Few intellectually honest observers would consider the attitude of the WHO perfect, so there’s a quasi-consensus when it comes to that. This changes, however, and leaves ample room for controversy and even conspiracy theories once we move on to analyzing the “reasons” dimension. More specifically, WHY was the World Health Organization wrong?

Broadly speaking, there are two main categories as far as potential answers are concerned:

1. It was wrong for political reasons, in an effort to help China and continue receiving Chinese funding, in other words the WHO experts released information they knew was wrong because they were politically motivated to do so
2. It was wrong simply because this is how the scientific method works when analyzing a virus you don’t have all that much in the way of experience with. There are bound to be errors along the way, especially at the very beginning. It’s what (ironically) makes the scientific method imperfect yet at the same time better than the alternatives, the fact that scientist learn from errors and bounce right back until the truth is discovered

Needless to say, it’s answer #1 which tends to lead to various conspiracy theories about the wealthy China which somehow “bribed” the WHO so as to further its agenda when it comes to on the one hand silencing those who wanted to spread the word about the virus initially and on the other hand, excessively praise China’s handling of the COVID-19 problem later on.

As far as the latter is concerned, it is indeed undeniable that the World Health Organization took things (way) too far when it comes to Beijing, including even terms such as “openness to sharing information” (which are downright ludicrous) used by Director-General Tedros. WHO critics are quick to point out this propaganda-driven intellectual bribery as they see it, whereas WHO defenders claim that in the absence of such flattery, China would have been even more opaque.

At the end of the day, there is no way to “know” with respect to such motives but what we do have more than enough of are money-related numbers which make answer #1 seem downright peculiar. Why? Simply because WHO financing numbers do anything but paint the picture of a World Health Organization that is dependent on China… on the contrary.

If anything, the WHO can be considered ultra-dependent on the United States, with position number one in terms of 2018-2019 financial contributors being occupied by the US (with a grand total of $893 million) and position two being occupied by the US billionaire Bill Gates’ foundation (with a grand total of $531 million).

China is not even in the top 10, with positions 3 to 10 being occupied by the United Kingdom ($435 million), GAVI Alliance ($371 million), Germany ($292 million), Japan ($215 million), UNOCHA ($192 million), Rotary International ($143 million), the World Bank ($133 million) and the European Commission ($131 million).

While it is true that China’s contribution went up over 50% (52%, to be more precise) since 2014, it did so from a less than impressive starting point and as such, China’s 2018-2019 contribution represented a less than impressive $86 million, over ten times less than that of the United States. If anything, this tends to suggest a narrative involving a WHO that would have been incentivized to do the exact opposite, paint China in a negative light so as to please its largest donor by far (the United States) rather than alienate it (which is what ended up happening, with the US deciding to cut World Health Organization funding, a devastating blow which risks representing a humanitarian disaster in light of the fact that the WHO has responsibilities which go well beyond COVID-19, many of which involve some of the world’s most vulnerable nations).

In the aftermath of the United States’ decision to cut WHO funding, it is almost certain that funding from China will improve but there is absolutely no way it can improve to the tune of nine figures yearly. As such, the entire conspiracy falls flat on its face when confronted with the previously mentioned numbers: why on Earth would China conspire against its largest contributor by far in an effort to please a contributor that isn’t even in the top 10?

As a conclusion, it is vital to point out that devastating mistakes are inevitable when dealing with a threat as new and therefore improperly understood as COVID-19, it’s how the scientific method works (learning from mistakes, building on the shoulders of giants, etc.), a scientific method that while imperfect, lead to us having the very Internet and gadgets used by many of today’s uninformed individuals to spread conspiracy theories that are the exact opposite of scientific.

China made significant mistakes, especially early on, and will most definitely end up paying for them. The WHO made its share of mistakes as well, many of which are quite frustrating in nature. But stating that there is some sort of mystical chain of causality which revolves around the WHO making mistakes because China made mistakes that needed to be covered up for propaganda reasons makes absolutely zero sense from the perspective of even basic logic and is therefore an attitude that goes against everything the ChinaFund.com team stands for. As dangerous as it is to be a “China cheerleader” who sees everything coming from Beijing through rose-colored glasses, embracing the exact opposite extreme is certainly not the way to go either.

When it comes to losers, unfortunately, there are more than a few, from “the usual suspects” in terms of businesses such as airlines and restaurants to even cities themselves, for example New York City. Why cities themselves? Primarily because mega-trends such as the one which constitutes the topic of this article wreaked havoc on the very principles that kept them sustainable.

If people work from home, why should they continue paying exorbitant rent prices instead of simply moving somewhere more affordable? What happens to landlords in this “paradigm shift” situation and what about the various contractors and third parties that are also included in the equation?

On the lifestyle front, with optional as well as government/state-enforced social distancing measures, what happens to habits such as eating out and enjoying a complex social life, which yet again represented a major selling point of urban areas?

These two simple examples make it clear that… well, things are actually anything but simple because as great as mega-trends such as working from home may sound, our system wasn’t exactly built for this significant of a paradigm shift. Look no further than commercial real estate to understand that entire industries would crumble if in our case working from home would become a permanent rather than temporary endeavor.

Why would it become permanent?

Because things are never straightforward in the world of economics and even once the pandemic ends, it would be naïve to assume all negative consequences will go away, primarily because “negative” is in the eye of the beholder and something that represents a toxic trend for industries such as commercial real estate or cities such as New York City might represent a blessing for other businesses and individuals.

For example, there are already studies coming out which illustrate that when working from home, not only does productivity not plummet when it comes to quite a few occupations, it actually goes up. Furthermore, when working from home, there is no need for the oftentimes-complex infrastructure of an office workplace: no rental costs for the employer, no maintenance costs and the list could go on and on.

To put it differently, quite a few employers are now have compelling evidence (both studies and empirical evidence when it comes to their own work from home experiments with their own employees) that this approach enables them to both save money and increase productivity… a combination one doesn’t exactly come across often In the business world.

At the end of the day, we are forced to use a term so popular in the tech landscape that it ended up in cliché territory: disruption.

Love it or hate it, the work from home mega-trend is poised to disrupt entire industries and, of course, China won’t exactly represent an exception. As such, it makes sense to think about this trend from the perspective of the Chinese economy and there are basically two very important perspectives that stand out:

1. The situation as far as China’s more developed regions are concerned does not look all that gloomy, with hyper-technologization already a given when it comes to anything from smartphone use to digital payments (with China, believe it or not, being among the leaders rather than followers when it comes to this trend) and with many sectors of the economy more than able to adapt or even facilitate the transition to a more heavily work from home-oriented paradigm. As an example, we have dedicated an entire article to the gig economy from a Chinese perspective and yet again, it’s quite remarkable in how many surprising areas China leads
2. When it comes to the less-developed regions of China, things tend to get a bit tricky in terms of anything from infrastructure (with China still having regions in which even the very basics by Western standards are lacking) to flexibility… let’s just say that for example remote education in a pandemic context is easier to implement in Shanghai than in one of China’s more rural regions. To put it differently, the work from home mega-trend represents yet another element which will make the significant gap between developed and under-developed regions more than clear

Of course, there are also issues that pertain to China as a whole, leaving the “developed vs. under-developed” gap aside, with commercial real estate and real estate in general representing a textbook example to that effect. In a “work from home” world, it will become even more obvious than it already is that a fair bit of malinvestment took place when it comes to pretty much everything real estate-related in China. As it was, China has proven to be over-zealous with respect to anything from creating new office spaces to building residential real estate and even in the absence of post-2020 trends, this isn’t exactly something that can be overlooked. The potentially reduced mobility and almost certainly reduced demand for office space would inevitably exacerbate and already systemic problem, so let’s just say the adaptability skills of the authorities will be put to the test.

All in all, it is fairly safe to conclude that in China as well as pretty much elsewhere, the previously mentioned “disruption” term is in the spotlight. It remains to be seen which countries will fare better in the long run if mega-trends such as the work from home one prove to be more than fleeting occurrences and as always, the ChinaFund.com team will keep readers and especially clients informed.

The ChinaFund.com team, however, owes it to its readers to analyze developments in a brutally rational manner and as such, we firmly believe it is impossible to wrap your head around what has happened in 2020 without deploying level-headed thinking and an analytical framework which revolves to as low of a degree as possible on emotion.

As such, we will get right to it and, in no particular order, enumerate the various entities that have gained from disorder in 2020:

1. Entities involved in the production and/or distribution of essential items, with prices skyrocketing when it comes to certain products, for example medical equipment, for obvious reasons. The attitude of authorities varied and opinions are mixed in such instances, with pro-interventionists believing the state needs to step in and set price caps and non-interventionists claiming that by doing that, governments would be discouraging creative entrepreneurs from stepping in and filling the supply void
2. The companies behind the products and services which have become considerably more used due to the quarantine measures that have been implemented all over the world. As such, Netflix shares soared, as did stocks associated with remote communication services such as Zoom, in light of the fact that more and more individuals found themselves looking for solutions to a wide range of problems during their quarantine, from the need to be entertained (Netflix) to the need to work remotely (Zoom)
3. Certain key players in which confidence has been placed with respect to finding a solution to the COVID-19 problem, anything from biotech companies that were and are working on vaccines and other options (antiviral drugs, symptom relievers, etc.) to tech companies that are working on various ingenious ways to tackle the crisis and avoid future calamities
4. Investors and/or traders who were either short pretty much any asset other than safe haven ones (US Treasuries, for example) or long safe haven assets back in March. During times of extreme panic such as the COVID-19 episode, it should come as no surprise that a wide range of assets (risk-on assets, of course) become correlated, as market participants scrambled to generate liquidity by panic selling left and right
5. Countries that have reacted in a swift and effective manner to the COVID-19 outbreak, for example South Korea or Singapore, and have made it clear that they represent administratively mature geopolitical players. A valid case could be made that China is also included in this category, with two important mentions however. On the one hand, that its initial response left a lot to be desired (minimizing the coronavirus threat and suppressing the free flow of information) and on the other hand, that it risks being “punished” by other nation due to the supply chain complexity reduction trend that has emerged as a result of the pandemic

As can be seen, there are definitely entities that can be considered “winners” from a strictly economic perspective. When it comes to other perspectives, that can no longer be stated because again, the COVID-19 pandemic resulted in a huge number of victims and as such, glorious words such as “victory” should be used sparsely in our view.

Furthermore, even from the previously mentioned economic perspective, the situation is trickier when it comes to some “winners” compared to others, with China yet again being in the proverbial spotlight in this respect. If we are to limit our analysis to the containment measure effectiveness dimension then, of course, China can be considered a clear winner in light of the fact that its draconian containment measures (with Wuhan being a textbook example to that effect) most definitely worked.

However, upon closer and longer-term-oriented analysis, it becomes abundantly clear that a just as compelling case can be made that in the mid to long-term, China might also end up being a loser on certain fronts. To be even more specific, a wide range of economic and geopolitical actors have been made aware of the fact, more so than in the past, that relying on Chinese exports excessively can lead to bottleneck situations precisely when the exact opposite would be needed. This became more than obvious with medical supplies, as Western sellers found themselves forced to face the reality that they were dependent on either importing the final product from China or at least on key components. Regardless, the end result was the same: a severe shortage crisis which resulted in apocalyptic images involving doctors who worked in some of the world’s most efficient medical systems (Northern Italy, New York and so on) that were forced to improvise in the absence of much-needed medical supplies.

As always, time will tell and this much is certain: while there have without a doubt been entities that have come out ahead in one way or another, the term “winners” is very risky to use in light of the fact that the moral dimension needs to be considered on the one hand and on the other hand, in light of the fact that as illustrated when analyzing China’s situation, today’s apparent winners risk being anything but if the COVID-19 crisis “contributes” to a perfect storm situation in the mid to long-term.

Unfortunately, images of Western doctors who were equipped in a manner one would expect from 3rd world doctors abounded, with elite ultra-trained doctors literally using garbage bags sealed with duct tape on top of their footwear, instructed by the CDC to use bandanas and various workarounds in the absence of masks and the list could go on and on.

On the opposite end of the spectrum, Asian healthcare systems were widely praised, from South Korea and Singapore (two very wealthy nations on a per capita basis and as such, it came as no surprise that their healthcare systems fared well), to… you’ve guessed it, China. Unlike the two previously mentioned examples, the Chinese healthcare system isn’t necessarily considered what one would call cutting edge… on the contrary. In fact, there is a ChinaFund.com article which has been dedicated exclusively to analyzing the Chinese healthcare system in a brutally honest manner, from pros which revolve around acknowledging that it has come a long way to cons which make it clear that it still has severe limitations.

However, as always, our team would strongly recommend exercising restraint and understanding that there is a serious propaganda dimension associated with praising China after the COVID-19 episode. Does this mean there aren’t praiseworthy elements involved? Of course not, it simply means reality tends to be more let’s say nuanced, for reasons such as:

1. The fact that many of the problems which popped up across Western healthcare systems were directly related to China and represented supply chain issues rather than anything else. To put it differently, the previously mentioned scenes which described desperate doctors who were adapting to scarcity-oriented realities as best they could were caused by two problems: on the one hand, the fact that the countries in question did not have adequate enough reserves of key essentials (masks, ventilators, protective equipment, etc.) or if you will mistakes made by those in charge in those countries but on the other hand, the fact that affected nations were overly-dependent on Chinese imports (either products or key components) and China failed to deliver at scale… if you will, mistakes made by the countries in question as well as China, which risk costing China quite a bit down the road due to the supply chain complexity reduction trend that risks emerging
2. The fact that some of China’s methods with respect to treating COVID-19 patients were questionable at best from a scientific method perspective, for example the fact that Traditional Chinese Medicine or TCM was widely used despite there not being enough in the way of scientific evidence for that approach to make sense. For more information on why China is aggressively “selling” TCM, we would strongly recommend reading the article we have dedicated to Traditional Chinese Medicine by clicking HERE
3. The fact that Chinese medical products/solutions have proven to be sub-par in many cases, with vast quantities of anything from masks to testing kits being recalled in jurisdictions such as the European Union due to not being of high enough quality when it comes to protective equipment or accuracy when it comes to tests
4. The fact that China’s good results as far as the virus spread containment dimension is concerned are more a function of the aggressive to the point of draconian measures which were imposed (severe lockdowns) than strictly something the healthcare system deserves praise for. To put it differently, China did a remarkable job containing the spread of the virus or preventing rather than having to cure (a highly recommended approach but one which makes it clear that the issue is nuanced)
5. The fact that many observers have raised a proverbial eyebrow when reading the numbers provided by Beijing or, to be more blunt, let’s just say the West has taken these numbers with a grain of salt right from the beginning and as time passed and the intelligence services of various nations stepped in, their research process revealed that indeed, it is very likely that China under-stated its numbers for propaganda purposes
6. The fact that while China did help other nations with anything from expertise to goodwill packages, it was mostly done for propaganda purposes rather than in an effort to provide consistent aid. For example, despite massive propaganda coming from Beijing about how China has helped Italy, European Union nations have provided much more in the way of aid

Please note that the reasons above are not meant to somehow prove that the healthcare system of China has done a disastrous job, not at all. Our goal was simply making it clear that on the one hand, there are still many areas of concern when it comes to Chinese healthcare and on the other hand, that to a more than significant degree, Chinese COVID-19 success stories revolve around containment more so than the healthcare system, around keeping the spread of the virus in check through unprecedentedly aggressive measures or, if you will, around preventing more so than curing.

It remains to be seen what the future will hold in terms of conclusions. For now, this much is certain: when analyzing the extremely complex implications of the COVID-19 pandemic, there is little room for cheerleading and emotion, brutal honesty combined with reason must prevail because otherwise, we end up with political bias that does little more than cloud our judgment and numb our critical thinking capabilities.

In a nutshell: we need consumption and debt-fueled currency creation for the status quo to be maintained because in the absence of these two forces, the current economic system would implode. An economic system which, as you might have noticed, revolves around the exact opposite of what used to be the “responsible” thing to do (keeping debt in check, being a saver, etc.) and on the contrary, we are firmly in “paradox of thrift” territory.

In other words, if enough market participants would do what used to be considered the responsible thing and let’s say start toning it down a notch or two in terms of consumption so as to perhaps pay off their debt sooner, the financial system wouldn’t be able to withstand such a shock because due to the over-leveraged nature of it, there is simply too much debt in the system and even if individuals would use 100% of the currency at their disposal to re-pay it, we’d run out of currency and the debt would be anything but close to being paid off.

Why?

Simply because in 2020 and beyond, debt is money. To put it differently, there is absolutely no difference between the $100 your grandparents have kept under their mattress for decades and the $100 which were created out of thin air as a result of a credit card owner deciding to buy a useless item. Needless to say, there is a lot more of the former than the latter in the system at this point in time and therefore, responsibly paying off debt is anything but scalable.

As such, from China to the United States, the authorities are left with two broad choices:

1. Put an end to the party by letting the current system collapse, in the hope that we can replace it with a more sustainable one, an option recommended by economists who are on the very conservative side, for example “hard money” economists (who advocate a return to the Gold Standard), libertarians and so on. Needless to say, this is an option that would result in enormous short-term disruption but it is the hope of those who advocate going down this road that in the mid to long-term, we will all be better off
2. Kick the can down the road indefinitely by creating new debt so as to pay off existing debt, in the hope that humanity will ultimately figure out a way out of this mess. This is the option preferred by the overwhelming majority of economists at this point in time, especially economists who hold official positions and want to do everything humanly possible to avoid having the entire status quo financial framework collapse on their proverbial watch. In contrast to the previous option, this enables those who want the current system to survive no matter what to experience short and mid-term relief, accepting the fact that the long-term implications can be quite problematic but hoping it does not come to that

For the most part, as far as pretty much all governments are concerned (from “communist” China to the Republican-led United States and yes, even countries on the very conservative/prudent end such as Germany), the topic of which choice to make isn’t even up for debate anymore… it has already been established that choice #2 is the way to go and with each financial and/or economic crisis episode, we dig ourselves deeper into the proverbial choice #2 trenches.

For example, to combat the effects of the Great Recession, the Federal Reserve increased the monetary base by as much as $85 billion per month at the height of the US monetary easing efforts, more currency creation in one year than in the almost 100 years before that, from 1913 up until the Great Recession.

To combat the effects of the 2020 economic crisis, more of the same but on a larger scale is being done. The tone was set by none other than China, which made it clear right from the beginning (back when the coronavirus/COVID-19 threat was considered regional at best and most Western nations downplayed the possibility of experiencing difficulties at home) that it intends to provide as much liquidity as necessary to offset the severe economic shutdown effects. And, indeed, the effects in question were more than dramatic, with for example auto sales dropping by more than 90% in February of 2020 compared to the month of January and the same principle being valid when it comes to a wide range of industries.

As such, while absolutely nothing is certain in the oftentimes volatile world of economics, the ChinaFund.com team considers it highly probable that China will join what is shaping up to be a global currency creation trend (or, to be more precise, the continuation of an already-existing trend involving aggressive monetary policy), for reasons which range from combating the economic effects of its severe lockdown period to retaliation, should various countries choose to step it up a notch (or more) from a currency war perspective, let’s not even refer to potential forms of retaliation should the trade war dimension kick in (with China, more likely than not, resorting to aggressive stimulus in the event that the world will go through a meaningful supply chain complexity reduction scenario, at the very least when it comes to products/services that are deemed to be crucial from a national security perspective).

Why?

Simply because a lot of developments tend to be too complex or let us call them non-linear for a stereotype-driven modus operandi to make sense.

Moving on to specifics, the comparison between the post-1929 Great Depression and 2020’s situation, it only takes a bit of historical know-how to understand that we are dealing with remarkably different conditions at this point in time: different incentive structures, a different political system, different geopolitical circumstances and the list could go on and on.

Let us dwell on political decision-makers a bit.

In the aftermath of the 1929 crash, President Herbert Hoover was initially of the opinion (encouraged by the thinkers who influenced him, of course) that the free market must be allowed to reach some kind of an equilibrium situation and as such, the initial strategy revolved around non-interventionism. With the benefit of hindsight, we now know that the effects were disastrous, to the point of the average citizens calling the newspapers many were forced to use to keep themselves warm “Hoover blankets” or using the term “Hoovervilles” to refer to the shanty towns built by now-homeless Americans out of sheer desperation. Eventually, a paradigm shift ended up being demanded and ultimately manifesting itself, with president Franklin Delano Roosevelt and his New Deal in the spotlight.

Fast-forward to the present and… do we really identify obvious symmetry?

No.

On the one hand, in light of the fact that for example in the United States, the Republican Party is in charge (right-leaning politicians), some would have expected conditions of non-interventionism to once again present themselves. However, the exact opposite happened. From Democrats to Republicans and even libertarians, pretty much everyone agreed that no, letting the market reach equilibrium on its own was not an option and that unprecedented monetary as well as fiscal stimulus was necessary: from once again lowering interest rates to zero, providing unlimited liquidity and even eliminating the need for banking system reserves as far as the Federal Reserve is concerned to an initial bipartisan economic stimulus program in the $2 trillion zone, which included anything from bailouts of corporations in affected industries to handing out checks to the average American citizen.

To put it differently, pretty much the exact opposite in terms of let’s “economic policy Zeitgeist” compared to the Great Depression.

Does this mean the proverbial day has been saved?

No, it simply means a solution has been chosen that is remarkably different to the post-1929 one and as such, Great Depression comparisons aren’t necessarily extremely compelling.

But, and therein lies the key to understanding our viewpoint, it’s important to understand what we know and especially what we do not know. While we know that the post-1929 policies had disastrous consequences, we do not “know” that the current measures will have positive long-term effects. This is an unprecedented situation and as such, we don’t know anything other than the fact that the measures chosen are strikingly different this time around.

In a positive scenario, yes, the day could theoretically be changed and central bankers as well as policy makers be considered modern-day heroes.

Realistically speaking, however, it isn’t that difficult to envision scenarios in which the exact opposite happens and things go terribly wrong. It’s just that this time around, the “terribly wrong” scenarios don’t involve a deflationary framework which leads to a “Great Depression” but perhaps an inflationary one which leads to a “Great Inflation” and the same principle is valid when it comes to what might happen next: in the post-1929 world, we went from a non-interventionist framework (Hoover) to an interventionist one (Roosevelt) whereas in the present, the exact opposite might happen, with society starting out with an interventionist modus operandi and moving on to a non-interventionist one.

Of course, this is nothing but pure speculation at this point.

As mentioned previously, time will tell if today’s central bankers and government officials will be considered heroes who saved the economy through their aggressive policies or, on the contrary, villains that sent the world around them toward an uncontrollable inflationary spiral. We simply do not know and can only speculate.

What we do know however is that for the time being, the road which has been chosen by decision makers from all over the world is remarkably different if we are to compare it to the road initially chosen by Hoover. As such, to finally address the question which constitutes the title of this post, we need to understand that no, we do not have enough reasons to be convinced that the post-pandemic economic lockdown which has occurred all over the world will lead to another Great Depression (an ultra-deflationary scenario). If anything, we have valid reasons to be concerned about the exact opposite: the fact that significant risk factors point to a higher probability of dealing with the ultra-inflationary (not to be confused with hyper-inflationary!) dimension this time around.

Of course, the ChinaFund.com team will continue monitoring events carefully, as they unfold, and sharing its findings with readers and especially clients. Should you be interested in picking the brains of the ChinaFund.com team members so as to tackle your concerns in greater detail, simply visit the Contact section of our website and let us know what we can be of assistance with.

“Fighting” deflation has become the norm to such a degree that as an economist, I always find it uncomfortable to even bring potential inflation problems to the attention of my peers because I know I’ll be on the receiving end of several eyebrow raises. In the proverbial West at least, inflation fears have all but been erased at this point in time and for contrarian reasons if nothing else, perhaps it would be wise to pay adequate attention to the inflation dimension.

Again, problematic inflation, not hyperinflation.

As explained time and time again, a country would have to be remarkably weak to represent a hyperinflation candidate, with all historical examples this author at least can think of fitting that narrative, from post-WW1 Germany which had been weakened by losing the war and a wide range of consequences which derived from that so as to become a hyperinflation candidate to chronically under-developed nations such as Zimbabwe.

Therefore, no, the ChinaFund.com team does not consider hyperinflation a serious risk factor for China at this point in time, much less so for nations with a more impressive track record of prosperity such as the United States.

But… so what?

This is where my line of thinking and that of many peers diverge. I for one consider it a fundamental mistake to assume that just because the worst case scenario (hyperinflation) is pretty much off the table and just because we haven’t exactly had major inflation concerns in the recent past as far as (moderately and above) developed nations are concerned, the topic of inflation does not warrant our attention.

Is it true that past financial calamities have been deflationary in nature?

Yes.

Is it true that it has been a long time since the West has been confronted with inflation problems?

Yes.

But let us please not forget one of the main adages of the investing world: past performance does not guarantee future results, especially if the past performance in question occurred despite unprecedented worldwide central banking measures.

Alan Greenspan lowered interest rates from 6.5% down to just 1% to combat the deflationary effect of the Dot-Com Bubble bursting, yet the market didn’t lose confidence in currencies and central banks to enough of a degree for inflation problems to appear… fair enough.

Moving on, Ben Bernanke was even more aggressive in the aftermath of the Great Recession, with interest rates being lowered all the way down to zero and aside from that, over one trillion dollars being injected into the financial system per year at the height of QE, with other central banks (notably the ECB and Bank of Japan) being even more aggressive. Yet, again, the market didn’t lose confidence in currencies and central banks… once again, fair enough.

However, a worrying pattern seems apparent: the fact that each time, a greater “dose” of monetary aid is required, with central banks needing to become more and more inventive as time passes.

As a thought experiment if nothing else, let us assume that next time around, even more aggressive measures will be employed: negative rates in the US, deeper negative rates in the EU and Japan, China following suit and so on. Furthermore, perhaps “traditional” monetary easing (injecting capital into financial systems) will not be enough and central banks will have to resort to so-called “helicopter money” or in other words, injecting money into the “real” economy.

If the market once again decides that everything is fine, we are good to go for another cycle.

But what if the exact opposite happens?

In that case, in China as well as elsewhere, we will be in for a “deflation followed by inflation” scenario. A rather uncontrolled one, most likely, despite the fact that for the most part, economists tend to “fear” deflation more because past performance has indeed proven that tackling inflation is easier than getting out of a deflationary spiral.

Again, however, what if the market decides to no longer follow the script(s) of the past?

This question is even more so valid in light of the fact that it is difficult to the point of impossible to quantify how much let’s call it pent up energy there is with respect to this phenomenon, with markets minimizing inflation concerns for decades and then all of a sudden perhaps doing the exact opposite.

Who is likely to be affected?

Pretty much everyone, since there aren’t exactly case studies involving proverbial good pupils from a monetary policy perspective… increasing aggressiveness has been the norm across the board.

Of course, there will be hierarchies involved.

For example, China is obviously likely to deal with less of an inflation problem that an average African nation. The same way, the United States is likely to fare better than China as long as the “worldwide reserve currency” narrative for the dollar remains intact and the list could go on and on.

But make no mistake: hyperinflation is most definitely not required to wipe out wealth, high inflation will get the job done just fine.

Furthermore, there are few instances in which timing is more difficult than in “deflation followed by inflation” scenarios due to the likelihood of selling existing assets so as to establish a cash position but not buying back in soon enough and therefore being caught unprepared once the inflationary wave hits.

As such, for most individuals, perhaps holding on to their existing assets or at least their best assets and embracing other strategies so as to build a cash position (anything from generating more income to pruning portfolios and selling the least desirable assets gradually) would be the way to go, especially in light of the fact that building a truly solid portfolio the right way takes time, there is just no way around it.

This undoubtedly sounds remarkably complicated and, unfortunately, it actually is. At the end of the day, a transition from “status quo deflation” like with previous financial calamities to “deflation followed by inflation” inevitably brings about a high degree of uncertainty. Therefore, being thorough and keeping your ear to the ground is a must, with the ChinaFund.com team gladly putting its services at your disposal so as to be of assistance with precisely such goals.

But what if it’s not hyperinflation that worries you as an economist but rather simply serious inflation?

In the opinion of this author at least, hyperinflation is most definitely not a legitimate threat for Western nations in 2020, as mentioned on other occasions. Why? Simply because we do not have a precedent involving a country going from prosperous to devastated as a direct result of hyperinflation. In all documented cases (yes, including Germany after World War I), economic devastation was brought about by other forces and it was only after a country became genuinely weakened that hyperinflation emerged.

As such, no, the likelihood of having hyperinflation in the US or even China anytime soon is fairly close to zero. But, and therein lies the nuance many experts are missing, you do not need actual hyperinflation (for example the dollar going from $4.2 to $4.2 trillion marks) to generate nightmares economically speaking. In my country (Romania) for example, we had very high inflation in the nineties but definitely nowhere near hyperinflation territory. Did that stop people from essentially seeing their wealth wiped out? Of course not. High inflation is far, far more insidiously dangerous than meets the eye and it therefore perplexes me that economists are not paying anywhere near adequate attention to this phenomenon.

Fast-forward to the present and we have the question which constitutes the title of this post most likely making readers wonder how exactly the Covid-19 white or black swan (depending on whom you ask) can ultimately lead to inflation-related problems. If anything, isn’t the exact opposite true, in light of the deflationary market crashes caused by such white/black swans?

From a short-term perspective, yes.

From a longer-term one and especially the situation China as well as pretty much every other nation finds itself in… let’s just say things are far more complicated.

What keeps me personally up at night is represented not by your “status quo” deflationary shock scenario but rather by something more specific: deflation, which leads to “more of the same” in terms of how the authorities react (central banks lowering already-low interest rates and injecting money into the system on the one hand and governments providing fiscal stimulus on the other) and is eventually followed by runaway inflation, as the market “digests” what happened and decides that enough is enough, losing confidence not just in one particular currency such as the Renminbi but rather in currencies in general.

Did this happen after Alan Greenspan responded to the Dot-Com Bubble’s aftermath by lowering interest rates from roughly 6.5% to a (staggering at that time) 1%?

No, it did not.

However, the market got let’s say accustomed to this type of “help” and when the next financial crisis hit (the Great Recession), it demanded more… much like a drug addict demands an ever-increasing dose to remain somewhat functional.

Did it receive what it wanted?

Ultimately, yes, with Ben Bernanke lowering interest rates all the way down to zero and over in the European Union as well as Japan, them even entering negative territory. Furthermore, lowering interest rates alone was no longer enough, with unorthodox options having to be chosen which involved monetary easing or if you will, injecting money in the financial system to the tune of $85 billion per month in the United States and even more in the EU as well as Japan at the height of their respecting easing journeys.

Do we have runaway inflation this time around?

Once again, no.

Why?

Simply because while the measures were indeed unprecedented, most of the money ended up as reserves in the banking system and quite a bit simply chased financial assets. As such, the end result was the formation of various bubbles across many asset classes or if you will, asset price inflation rather than consumer price inflation.

In light of the serious economic problems brought about by the Covid-19 situation, the market is once again demanding stimulus and we have every reason to believe that just like with the Great Recession compared to the Dot-Com Bubble, governments and central banks will be pressured into offering an even more substantial “dose” of monetary as well as fiscal stimulus.

Will there be inflation problems next time?

While nobody can know for sure and those who claim they do are simply lying, let’s just say the probability is greater this time around. This is primarily a result of the fact that central banks seem to have limited “ammunition” in light of how low interest rates currently are and as such, the market will place more and more pressure on the fiscal side as well. What this means is that as opposed to the Great Recession response, there is a greater likelihood of monetary easing (most likely considerably more than last time around) ultimately leading to money finding its way to the “real” economy and thereby generating inflationary effects.

As far as deflation is concerned, we have had more than enough experience with it in the 21st century across Western nations but when it comes to inflation, the exact opposite is true, with quite a bit of time passing since the let’s call them stagflation days. Therefore, worrying about inflation as well as deflation at this stage is, in the opinion of the ChinaFund.com team at least, the rational thing to do, in China as well as the West.

Is inflation likely to affect China more severely?

Most likely, in light of the fact that as mentioned on other occasions, China is not yet considered a safe haven destination. As a general rule: the weaker a nation is, the more vulnerable it is to inflation-related problems, from countries such as Zimbabwe and Venezuela which are hyperinflation candidates to the world’s most robust economies, where the likelihood of hyperinflation occurring is close to zero but serious wealth-altering inflation problems representing anything but an impossibility. The bottom line is this: we firmly believe that absolutely everyone needs to start paying more attention to inflation at this point in time and should you and/or your organization require assistance with just that, the ChinaFund.com team is here to help.

How dangerous is this state of affairs?

Most definitely dangerous enough to be considered a threat to let’s call it status quo globalization, in light of the fact that it revealed weaknesses which go beyond the political dimension. Simply put, for the most part and especially as far as the mainstream world is concerned, discussions pertaining to globalization in general and China in the context of globalization in particular revolved around socio-political aspects, for example how affected workers in Western countries end up being by offshoring.

The 2020 situation, as mentioned in other articles as well, made it clear that some globalization vulnerabilities can have a downright humanitarian dimension. A textbook example to that effect is represented by the severe shortage of masks and medical equipment in the proverbial West, a shortage which was generated by bottleneck issues in China. More specifically, this shortage had two let us call them broad causes:

1. Causes pertaining to China, primarily the fact that the authorities were reluctant to allow exports of key medical supplies shortly after China managed to get its domestic spread situation under control, for reasons which revolve around fears that a second wave of infection might catch China unprepared
2. Causes pertaining to overly optimized Western companies, which didn’t keep nearly enough supplies warehoused due to their desire to keep costs down so as to be as competitive as possible, a state of affairs which created a business model framework which has proven to be anything but robust enough to withstand sudden surges in demand brought about by situations such as pandemics

As such, Western nations in particularly or countries with excessively complex supply chains more broadly speaking find themselves facing a difficult decision: how should they react after analyzing the 2020 situation?

To (over)simplify, there are once again two broad solution types:

1. Solutions which revolve around taking major steps back with respect to globalization, even if it means that profit margins will be affected and that major business world as well as political world disruptions are bound to occur. Or, to put it differently, solutions which involve simplifying supply chains and perhaps keeping things local to as significant of a degree as possible
2. Solutions which revolve around maintaining course as far as status quo globalization is concerned but implementing other types of changes so as to make the system more robust. For example, changes such as encouraging the business sector to maintain more robust stocks, especially when it comes to products that are considered systemically important. This can be accomplished through a wide range of measures, from simple legislative action (essentially forcing the businesses in question to comply and letting them figure out how to tackle the cost dimension) to more or less complex measures meant to help the affected businesses (tax breaks, subsidies, etc.)

Needless to say, China would prefer the second option, whereas as the business sector is most likely less than thrilled about both. Perhaps it would warm up to the idea if states make a compelling enough argument that they can provide assistance throughout the transition process but again, even in the very best case scenarios, major disruption is to be expected.

What about the general Western public?

For the most part, it should come as no surprise that the first solution type is extremely easy to “sell” politically speaking. As it stood before the 2020 developments, the Western public was considerably less than thrilled with globalization in general and the effects it inevitably brought about as far as employment is concerned. Add post-pandemic frustration to the mix and it should be more than obvious that anti-globalization sentiment shot up spectacularly. Ask a member of the general public to think of type #2 solutions and most people will reply that the endeavor is far too complex and abstract. As far as type #1 solutions are concerned (pushing against globalization), the exact opposite tends to happen, with the average citizen having an easy target to point to (blaming China is anything but difficult in the West) as well as measures which seem simple enough to implement (even if that is hardly the case, realistically speaking) in front of him. It is not necessary to be an expert in sociology to realize that the Western public is far more likely to embrace type #1 solutions.

How determined are Western citizens to apply political pressure?

That remains to be seen.

With elections looming in the United States as well as other jurisdiction, the 2020 covid-19 situation will without a doubt represent the major topic that will be debated. If politicians sense that a stronger and stronger anti-globalization movement is materializing, their political instincts will dictate that positioning themselves on the “right” side of that trend makes perfect sense.

A more than compelling case can be made that ideal conditions for populist anti-globalization movements risk emerging, with the many consequences (economic, geopolitical and otherwise) they bring about. An experienced economist and/or historian will quickly point out that “quick-fix” solutions such as cranking down on globalization might seem politically appealing and easy enough to implement but in reality, the unintended consequences which will eventually become apparent risk putting society as a whole in a situation where it realizes that the entire effort did more harm than good. As always, the ChinaFund.com team will monitor these developments carefully and with a clear head so as to provide much-needed clarity to readers and especially clients, clarity which will enable them to position themselves accordingly in the months and years to come.

On the contrary.

Elementary game theory tells us that if we see things from the perspective of let’s say Germany to give a European example or Canada to give a North American example, the Donald Trump administration’s attitude as far as allies (?) are concerned has been chaotic… to put it mildly.

From forcing Germany’s hand with respect to anything from beefing up its defense spending so as to reach parity with its NATO 2% commitment to “convincing” it to tone things down a notch (or two) when it comes to pipeline deals with Russia. From placing tremendous pressure on Canada from a trade perspective to the point of painting the picture of it receiving a proverbial free ride from the US to minimizing its climate-related agenda/priorities… the list could go on and on.

In light of this chaotic framework, it should come as no surprise that Western trading partners would consider a let’s say centrist administration a breath of fresh air. For example, while Barack Obama and past presidents raised similar issues as far as let’s say NATO spending was concerned, they for the most part did that in a manner in line with diplomatic frameworks as opposed to Donald Trump let’s call it (multiple orders of magnitude more) spontaneous approach.

In someone’s personal life, spontaneity may very well be a positive aspect.

In business, a similar principle is valid in some cases.

As far as international relations are concerned, however, the exact opposite is true. “Boring” is good and there is nothing more diplomats want than a boringly predictable landscape. As such, is it that big of a surprise that Western trading partners consider Joe Biden a potential facilitator of predictability and as such, a more desirable option than Donald Trump?

Of course not.

Where does this leave China?

As mentioned in other articles as well, one might assume that the exact same principle is valid when it comes to China, with Beijing being less than thrilled about how things have evolved from a trade perspective over the past few years… the trade war narrative, in a nutshell.

However, that assumption may very well be a bit short-righted.

Why?

Simply because while it is true that Beijing doesn’t want this trade war narrative, would it be that much of a stretch to assume that it would be willing to accept and even prefer it if there are enough pros involved that sweeten the deal? Even unintentionally facilitated pros?

Time and time again, it is relatively straightforward to notice that Beijing doesn’t shy away from playing the long-term game. And from a long-term perspective, there are more than a few advantages associated with the Donald Trump administration, even if most of them are unintentional, for example:

1. The fact that Donald Trump manages to put unprecedented strain on the United States’ relationship with most military as well as economic allies, a geopolitical climate that enables China to gain influence… one inch at a time, if you will
2. The fact that in light of Donald Trump’s many excesses and controversial decisions (such as the withdrawal of the US from the Paris Accords and its attitude toward climate, the Iran nuclear deal situation and many others), it is far easier for Beijing’s excesses (especially human rights-related ones) to fly under the (geopolitical) radar
3. The fact that few candidates generate more polarization among US citizens than Donald Trump… once again, the perfect context for an economic adversary such as China

The list could continue but there is no need to dig deeper in light of the fact that the common denominator is should be crystal-clear: the fact that China may very well prefer a Trump re-election scenario.

As humorous as it may seem, it is once again all about Trump. From Western partners which prefer Biden to economic adversaries such as China that have a valid case in favor of preferring Trump… the reasons for the most part gravitate toward Donald Trump, with little attention being paid to Joe Biden, his platform, his messages and overall attitude.

Say what you will about Donald Trump but this much is certain: he has most definitely managed to shift pretty much everyone’s attention toward him. Whether we are referring to those who criticize him, those who praise him, those who falsely praise him so as to push their more or less obscure agendas and so on, it is undeniable that for the foreseeable future, the current president of the United States is likely to remain in the spotlight.

Where does that leave Joe Biden?

Ironically, in a remarkably good position to speculate the current situation and center his campaign around the idea that “balance” is the operative word and the United States might revert to just that if he is electing, a situation allies and domestic moderates alike clearly stand behind. From China’s perspective, as pretty much always, the situation tends to be far more complex than meets the eye and while there are clearly disadvantages for Beijing that derive from a Trump Presidency, the pros which have been hopefully clearly enough outlined through this article may very well ultimately outweigh the cons. As frequently to the point of obsessively mentioned here at ChinaFund.com, paying attention to nuances is a must if you are serious about meaningfully understanding this jurisdiction, something our team would be happy to be of assistance with.