Disease, debt and depression

As I write the coronavirus epidemic (not yet declared pandemic) continues to spread.  Now there are more new cases outside China than within, with a particular acceleration in South Korea, Japan and Iran.  Up to now more than 80,000 people infected in China alone, where the outbreak originated. The number of people who have been confirmed to have died as a result of the virus has now surpassed 3,200.

As I said in my first post on the outbreak, “this infection is characterized by human-to-human transmission and an apparent two-week incubation period before the sickness hits, so the infection will likely continue to spread across the globe.”  Even though more people die each year from complications after suffering influenza, and for that matter from suicides or traffic accidents, what is scary about the infection is that the death rate is much higher than for flu, perhaps 30 times higher.  So if it spreads across the world, it will eventually kill more people.

And as I said in that first post, “The coronavirus outbreak may fade like others before it, but it is very likely that there will be more and possible even deadlier pathogens ahead.” That’s because the most likely cause of the outbreak was the transmission of the virus from animals, where it has probably been hosted for thousands of years, to humans through use of intensive industrial farming and the extension of exotic wildlife meat markets.

COVID-19 is more virulent and deadly than the annual influenza viruses that kill many more vulnerable people each year.  But if not contained, it will eventually match that death rate and appear in a new form each year.  However, if you just take precautions (hand washing, not travelling or working etc) you should be okay, especially if you are healthy, young and well-fed.  But if you are old, have lots of health issues and live in bad conditions, but you still must travel and go to work, then you are at a much greater risk of serious illness or death.  COVID-19 is not an equal-opportunity killer.

But the illnesses and deaths that come from COVID-19 is not the worry of the strategists of capital.  They are only concerned with damage to stock markets, profits and the capitalist economy.  Indeed, I have heard it argued in the executive suites of finance capital that if lots of old, unproductive people die off, that could boost productivity because the young and productive will survive in greater numbers!

That’s a classic early 19th century Malthusian solution to any crisis in capitalism.  Unfortunately, for the followers of the reactionary parson Malthus, his theory that crises in capitalism are caused by overpopulation has been demolished, given the experience of the last 200 years.  Nature may be involved in the virus epidemic, but the number of deaths depends on human action – the social structure of an economy; the level of medical infrastructure and resources and the policies of governments.

It is no accident that China, having been initially caught on the hop with this outbreak, was able to mobilise massive resources and impose draconian shut-down conditions on the population that has eventually brought the virus spread under control.  Things do not look so controlled in countries like Korea or Japan, or probably the US, where resources are less planned and governments want people to stay at work for capital, not avoid getting ill.  And poor, rotten regimes like Iran appear to have lost control completely.

No, the real worry for the strategists of capital is whether this epidemic could be the trigger for a major recession or slump, the first since the Great Recession of 2008-9.  That’s because the epidemic hit just at a time when the major capitalist economies were already looking very weak.  The world capitalist economy has already slowed to a near ‘stall speed’ of about 2.5% a year.  The US is growing at just 2% a year, Europe and Japan at just 1%; and the major so-called emerging economies of Brazil, Mexico, Turkey, Argentina, South Africa and Russia are basically static.  The huge economies of India and China have also slowed significantly in the last year.  And now the shutdown from COVID-19 has pushed the Chinese economy into a ravine.

The OECD – which represents the planet’s 36 most advanced economies – is now warning of the possibility that the impact of COVID-19 would halve global economic growth this year from its previous forecast.  The OECD lowered its central growth forecast from 2.9 per cent to 2.4 per cent, but said a “longer lasting and more intensive coronavirus outbreak” could slash growth to 1.5 per cent in 2020.  Even under its central forecast, the OECD warned that global growth could shrink in the first quarter. Chinese growth is expected to fall below 5% this year, down from 6.1% last year – which was already the weakest growth rate in the world’s second largest economy in almost 30 years. The effect of widespread factory and business closures in China alone would cut 0.5 percentage points from global growth as it reduced its main forecast to 2.4 per cent in the quarter to end-March.

Elsewhere, Italy endured its 17th consecutive monthly decline in manufacturing activity in February. And the Italian government announced plans to inject €3.6bn into the economy. IHS Markit’s purchasing managers’ index for Italian manufacturing edged down by 0.2 points to 48.7 in February. A reading below 50 indicates that the majority of companies surveyed are reporting a shrinking of activity. And the survey was completed on February 21, before the coronavirus outbreak intensified in Italy. There was a similar contraction of factory activity in France, where the manufacturing PMI fell by 1.3 points to 49.8. However, manufacturing activity increased for the eurozone as a whole in February, as the PMI for the bloc rose by 1.3 points to 49.2, but still under 50.

The US, so far, has avoided a serious downturn in consumer spending, partly because the epidemic has not spread widely in America.  Maybe the US economy can avoid a slump from COVID-19.  But the signs are still worrying. The latest activity index for services in February showed that the sector showed a contraction for the first time in six years and the overall indicator (graph below) also went into negative territory.

Outside the OECD area, there was more bad news on growth. South Africa’s Absa Manufacturing PMI fell to 44.3 in February of 2020 from 45.2 in the previous month. The reading pointed to the seventh consecutive month of contraction in factory activity and at the quickest pace since August 2009. And China’s capitalist sector reported its lowest level of activity since records began. The Caixin China General Manufacturing PMI plunged to 40.3 in February 2020, the lowest level since the survey began in April 2004.

The IMF too has reduced its already low economic growth forecast for 2020.  Experience suggests that about one-third of the economic losses from the disease will be direct costs: from loss of life, workplace closures, and quarantines. The remaining two-thirds will be indirect, reflecting a retrenchment in consumer confidence and business behavior and a tightening in financial markets.”  So “under any scenario, global growth in 2020 will drop below last year’s level. How far it will fall, and for how long, is difficult to predict, and would depend on the epidemic, but also on the timeliness and effectiveness of our actions.”

One mainstream economic forecaster, Capital Economics, cut its growth forecast by 0.4 percentage points to 2.5 per cent for 2020, in what the IMF considers recession territory. And Jennifer McKeown, head of economic research at Capital Economics, cautioned that if the outbreak became a global pandemic, the effect “could be as bad as 2009, when world GDP fell by 0.5 per cent.” And a global recession in the first half of this year is “suddenly looking like a distinct possibility”, said Erik Nielsen, chief economist at UniCredit.

In a study of a global flu pandemic, Oxford University professors estimated that a four-week closure of schools — almost exactly what Japan has introduced — would knock 0.6 per cent off output in one year as parents would have to stay off work to look after children. In a 2006 paper, Warwick McKibbin and Alexandra Sidorenko of the Australian National University estimated that a moderate to severe global flu pandemic with a mortality rate up to 1.2 per cent would knock up to 6 per cent off advanced economy GDP in the year of any outbreak.

The Institute of International Finance (IIF), the research agency funded by international banks and financial institutions, announced that: “We’re downgrading China growth this year from 5.9% to 3.7% & the US from 2.0% to 1.3%. Rest of the world is shaky. Germany struggling to retool autos, Japan weighed down by 2019 tax hike. EM has been weak for a while. Global growth could approach 1.0% in 2020, weakest since 2009.”

What are the policy reactions of the official authorities to avoid a serious slump?  The US Federal Reserve stepped in to cut its policy interest rate at an emergency meeting. Canada followed suit and others will follow.  The IMF and World Bank is making available about $50 billion through its rapid-disbursing emergency financing facilities for low income and emerging market countries that could potentially seek support. Of this, $10 billion is available at zero interest for the poorest members through the Rapid Credit Facility.

This may have some effect, but cuts in interest rates and cheap credit are more likely to end up being used to boost the stock market with yet more ‘fictitious capital’ – and indeed stock markets have made a limited recovery after falling more than 10% from peaks.  The problem is that this recession is not caused by ‘a lack of demand’, as Keynesian theory would have it, but by a ‘supply-side shock’ – namely the loss of production, investment and trade. Keynesian/monetarist solutions won’t work, because interest rates are already near zero and consumers have not stopped spending – on the contrary. Jon Cunliffe, deputy governor of the Bank of England, said that since coronavirus was “a pure supply shock there is not much we can do about it”.

And as British Marxist economist Chris Dillow argues, the coronavirus epidemic is really just an extra factor keeping the major capitalist economies dysfunctional and stagnating. He lays the main cause of the stagnation on the long-term decline in the profitability of capital. “basic theory (and common sense) tells us that there should be a link between yields on financial assets and those on real ones, so low yields on bonds should be a sign of low yields on physical capital. And they are.”  He identifies ‘three big facts’: the slowdown in productivity growth; the vulnerability to crisis; and low-grade jobs. And as he says, “Of course, all these trends have long been discussed by Marxists: a falling rate of profit; monopoly leading to stagnation; proneness to crisis; and worse living conditions for many people. And there is plenty of evidence for them.”  Indeed, as any regular reader of this blog will know.

And then there is debt.  In this decade of record low interest rates (even negative), companies have been on a borrowing binge.  This is something that I have banged on about in this blog ad nauseam.  Huge debt, particularly in the corporate sector, is a recipe for a serious crash if the profitability of capital were to drop sharply.

Now John Plender in the Financial Times has taken up my argument.  He pointed out, according to the IIF, the ratio of global debt to gross domestic product hit an all-time high of over 322 per cent in the third quarter of 2019, with total debt reaching close to $253tn. “The implication, if the virus continues to spread, is that any fragilities in the financial system have the potential to trigger a new debt crisis.”

The huge rise in US non-financial corporate debt is particularly striking.  This has enabled the very large global tech companies to buy up their own shares and issue huge dividends to shareholders while piling up cash abroad to avoid tax.  But it has also enabled the small and medium sized companies in the US, Europe and Japan, which have not been making any profits worth speaking of for years to survive in what has been called a ‘zombie state’; namely making just enough to pay their workers, buy inputs and service their (rising) debt, but without having anything left over for new investment and expansion.

Plender remarks that a recent OECD report says that, at the end of December 2019, the global outstanding stock of non-financial corporate bonds reached an all-time high of $13.5tn, double the level in real terms against December 2008. “The rise is most striking in the US, where the Fed estimates that corporate debt has risen from $3.3tn before the financial crisis to $6.5tn last year. Given that Google parent Alphabet, Apple, Facebook and Microsoft alone held net cash at the end of last year of $328bn, this suggests that much of the debt is concentrated in old economy sectors where many companies are less cash generative than Big Tech. Debt servicing is thus more burdensome.”

The IMF’s latest global financial stability report amplifies this point with a simulation showing that a recession half as severe as 2009 would result in companies with $19tn of outstanding debt having insufficient profits to service that debt.

So if sales should collapse, supply chains be disrupted and profitability fall further, these heavily indebted companies could keel over.  That would hit credit markets and the banks and trigger a financial collapse.  As I have shown on several occasions, the profitability of capital in the major economies has been on a downward trend (see graph above from Penn World tables 9.1).

And the mass of global profits was also beginning to contract before COVID-19 exploded onto the scene (my graph below from corporate profits data of six main economies, Q4 2019 partly estimated).  So even if the virus does not trigger a slump, the conditions for any significant recovery are just not there.

Eventually this virus is going to wane (although it might stay in human bodies forever mutating into an annual upsurge in winter cases).  The issue is whether the ‘supply shock’ is so great that, even though economies start to recover as people get back to work, travel and trade resumes, the damage has been so deep and the time taken so long to recover, that this won’t be a quick one-quarter, V-shaped economic cycle, but a proper U-shaped slump of six to 12 months.

24 thoughts on “Disease, debt and depression

    1. The problem with Chuang’s argument lies in the fact that plagues didn’t begin with capitalism, but as soon as the homo sapiens became sedentary.

      Hunter-gatherer societies almost never got sick: the original ecosystems were still intact, and viruses and bacteria were naturally contained. It was only when humans begun to deforest and flatten the earth that those became an ideal ground for proliferation.

      The more advanced the stage of development of the productive forces, the more likely plagues are to occur. That will also be true for socialism and communism. Newer realities create newer problems (e.g. the invention and massification of penicillin gave birth to the superbacteria).

      It’s worth remembering that China’s ongoing urbanization and industrialization are on an unparalled scale, which dwarves the ones that happened in Europe and the USA in size and is happening in a much shorter time frame. China is facing and will face collateral effects no other society has ever dreamed of facing.

      China will have to innovate in logistics. It will have to innovate in healthcare. It will have to innovate in organization and in public policies. The West is not a model anymore.

      P.S.: it’s funny Chuang used the existence of many strikes as evidence China is capitalist. During the High Cold War, the western trotskyists used the absence of strikes in the USSR as evidence it was not socialist at all! (but a “degenerated bureaucracy”). The argument of the time was that strikes, in the socialist system, would serve as a “feedback device” to the central government, so it could re-plan the economy on the fly, or made the bigger adjustments for the next year.

      The role of the unions in a socialist society is a huge point of discord, since the 1917 October Revolution itself. There were those who defended it should be a completely independent institution, those who defended it should be a part of the government and even those who thought it shouldn’t exist in a socialist economy at all. This is obviously a practical matter.

    2. I also accessed the link to Chuang. I was impressed enough to try to find out who the author(s) are. They seem in some way associated with the London based “European Alternative” (founded by two Italians who periodically host festivals for concerned and often well connected “progressives” who want to save Europe (capitalism?) from itself. Does anyone know who’s behind Chuang? I must have been led astray because this piece and another by the same organization are much better that would be suggested by my investigatory attempts…

  1. ”a reader Says:
    March 5, 2020 at 12:03 pm | Reply
    Chuang: ‘Social Contagion — Microbiological Class War in China’:


    michael roberts Says:
    March 5, 2020 at 12:47 pm | Reply
    Super article – a must read

    Absolutely, a wonderful article to be read in conjuncture with Wallace’s “Big Farms Make Big Flu” (2016). “Demonstrates how capitalist agriculture, profit in command and the destruction/ absence of socialist healthcare combine to threaten humanity’s future, and this without global warming.

  2. i think the metadology for calculating flu deaths does not only account for those that was directly killed by flu, but also those that could had lived if there was no flu, which actually inflates the death rate compared to covid 19.

    thanks for this article mr roberts.

  3. Thank you for the article. I have a question/remark, wether what it is happening could actually be seen as a supply shock only; if we consider for example a reduced tourism demand, maybe we can also consider it is a demand shock also.

    1. Giancarlo. Yes clearly if tourism or travel is reduced that is a demand factor and indeed if the recession takes off the loss of demand will increase. The starter however was the shutdown of production. But you are right that it is both. Indeed all slumps are both.

  4. China was not simply “caught on the hop,” that is, unprepared for a surprise. Officials actively suppressed a response in late December and early January, by which time health professionals were sounding the alarm as best they could up the chain of command. Officials even called gene sequencing labs and ordered them to not to test samples that hospitals were sending in and to destroy the samples on hand! The lunar new year holidays were almost here, and a happy business and political atmosphere was more important to the regime.

    1. Charles.
      I have been following the evolution of Covid-19 since the initial situation, and the statements they make are the product of the misinformation of the American press.

      1. R.M., the investigative report in the link I cited comes from Caixin, the Chinese publication. You will have a difficult time proving that it is U.S. press misrepresentation.

    2. Yes, the local authorities screwed up, which delayed action by some two weeks worst case scenario.

      But it’s important to state that China is a nation at war against a very powerful enemy (the USA/the West), so it has very strict anti-propaganda laws and protocols. The cops who made that doctor to sign a letter of reprimand were just following the Law.

      When it became evident the epidemic was real (which it did not take very long, since the virus is very contagious), the local authorities were immediately sacked by the central government, and the mayor of Wuhan immediately offered to resign, if that would placate the masses (I don’t know if his resignation was accepted or not).

      It’s highly unlikely the COVID-19 became an epidemic just because a couple cops screwed up. We can attest that by the fact that the Western nations had more than one month extra to contain the virus and failed utterly. The virus can be transmitted through aerosol and most surfaces – just your basic sanitation procedures wouldn’t suffice anyway, and a whole new protocol (much harsher than what the WHO recommends for epidemics) had to be created on the fly by the CCP.

  5. Dear Professor Michael Roberts.
    I have been following the progress of Covid-19 day by day, and I think that any assessment today is extremely early, as it will be much worse than what all economic analysts are doing.
    First, Trump’s position is practically denial so as not to harm the stock exchange. And the numbers that are appearing in the USA are totally unreal. If you look at the relationship between the dead and the diagnosed, you will see that the American woman is one of the highest in the world. The problem is that people are not going to seek diagnosis mainly for fear of costs and are not leaving to go to work because they simply do not have coverage.
    The dismantling of the CDC that Trump has promoted is putting this former vanguard organ behind all OECD countries. To see the scandal, the University of São Paulo, in Brazil, with all the lack of resources that we have already developed a Coronavirus diagnostic kit.
    While the USA tests a few hundred people, Korea tests thousands.
    According to experts, the epidemic can develop in waves, that is, China itself that originated the epidemic is already thinking about starting to close its borders so as not to receive contaminated people from outside.
    I read a very interesting article on WIRED entitled “The US Has a‘ Plan ’to Fight Coronavirus: You” that shows the crisis situation that is becoming in the United States.
    In Brazil we will have big problems, but within our capacities the confrontation will be more active due to the strength of the state bureaucracy in the health area, because if we depend on our president, who manages to be more stupid than Trump, we are screwed.

  6. Michael.
    If you want a comment from an apprentice economist, I can even give it, but in my own way I can say that 1929 may even be a pleasant period in the history of international capitalism in relation to 2020.
    There are factors that are not being taken into account, such as the fall in supply chains that will not necessarily happen at the same time, for example, China and Italy beat the coronavirus and the USA and Germany enter the epidemic in full.

  7. As Marxists we take a multi-sided and always de-personalised view of the world. We need to recognise that without viruses and bacteria the living world as we know it would not exist. This is particularly true of viruses or the virome which by weight constitutes the largest block of organic matter on this planet despite the infinitesimally small size of viruses, the primogenitor of reproductive life and the cross-pollinator of genes. The purpose of viruses it appears is three-fold: to accelerate adaption, to promotive diversity and to protect diversity. Of course, this process is not seamless but convulsive leading to incidences of die off.

    When we look below the surface, we observe how viruses herd bacteria in the form of bacteriophages prevent outgrowths or the eruption of toxic species. In the plant world we observe how viruses in the form of mycoviruses, through a process called hypovirulence downgrade, fungal invasions. Hence the relation between viruses and diversity. Seen in this global light we begin to understand human intervention. Viruses have evolved to prevent phenomena such as capitalist monoculture, high density cities particularly ones dependent on migrant labour with their packed dormitory ghettoes, and they take no prisoners when people through poor diet are dependent on drugs rather than the diverse microbiome in their gut.

    It is true of course that plagues precede capitalism as some of the comments have pointed out. We only have to look at what happened when part of the human race, those who had adapted to animal husbandry, the Spanish Conquistadors, invaded the Americas wiping out 80% of the indigenous population through disease because they were mainly farmers rather than pastoralists.

    A communist society, which will work with nature rather than against it, and which respects evolution rather than violating it, will work with rather than disrupt the virome. For more on this question read my article “Why Viruses are necessarily Anti-capital”. https://theplanningmotivedotcom.files.wordpress.com/2020/02/anti-capitalist-viruses-pdf.pdf

    With regard to the stock and bond markets, we are only in step one of a two step financial crisis. The falls, though substantial, are still only based on a perspective of 3 months of disruption.

  8. As with all other plagues, diseases and viruses, the mortality rate is higher where economic development is at a low level. The same was seen in recent years with Ebola, which has a 90% mortality rate compared to the less than 1% mortality rate from coronavirus. Even with Ebola, western health workers that contracted it were able to recover given the treatment that advanced medicine in more developed capitalist economies could provide to them.

    A large part of the mortality rate depends on standard of living and general state of health of the population, and this is higher on more developed capitalist economies, and more developed in capitalist economies than pre-capitalist economies. The number of deaths in the UK is still only 2, and in both cases its of elderly people, already with health problems. The vast majority of the population, at least 80% do not even suffer any, or only mild systems, yet the moral panic being created is shutting down large parts of the economy. That is more likely to be a cause of deaths than is the virus itself.

    Already, we see in the UK that people with cancer are being told that their treatment/operations may be cancelled for example, because hospital staff are being told to stay away from work for a fortnight, whether they are ill or not, simply as part of self-isolation. The moral panic has already led to Asian people being attacked in the street, and it is feeding other forms of reactionary nationalism, especially following the reactionary Brexit decision, for example providing a narrative around opposition to globalisation and free movement.

    Already, we see that moral panic causing panic buying, and shelves on stores being emptied of food and other basic supplies including medicines. Yet, the reality is that 5 months into this epidemic since it began in China, we have only just over 3,000 deaths globally, and just 2 in Britain. In 1918, 50 million died globally from Spanish Flue, equivalent to 150 million today. In 2018, 17,000 people died in Britain from seasonal flu, yet we did not have the media announcing each new case of flu, or calling on everyone to stay home, and so on. We know that austerity and economic slowdown is a cause of deaths and ill-health. That and for example the fact that the less privileged will be the ones who do not get what they need when store shelves are emptied, healthcacre shuts down and so on, means that far more deaths will be caused from those economic consequences of a moral panic than from the coronavirus itself.

  9. “The cops who made that doctor to sign a letter of reprimand were just following the Law.”

    …as every cop who has ever suppressed any worker has always said, just following the law.

    You know how the cops in NYC say “we’re just following the law”?

    Like this: “Up against the wall, mother******.”

    Just following the law? Repeating the failure of 2003, to the letter? That law?

    Can’t think of a better argument to be made in favor of anarchism than that: They were just following the law.

    Who knew there were so many law-abiding souls among “Marxists.”

    Follow the law. Let’s have decorum. Mind your manners. Don’t use harsh language.

    Etiquette is the first refuge of the panic-stricken petit-bourgeois defending his or her property.

    Enough to gag a maggot. Totally.

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