At home with gas mask and toilet paper

Economic Apocalypse

Weekly Irrefutable

“It’s that rat circus out there, I’m beginning to enjoy it.” – Max Rockatansky[1]


Think about every post-apocalyptic film you have ever seen. Whether it is a global pandemic, robo-apocalypse, global warming, zombies or an alien threat, they all share the same central problem: low to non-existent “social co-operation.”

In such a film, there is always an event that causes something to fundamentally change in society. For various reasons the normal course of life has shifted and civilization has collapsed. The problem is not that there is no government, rather, the problem is that there is no free exchange of goods and services between individuals. When social co-operation stops, there is no bread baker, dressmaker or watch maker; there are no goods and services being produced so nothing can be exchanged. Money has no role when there is no social co-operation because money is a medium of exchange. Where there is nothing to be exchanged or where the government owns all the means of production money has no purpose.

There are normally two outcomes in the event of an apocalypse. The best-case scenario is a film like I am Legend or Bird Box, where the characters finally arrive at a safe haven compound to live in well fortified refuge secluded from the threat. In this scenario a new society is formed whereby individuals can now live and exchange their goods and services, or may even choose communal living that is possible with a small population. A hand-to-mouth existence becomes the best that can be hoped for.

The worst-case scenario would be a film such as The Road, where everyone is left to fend for themselves, resorting to robbery or even cannibalism in order to survive. In such a scenario, man is reduced to something worse than an animal and human extinction seems inevitable if no tribe and eventual community is created.

For us born in the West, we have been living in a world where there has never been any prolonged threat of food shortages or hyperinflation. This is unlike the majority of people worldwide who live under conditions where supply shortages and currency collapse is the norm. The threat of pandemic is something that few have considered in the West and for the first time many are experiencing shortage of goods. So far things still seem okay other than a few household items like toilet paper, hand sanitizer and rubber gloves, there seems to be not many other shortages (where I live), except for physical precious metals.

But what would life be like under a prolonged period of time such as a 6 month of quarantine? What could happen then?

Life under 6-month quarantine

If the government mandates all non-essential services to stop, then it could mean anything other than first responders, grocery stores, pharmacies, hospitals or anything else in their direct supply chain will be the only ones producing goods and services. Anything related to social gatherings such as weddings, parties, entertainment, bars, restaurants, gym and countless goods and service businesses may be forced to halt production.

It doesn’t actually matter whether or not production slows. We know there are two actions that will be taken by the “leadership” of every country in the world. In the case of the USA:

Fiscal “Stimulus:” the US Government is proposing to borrow $2.5 Trillion that will be given to individuals and corporations. There may be various schemes and eligibility requirements, but it all amounts to the government giving money directly to the people. 

Monetary “Stimulus:” the Federal Reserve is pledging an initial $700 billion in asset purchases along with many other money creation ideas such as buying corporate bonds (like the European Central Bank) or perhaps one day buying stocks directly (like the Bank of Japan and the Swiss National Bank). There are numerous methods in which the Fed can intervene, but they all amount to the creation of money out of thin air then lending it at rates close to zero or negative to the wealthiest members of society. There is no upper limit on the amount of money the Fed can create. The hubris can be exemplified by the Minneapolis Federal Reserve president who said in a 60 minutes interview that: “there is an infinite amount of cash in the Federal Reserve.”[2]

The potential of the Fed buying corporate bonds is especially concerning because it will grant practically “free money” to corporations, and if history is any indicator of the future, a lot of it will go to stock buybacks for the purpose of increasing share price. While the notion of the Fed buying equity in publicly traded companies requires little explanation; it’s a simple theft that amounts to money creation and the purchase of a real asset. This will do nothing except levitate stock prices even further.

The end result could be that production of goods and services goes down because few people are working. At the same time trillions of dollars will be given to people by the government and trillions more dollars will be given to banks and corporations by the Fed. It’s possible that this creates a “Crack-Up Boom,” as Mises warned us about, or in simple terms, a hyperinflation. The decrease in production, followed by increased demand for goods, coupled with further demand due to the new money being given out will lead to a shortage of goods, higher prices and skyrocketing stocks, bonds and real estate prices.

Not one mainstream economist has made a public statement regarding the trillions of dollars of stimulus, it seems as though they either don’t understand it or they just don’t care.

The short answer is there is no shortage of money, rather, there is a shortage of goods and services that are produced in an economy. If people can get paid to produce nothing, then “why work” is a good question. But a better question is: what will people buy with the money they are given? If everyone uses their $1,200 government to buy more guns, ammo and toilet paper, but production for these goods does not increase, then you will find a shortage of, and higher prices of guns, ammo and toilet paper.

Ending on a positive note

Hopefully the virus goes away quickly and life can resume to normal. If it does, then what are some potentially positive takeaways?

1) It’s possible that production of some goods may shift into others, such as an alcohol distillery shifting to manufacturing hand sanitizer. In theory, if consumer preferences change and production decreases in some areas countered with production increases in other areas, then significant price increases may not occur.

2) Supply shortages may be avoided if more companies start producing goods valued under quarantine, such as increasing production of medical supplies, food and survival equipment. This might also keep prices low.

3) The world may shift to more virtual or home-based communication. Although the technology is there, countless corporations and government agencies continue to operate in a physical office space from Monday through Friday. Perhaps more organizations will continue to work from a virtual office, which could dramatically change the lifestyle of millions of people. 

4) Homeschooling might become more popular. Even though the teacher’s union is strong and they will fight for their jobs, the time at home may allow many parents to see the benefit of homeschooling. It can reduce the bullying, sexual and physical abuse that takes place in schools, while also allowing parents to self-direct their children’s education and connect with other like-minded individuals across the globe.

5) Many may start to question what exactly the government does. If they take the time to read Mises, Rothbard and articles similar to this, it may allow people to discover Austrian economics and learn about freedom and liberty.

6) Further research and innovation on infectious disease could become more popular and valued by society.

We must remember there is “no optimal money supply.” This money creation will distort prices and make decision-making more difficult. It will increase the cost of living, increase debt levels and will affect the poorest members of society the most because they don’t have assets or access to “easy money” the way banks, corporations and the wealthiest of society does.

I wish you all a safe quarantine.

EC


[1] Quote from the film Mad Max (1979).

[2] https://finance.yahoo.com/news/fed-infinite-cash-put-test-151758847.html

Leave a Reply