The Public Health Emergency Is Radically Reshaping The Economy

The economy isn’t something fixed in stone. Unlike governments and public institutions, it can change rapidly, adapting to circumstances and consumer preferences. This changeability is actually the basis of the wealth of our society. It is the ability to adjust what we produce that provides people with the goods and services that they want. 

The current public health emergency is a case in point. While some businesses are shuttering, others that deal directly with the pandemic are thriving. Investors are ploughing resources into them to meet the ever-growing demand for specific services. It is a beautiful example of the power and flexibility of the market.

You can see good examples of this phenomenon all over the economy. Food retailers are laying on tens of thousands of new staff to provide delivery services to their customers. So too are online retailers. Manufacturers are retooling their plants to create products that public health services and individuals need to fight the virus. And carmakers are refitting their factories to produce respirators – vital in the fight against COVID-19. 

If you head out onto the road today, you see an abundance of vans all over the place, delivering goods to vulnerable people in need of food. Resellers like Southern Commercial Sales are witnessing an explosion in business. The inability to be physically proximate is leading entrepreneurs to rethink how they manage and distribute their goods radically. The lack of brick-and-mortar interactions needn’t be a death blow in an economy undergirded by the internet. 

Of course, not all of the “reshaping” is good news. Neither is it a reflection of consumer demand in a state of freedom. What we see right now is what you get when you make everybody a prisoner in their homes. Things won’t stay as they are right now. They’ll snap back to pre-crisis patterns when it becomes safe to venture outdoors again.

The economy is also going to take a big hit in areas that people never expected. How the travel industry will recover from this episode isn’t yet clear. We’re likely to see massive wage cuts in some sectors as they limp back to health over the next couple years. And assets will go on a fire sale. If major firms fail, then new owners will sweep in and snap up the remaining resources.

Companies will also have to fundamentally rethink their approach to risk management. It no longer makes sense to borrow money to buy back shares and inflate the share price. Firms just learned that the real world is full of risks and that holding back some cash is actually a good idea. 

On the money side of the equation, things don’t look so good. As both aggregate demand and supply collapse in the short-run, we’re likely to see prices fall. But it is hard to imagine that inflation won’t rear its ugly head when workers return to their jobs. All that central bank money printing is going to come back to bite us. And when that happens, it will take people by surprise. Ray Dalio is right when he says “cash is trash.”