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Can the economy survive a prolonged lockdown?


25 March 2020


 
Empty shelves during corona panic
Empty shelves during corona panic
 

The predicament many countries around the world may soon face if their economies remain in a lock-down to keep the pace of the spread of the corona virus to a level their health care services can handle is that the economic fall-out may soon eclipse the disease. If corporations go bankrupt then there is little left of the economy once the virus has gone. But stimulus packages only last for a few months. Then we may face a deadly dilemma.

It seems impossible to put significant part of the economy in the mothballs for a year or even longer and then restart them just like that.

The question leaders around the world may soon face is how many people must die to keep the economy from collapsing? A collapse of the economy could kill more people than the virus itself. Some leaders mull the idea of going back to business as usual. But if we rephrase the question as how many people must die to pay for the interest then ending interest payments can provide some relief.

Until now most victims of usury mostly were people in developing countries lured into debt by bankers. To pay for the interest these countries had to reduce food subsidies and were forced to cut down essential services like health care. But now many weak and elderly are at risk in developed countries that see their healthcare systems overwhelmed. Restarting the economy could make it even worse.

It may help to halt interest payments on existing debts and to tax central bank currency at a rate of 10-12% per year. As long as the economy is in a stand-still there is a lot of money idle on the sideline. Taxing currency eliminates the floor under interest rates so that the government may be able to borrow at -5% per year up to keep essential services up and running. It is not a solution but it can help.

Interest rates are near zero already and governments can borrow massively at these rates. Of course central banks help them out but if central banks can print currency like there is no tomorrow and interest rates don't go up then the equilibrium interest rates where supply and demand for money and capital equal must be negative. This allows the government to borrow money to pay people to stay at home.

As a thought experiment one can imagine an econonmy in total lockdown with only essential services up and running. The government must run the economy while there hardly is any tax income. The flow of money comes to a stand still. Most money is now waiting on the sideline. The only way to generate income for the government may be to tax money and to borrow at negative interest rates.

Ending interest payments and borrowing at negative interest rates can improve government finances so that a shutdown can be sustained longer. And with a holding fee currency becomes less desired so liquidity returns to financial marktes. In this way businesses can be financed, perhaps at negative interest rates, so they can last longer and require less government support.

Featured image: Empty shelves in Dutch supermarkt during corona panic. Ymblanter (2020). Wikimedia Commons. Public Domain.