Author: JanMusschoot

NICO

Where are the acronyms of the corona crisis?

During the Global Financial Crisis, we learned about CDO, CDS, Fannie Mae, Freddie Mac, MBS, NINJA…

Today? Nothing.

Why? Because the crisis didn’t originate in the financial system, but in the sudden shutdown of whole industries.

If you like acronyms to describe what’s going on, I want to coin NICO: no income, cash out.

Comments on ‘Macroeconomic implications of Covid-19: can negative supply shocks cause demand shortages?’

This paper by Guerrieri, Lorenzoni, Straub and Werning (GLSW) looks at the macroeconomic effects of Covid-19.

The authors argue that

  • the economic shocks associated to Covid-191 can cause a fall in aggregate demand that exceeds the original shock
  • fiscal stimulus is less effective than usual because some sectors are shut down
  • monetary policy can prevent firm exits and is more effective
  • the best policy is to close contact-intensive sectors and to provide insurance payments to affected workers

My summary of the GLSW model (their paper is 37 pages long, so obviously I’m oversimplifying and probably missing important things!):

Continue reading “Comments on ‘Macroeconomic implications of Covid-19: can negative supply shocks cause demand shortages?’”

Coronaplan

De federale en de Vlaamse regering hebben de acute fase van de economische coronacrisis goed aangepakt. Getroffen gezinnen en ondernemingen kunnen hun rekeningen blijven betalen dankzij een reeks maatregelen1.

Voor bedrijven waarvan de omzet langere tijd laag zal blijven2, lopen de kosten echter op. Zonder steun zullen ook veel gezonde bedrijven overkop gaan.

Mijn plan hieronder gaat uit van de volgende principes

  • Het coronavirus is een geval van overmacht waarbij staatssteun gerechtvaardigd is
  • Ondernemen houdt risico’s in, de overheid kan niet alle verliezen compenseren
  • De steun moet gaan naar rendabele bedrijven, niet naar ‘zombiebedrijven’
  • De steun moet gaan naar wie eerlijk belastingen betaalt
  • Het systeem moet snel, eenvoudig en fraudebestendig zijn
  • Arbeidstekorten moeten vermeden worden

Het plan

Continue reading “Coronaplan”

Wie gaat de coronacrisis betalen?

Niemand.

Het begrotingstekort zal spectaculair stijgen door de coronacrisis. De overheid krijgt immers minder BTW, sociale zekerheidsbijdragen en bedrijfsvoorheffing binnen. Tegelijk geeft ze meer uit in de vorm van werkloosheidsuitkeringen en steun aan bedrijven.

Maar van waar moet het geld dan komen om dat allemaal te betalen? Hogere belastingen?

Nee. De overheid leent het tekort op de obligatiemarkten. Door de tijdelijke hulp kunnen de gezinnen en de bedrijven deze crisis met zo min mogelijk schade overleven. Op die manier zal de economie zich snel herstellen.

Een hogere staatsschuld is in deze tijden dus een vorm van goed bestuur!

Update 23/05/2020: Morgan Housel beschrijft in Who pays for this? hoe Amerika de staatsschuld aanpakte na de Tweede Wereldoorlog.

Kort samengevat: de oorlogsschuld werd nooit afgebouwd. Sterker nog, de V.S. boekten bijna ieder jaar nieuwe begrotingstekorten. Maar de economie groeide sneller dan de staatsschuld, waardoor de schuldgraad kromp.

Interlocking balance sheets and the corona-induced sudden stop

This post highlights the financial problems caused by (the reaction to) the coronavirus. I look at the balance sheets and cash flows of five sectors. The five sectors are (1) businesses that continue operations, (2) businesses that are closed due to the coronavirus, (3) households, (4) the government and (5) banks.

Key findings:

  • Businesses face a cash crunch
  • The net worth of households falls by about 50% of GDP due to lower stock prices
  • Each month of lockdown costs about 2% of annual GDP
  • The accrual of fixed costs while revenue is down is the fundamental problem of the corona crisis
  • Loans and tax deferrals can prevent bankruptcies for a while
  • However, loans and tax deferrals don’t protect businesses and households against insolvency
  • Therefore, the government should transfer resources to those hit by the crisis
  • Fiscal consolidation after the health crisis is over imperils the recovery
Continue reading “Interlocking balance sheets and the corona-induced sudden stop”

If you’re betting on herd immunity (bad idea!), do it in a controlled way

To be clear: exposing people to a deadly virus in order to achieve herd immunity is insane. Policy makers and doctors who seriously considered this option should be tried for crimes against humanity. Millions would die, even with the best medical care.

Herd immunity violates the Nuremberg Code

Belgian virologist Marc Van Ranst wanted1 to keep schools open so children would have herd immunity by the time there’s a second wave of the virus.

Such a “strategy” violates several points of the Nuremberg Code:

Continue reading “If you’re betting on herd immunity (bad idea!), do it in a controlled way”

Helicopter money as a weapon in the war against the coronavirus crisis

This post was originally intended to be published elsewhere, but ultimately wasn’t. Note that this article is only about helicopter money. However, governments and central banks urgently need to do much more. The state should bail out all businesses. Businesses should hold on to their employees even if they cannot work so the economy can have a V-shaped recovery. The government should pay the workers. I also have other proposals for the ECB, see here and here.

Continue reading “Helicopter money as a weapon in the war against the coronavirus crisis”

How the ECB can stop the coronavirus crisis overnight

I haven’t posted on the blog in a while, but I’m very active on Twitter.

Here’s my 3 point plan for the ECB:

(1) The ECB should issue bonds, which are risk free (the ECB cannot default on euro liabilities). It should buy every sovereign bond trading at a yield of 40 basis points or more above the yield on the ECB bonds.

(2) The ECB should set the interest rate on TLTROs at -5% until six months after the coronavirus public health crisis is over.

(3) The ECB should do helicopter money as soon as businesses are operational again, because the outlook for price stability is bleak.

Coronavirus economics: dangerous hacks versus credible voices

The coronavirus pandemic once again demonstrates that a lot of prominent economic commentors are dangerous. Their recommendations will amplify the economic shock caused by the virus.

People who claim that

  • the coronavirus is not the job of central banks
  • this is mainly a supply chain issue
  • we have to beware of the long term consequences of doing fiscal/monetary stimulus now
  • we should continue business as usual

are spreading falsehoods.

Don’t listen to that guy!

Here is a selection of people who do grasp the importance of acting now in order to prevent an economic meltdown later.

Scott Sumner and David Beckworth: How central banks should respond to the coronavirus threat (podcast)

John Cochrane: Corona virus monetary policy

Skanda Amarnath: