @Coronavirus, 27 February 2020.
“The most powerful Governments on the planet can’t contain the #CoronaVirus, but claim that they can control the Earth’s temperature with more taxes.”
A hundred years ago, in The Economic Consequences of the Peace, John Maynard Keynes wrote elegiacally of the economic standards enjoyed by affluent members of British society before the outbreak of the Great War. While the masses laboured on a more or less subsistence basis,
..escape was possible, for any man of capacity or character at all exceeding the average, into the middle and upper classes, for whom life offered, at a low cost and with the least trouble, conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages. The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend. He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality, could despatch his servant to the neighbouring office of a bank for such supply of the precious metals as might seem convenient, and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference. But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable. The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion, which were to play the serpent to this paradise, were little more than the amusements of his daily newspaper, and appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalization of which was nearly complete in practice.
The war – more precisely, two World Wars – changed all that. 1914, before the Guns of August, marked the high water mark of British Empire (and others).
Monetary systems change, too. Before President Nixon “temporarily” took the US Dollar off gold in 1971, there was the Bretton Woods system, established in 1944, a gold exchange standard placing the US currency firmly at the heart of the network. But the ‘guns and butter’ policies of subsequent US administrations caused American gold to melt away abroad, so the system was ultimately canned. Some suggest that monetary systems tend to have a shelf life of roughly three decades, which would indicate that our current set-up – whatever we might wish to call it, and however we might wish to describe it – is on borrowed time.
For as long as we can remember, we have harboured doubts about the sustainability of the debt markets. If you accept our thesis that there is now simply too much debt in the global financial system, it is reasonable to conclude that there are only three ways of resolving the current global debt predicament.
One is for governments to engineer sufficient economic growth to keep the debt serviced. Those hopes seemed fragile before the rise of Coronavirus. They seem doubly fragile in the context of the euro zone, which was already flirting with recession but which is also struggling with a self-imposed common currency straitjacket that makes unilateral sovereign monetary stimulus difficult if not impossible – assuming there was even still some point to monetary manoeuvring at the zero lower bound.
EU financial regulators arrive for their annual inspection of Deutsche Bank
A second is for governments to default explicitly on their debts. Since we live in a credit-based global monetary system, let us gently kick that option into the long grass.
Which brings us to option number three – which also happens to be the option to which every heavily indebted government has resorted since the beginning of recorded history. A policy of state-sanctioned inflationism. QE, ZIRP and NIRP may not have worked, but perhaps MMT will prove the acronym that works like a charm fourth time around.
Some of us would prefer rather not to find out. Nassim Taleb commends what he calls antifragility. We would call it simple robustness – and in investment terms, it comes from true diversity. Why, for example, own just one asset class when you could own three or four, all genuinely uncorrelated against each other ? And why focus on a purely indexed approach (which guarantees the mediocrity that comes from owning indiscriminate market exposure) when you can tilt the odds more defensively in your favour ? The one asset class we remain most sceptical of is, of course, debt. Particularly if the Coronavirus outbreak (deflationary shock) leads to ultra-aggressive policy response (inflationary stimulus10). So bonds are out, but inflationary and systemic crisis hedges, including gold, are in, especially if we can own them without obviously overpaying, through the medium of precious metals mining companies with compelling cash flow yields.
Many investors see merit in size. In almost every respect of investments we, like Buffett, regard size as an anchor to performance. At the risk of stretching an analogy, a globalised trade system that has been keenly embraced by the West over several decades runs the risk of being brought low, if not outright reversed, by some tiny microbes. The system is simply not as robust as everybody believed. As Shakespeare put it, in Richard II, with some truly nightmarish imagery:
..within the hollow crown
That rounds the mortal temples of a king
Keeps Death his court and there the antic sits,
Scoffing his state and grinning at his pomp,
Allowing him a breath, a little scene,
To monarchize, be fear’d and kill with looks,
Infusing him with self and vain conceit,
As if this flesh which walls about our life,
Were brass impregnable, and humor’d thus
Comes at the last and with a little pin
Bores through his castle wall, and farewell king !
In Dark Realm Studios’ Pandemic 2 (free to play), released over a decade ago, the aim of the game is to wipe out mankind. In a novel twist that makes the game both a guilty and a ghoulish pleasure, you take the perspective of a virus, bacteria or parasite, which you get to name. (This correspondent normally christens his disease ‘Modern Central Banking’.) Points are awarded for your disease’s visibility, infectivity, and lethality. You can choose precisely which symptoms your disease will present, and just how resistant it will be to environmental conditions and different drug regimes. Meanwhile, a scrolling news ticker brings you minute to minute coverage of the end of the world, and a world map shows you planes and ships innocently scudding around the globe (at least until the borders start getting closed). As an early warning against the vulnerabilities of a globalised economic system, it is the very nonpareil.
Place your bets
In H.G. Wells’ The War of the Worlds (spoiler alert !), the Martians are ultimately felled, not by mankind’s technological ingenuity, but by tiny microbes against which they have no natural immunity:
A mighty space it was, with gigantic machines here and there within it, huge mounds of material and strange shelter places. And scattered about it, some in their overturned war machines, some in the now rigid handling-machines, and a dozen of them stark and silent and laid in a row, were the Martians—dead!—slain by the putrefactive and disease bacteria against which their systems were unprepared; slain as the red weed was being slain; slain, after all man’s devices had failed, by the humblest things that God, in His wisdom, has put upon this earth.
James Lovelock’s Gaia Theory, developed with the microbiologist Lynn Margulis, posits that the Earth is a self-regulating mechanism – a complex, organic computer, if you will. In the TV series Edge of Darkness and even more powerfully in The Terminator film franchise, we start to drift towards the idea that if mankind proves to be an existential threat to the planet, Gaia will work out some way of dealing with us in an appropriate fashion. Strange, and a little amusing, to think that we might have been the aliens all along.
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