Prof. Steve Hanke: COVID-19 economic crisis is 'massive', expect 'many many bankruptcies'

Recorded on 2 July, 2020

PRESENTER: US non-farm payrolls came in at 4.8 million beating expectations for 3 million. Meanwhile the unemployment rate improved to 11.1%, from 13.3% in the prior month as the impact from the Coronavirus starts to ease.

However, the United States is still the country with the highest total cases of COVID-19 around the world. Joining me to discuss the outlook for the US and global economy is Professor Steve Hanke from the Department of Economics at the Johns Hopkins University in Baltimore.

Let's just start with your global economic outlook. What kind of a shape of recovery are you anticipating?

Professor Hanke predicts a V-shaped recovery

PROFESSOR HANKE: Well I'm anticipating the initial opening of the economies will result in what they call a V-shaped recovery. Because you're essentially starting from zero and dialling up a little bit. Things will look like they're getting better rapidly, and they will be getting better rapidly. But then all the problems will begin because this impact of the virus and all the lockdowns, which have been basically directed by the central planners and the public health people who haven't paid any attention to the economy with the exception of one place, Sweden.

Sweden has tried to balance the economy and keep it running while also dealing with the virus and that's the only liberal model of the economic and public health response to the virus. Everybody else has been in some phase of hard lockdown basically ignoring the economy altogether. The damage that's been done with this approach is massive and all these so-called supply chains that have been disrupted are going to be hard to put back together again.

Point number one, there'll be many, many bankruptcies as this thing drags on. That's again something hard to put back together again. In other words, when somebody goes bankrupt, the building is still there, and the capital stocks are still there. But you’ve got to get new management, employees and try to figure out if you're actually going to even open again.

GDP will not return to pre-COVID levels until at least late 2022

I don't think we will come up to the level of real GDP that we experienced prior to the virus until at least late 2022 and it might be well beyond 2022. And one way that people have underestimated the damage that's been done, if you look at GDP in the economy that's a value of all final goods and services sold in the economy. But there's something called gross output, and gross output in the United States, for example, is about double the size of GDP.

Now what is gross output? It includes all the supply chain intermediate transactions that take place prior to reaching GDP. All of that's been disrupted and the magnitude of course is massive because gross output is double the size of GDP.

‘Forget about the second wave, there'll be a second, third, fourth, fifth and sixth’

PRESENTER: Let's dig into a couple of countries. Now, when it comes to the United States what type of a recession or even depression are you bracing for and how is that likely to compare to 2008? Are you encouraged by the fact that the US economy is reopening and some of the data is starting to improve, or is that just the fact that we're coming from a very low base?

PROFESSOR HANKE: Relative to 2008 the problem is massive. 2008 is peanuts compared to what's going on.

PRESENTER: And what about the risk of a second wave. How are you kind of factoring that into your estimates for the outlook for the US? And does that imply that you're expecting us to head into a depression more than a recession, if 2008 looks like peanuts compared to today?

PROFESSOR HANKE: There'll be many waves, you talk about a second. No. There'll be many. There'll be all kinds of bumps in the road. Consistent with what I originally said and that is the supply chain disruption is much greater than we think. Again, if you look at those supply chains and their transit and the financial transactions within those, they are about twice the size of GDP. These intermediate transactions, that's where all this disruption is.

And you're going to have trouble putting Humpty Dumpty back together again. There’ll be all kinds of speed bumps in the road. Forget about the second wave, there'll be a second, third, fourth, fifth and sixth.

That's public health epidemiology talk, not economic talk. The epidemiologists know nothing about economics. It's clear that the approach they've used in all these lockdowns and the so-called expert advice they've been given, except in Sweden, has been all geared towards public health. Ideology has nothing to do with the economy. I mean for them the economic shutdown is a 0 cost. They don't consider that a cost

COVID-19 has run Argentina’s economy off the road again

PRESENTER: Now, we've spoken about quite a few Latin American countries in the past. Let's just talk about Argentina because that has been fighting really hard to tackle its fiscal deficit. But what has the Coronavirus really meant for its progress, given the declines both in terms of tax revenue and of course rising government spending as well?

PROFESSOR HANKE: Well, Argentina is a special case because they're one of the four countries in the world that are actually in default right now in their sovereign debt and that prevention debts will almost all default too.

At current it's a very vulnerable economy in the sense that it was already in the tank even before the virus. Yet the virus just aggravates things and they're even further down in the tank. I'm the only one who majors inflation accurately in Argentina, and today the annual inflation rate is 71% per annum, so the big problem there is the central bank and the Peso. This has been going on for over 100 years, and they have to get rid of the Peso and replace it with the US dollar.

That's what people do spontaneously and privately in Argentina anyway. But they have to get rid of the central bank, the central bank and the Peso are the problems. They always end financing fiscal deficits and public spending largesse in Argentina, and they get the country in trouble. I mean they've gone through one now. We've had to two huge sovereign defaults in 10 years in Argentina.

It's the biggest deadbeat in the world. I mean it's a complete deadbeat country which is unfortunate as a lot of potential, but I think it's just run off the road again. They have trouble staying on the road and the reason why is the central bank.

Central banks are Latin America’s economic Achilles heel

PRESENTER: What about Venezuela then? We know it's grappling with a whole host of economic issues. I know you study inflation a lot and rampant inflation has certainly been one of its key economic woes. The coronavirus no doubt adding to its problems. Talk to us about just how bad the situation is there.

PROFESSOR HANKE: Well it's kind of almost unimaginable. When I was President Caldera’s advisor in 1995 and 1996 there were all kinds of problems.

That's why he brought me in as an advisor and my advice was that they had to put this central bank in a straitjacket, adopt a currency board law to run it where the book of the bolivar would be issued. It would be back to 100% by US dollars, it would trade freely at a fixed exchange rate with the US dollar. The bolivar then would be a clone of the US dollar and everything would be fine.

You'd have a hard budget, constraint the system, the central bank wouldn't be allowed to extend credit to the fiscal authorities and so forth. It never happened. He didn't have the votes to get it. Then we had Chavez and we have Maduro and we have a hyperinflation going on - one of the longest ones in world history.

Today I just measured the inflation rate it's 2495% per year in Venezuela. It's the only hyper inflating country in the world. It's a complete basket case. I mean if Argentina is in the tank, Venezuela is a basket case. Let's put it that way.

Now with all these Latin American countries, the problem is they have central banks. Almost all of them except what we've got in Central America, e.g. Panama and El Salvador that are dollarized and more or less undercut. Well Panama does very well, it's been dollarized for over a hundred years.

And then in South America we do have Ecuador that is dollarized and doesn't really have a central bank that operates with discretionary monetary policy. They all should get rid of their central banks and their local currencies, or if they keep the local currency safe, they should have currency board arrangements that make those local currencies clone of the anchor which would be the US dollar.

Tackling the curse of exchange rate instability

PRESENTER: And that ties in with the piece that you wrote in The National Review basically saying that exchange rate instability is a curse with the onset of the coronavirus, and currency is taking a deep dive around the world. And you say that the prospect of private currency boards which are either backed by stable fiat currencies or gold is the promising one. Tell us a bit more.

PROFESSOR HANKE: Well one way around is the government monopolies namely central banks is to simply issue private money and people could use it.

Now how would that work?

Well you'd have a private currency board. My recommendation has always been to have those housed in Switzerland. Have the reserves held in Switzerland and have them operate under Swiss law. This is all for security, credibility and all the rest of it. And then you'd issue a private money and that private money would be backed 100% with, let's say, gold.

This would be very attractive in some places like: Turkey, Iran, Russia, even Lebanon is in a middle of a huge currency crisis right now.

If you did that you would have gold reserves backing whatever the private currency was that you were issuing and what that would mean is that currency would be a clone or equivalent of gold. Because it would trade at an absolutely fixed exchange rate. You'd have 100% gold reserves backing the currency so it would have full credibility, if you didn't like your currency, the private currency, you take it in and exchange it for gold and vice versa of course.

I think this is the most promising thing because it can always be done now as we know even with something that isn't a currency like Bitcoin.

Bitcoin is not a currency. It's not a currency because it's a highly speculative asset, prices fluctuating all over the place. It isn't a stable unit of account meaning it can't really qualify as a currency. No one really is going to be doing contracts or much by way of transactions, certainly long-term transactions in Bitcoin. As it would be like having a yardstick to measure off things and the length of the yardstick would be fluctuating all over the place.

You'd never get the measurements right. If you're trying to build a house or even put up drapes in your house, one day the drapes might be all over the floor and then the next day they're halfway up the window. They have to have something stable.

Prior preparation prevents poor performance

PRESENTER: You said that Hong Kong remains a world leader in handling the coronavirus. What are some of the lessons? Do you think that countries like the US and Brazil that are still struggling can learn from the example?

PROFESSOR HANKE: Well I think it really gets down to the five P's: prior preparation prevents poor performance and in some places like Singapore and Hong Kong, for example, and Sweden and Taiwan, you have had the five Ps in place. Prior preparation prevents poor performance. They were prepared, they were ready and knew what they were doing.

Every place else, it's all been ad hoc with a lot of public health kind of officials running around clearly not having a very good idea of what they're doing and the data by the way is terrible. So, you're operating it. It's like flying blind. If you're a pilot of a plane and you can't see all the instruments and or the instruments are giving you phony numbers - you've got a problem. And that's what's going on in most places.