Nothing, we are frequently listening, will be as before. The second wave of the covid-19 epidemic is there. The economic rebound which happened during the 3rd quarter, coming after the deep growth fall occurred during the previous quarter is under threat everywhere in the world except in China. So the situation is worrying despite the put in place of economic policies assigned to enterprises protection against the effects of the recession in every country. Behavior of household who have accumulated on their banking and saving accounts a huge amount of money has surprised and their reluctance to consume has aggravated the recession. The States have increased their indebtedness in a spectacular way without leading, at the contrary, to interest rates rises but their expenditures or the tax reductions have not allowed, as it was during the past, to impeach an unemployment increase. Everything is doing as if the foundations of economic analysis and the traditional remedies which where resulting from them were becoming obsolete. The economic crisis which results from the sanitary crisis the world is going through will likely make us aware of that, in these matters, we are going to a world after.
The crisis magnitude is today measured by the growth fall. The even concept of crisis is applied almost exclusively to the evolution of the production and of the exchanges of goods and services. And we frequently make the confusion between this production which is a flow with the accumulated goods, material or immaterial, which are, them, the wealth of a country or of an economic agent. It is the whole difference between the revenue of a household and his assets or between the operating account and the balance sheet of an enterprise. Someone is not rich because he makes a lot of money but because he has accumulated a lot of money. In the same way, GDP, when it grows, doesn’t show an increase of the related country wealth but, simply, of its production. It is because that concept has been ignored that nobody saw coming the sub-prime crisis in 2007 in the U.S., when the country had a high growth rate and full employment. Growth was there but expenditures were not paid by household because they were financed by an increase of their indebtedness.
Economic indicators must now be adapted. To compare a country public indebtedness to its GDP doesn’t anymore make sense. It would be better to compare it to the net value of household assets because it is them who are the guarantors of its reimbursement. Such a calculus would reveal a lot of surprises but it will as more necessary as that in the coming years the public debts increase will be one of the major consequences of the sanitary crisis.
The second transformation is related to inflation. It has disappeared. Obviously, it is not a consequence of the sanitary crisis. In reality, what has disappeared is the increase of the goods and services prices, these which are offered to consumers. But the concept must be revised because it must now include the evolution of the prices of real estate and financial assets. That has major consequences on public action. Until now, the economic policy had, as a mission, to look after price stability. Budgetary policy must not be too expansionist in order to avoid any inflationary spiral and the monetary policy had, as its mandate, and it is included in European Central Bank one, to adjust money supply in order to not compromise price stability. But inflation is not anymore an issue. Technological progress has generated productivity gains which were translated by spectacular costs reductions which have been passed on and have benefited to consumers. It has also, as in the case of oil and natural gas, allowed a natural reserves increase thanks to new extractions techniques which have favored the stabilization and even sometimes a diminution of the prices. At last, globalization, through borders opening has allowed an intensification of competition between different producers which, also there, have been transmitted to consumers through prices reduction.
We then reached a paradox according to which monetary policy has now as an objective to increase a country or a related zone inflation rate, as in the euro zone where ECB conducts a huge sovereign debts acquisition policy without achieving that inflation reaches its 2% target which is included in its mandate. But that policy contributes to the real estate and financial prices increase. It is surprising that, in the current crisis environment, Nasdaq beats records, that European stock markets only know a limited fall and the real estate prices are still increasing. The followed economic policies haven’t been able to impeach deflation in several sectors but they have contributed to the assets prices increase.
This new environment explains the persistency of so low and even negative interest rates in many countries when even States financing needs have strongly risen and when their indebtedness level reached record highs. Here too, traditional economic reasoning has been wrong. An interest rate rebound risk had been invoked to alert again excessive public deficits. In France, public finance program bills, approved by the Parliament were mentioning debt charges increase. We register, to the contrary, an important reduction. The trend will even be stronger in 2020 and 2021, despite the very important rise of public deficits. Interest rates for all maturities until ten years are negative in France since the beginning of the outbreak. Yet, bonds issuances are partly used to reimburse loans coming at maturities which carry sometimes a 5% interest. The fact to replace them by bonds carrying such low rates generates savings on the debt charge and these savings are lasting because rates are fixe all along the bond duration.
So the economic policy will have to break with its traditional schemas and abandon reasoning based on growth, employment and deficits. It will not be the amounts of the injected money in the economy to reach defined objectives related to employment or investment but their transmission channel and their affectation which will be decisive. The debate between supply-side or demand-side policies has become irrelevant. Both kinds of action are justified to the condition that distributed resources or tax exemptions correspond to the fixed objectives. To increase household resources when they put them in their banking accounts or to decide transfers in favor of enterprises when they reduce their debts or buy back their own shares will not make any more sense.
Announcements effects, at last, will have to be abandoned because numbers put forward to get out from the crisis are much less important than the choices relevance in favor of these who will benefit from them. Interventions, whatever their nature will have to be precisely targeted to being efficient. The State will have, as a duty, to become a real “Strategist State”, to the despite to these who are in favor of its retreat. It will have to avoid to pursuing several objectives in the same time, which can be sometimes contradictory, to try to please to everybody all along with, surreptitiously, restricting the access to the promised resources in order to reduce their real cost. In public action, as in the rest of human activity, tomorrow will so have to be different.