 We're talking about economics. We're talking about local economics and also global economics with a global economics professor at Shamanad, political economics, he calls it. It's Christopher McNally. Thank you very much for joining us, Chris. We really appreciate you coming on. Thanks for having me, Jay. Well, you wrote an article which appeared in the Sunday Star Advertiser about economics and coronavirus. People talk about, certainly Dr. Trump, the fellow on Washington, he talks about global economics, or at least national economics, and how our economy is being affected and will be affected by the coronavirus. But to hear it from you is different, and I'd like to discuss your article with you and get a handle on where this is all going in terms of economics. So can you summarize the article? As I recall, there were three factors, three phenomena that were operating. One is interruptions to the supply chain, interruptions to demand and interruptions to financial availability. So can you talk about that? Yes. So the first thing is that this is probably unprecedented in terms of the economic impact. So there's really no historical playbook to go by. When the 1918 flu hit, we were in a very different type of global economy, and we just have finished World War I. So what we're getting is basically three different types of shock. The first shock, as you mentioned, is a supply shock. It basically started when China shut down its industrial and manufacturing economy, and as a result, many companies from South Korea to Germany were lacking parts. To some extent, companies were able to deal because they had parts and inventories. They were able to source some of the parts from other countries, and then when China gradually started to return to businesses normally that's manufacturing sector, then really March, mid-March, so just basically around now, they started to airlift a lot of these parts. But the problem is the supply shock is continuing. Because a lot of companies in the United States are starting to shut down, plus we've had shutdowns in South Korea, and we're getting quite major shutdowns in Europe, especially in Italy, where they basically have done the same thing the Chinese have been doing, which is to shut down their whole manufacturing sector, especially up in the north from Lombardia and other parts of Italy, more than Italy. So that's the first one. Well, it sounds to me like on the first one, the chain is only as strong as its weakest link. So if I order something from Amazon, and Amazon is still operating, they can see making a buck on this, and they have the people, the equipment, and they're determined. Jeff Bezos is determined to keep on functioning, and he knows that not only it's a matter of business, but as a matter of protecting the country, he's got to keep supplying things, and he's in the best position to supply. But I order something from Amazon, from my business or from my home, and there's a manufacturer out there, and the manufacturer needs a screw, a certain kind of little machine screw called a 6SJ7 screw, and somebody in his supply chain is unable to manufacture and get to him that screw. Therefore, he stops. Therefore, Amazon stops. The whole chain is as weak as its weakest link. Am I right? Yes, absolutely. But the good thing is, there's a lot of flexibility in these chains. So there might be one manufacturer that can't make that screw, they might be able to source another screw, or they might be able to even be 3D printed. They've been doing that in Italy in certain parts for the medical sector. And the real supply shock is actually more for things like safe math, protective equipment for medical workers, as well as the test kits, which are clearly in short supply. And that is because the demand has gone up so much for certain things, and then the second shock actually, I feel, is much more significant at this point, and that's the demand shock. And that means a lot of companies that were fearing they couldn't supply cars or electronics to the consumer, now I'm facing the opposite problem, which is certainly math. Nobody wants to buy anything anymore, except some household goods, protective equipment, etc. So what's happening with the economy is just going into a tailspin. Is that real, Chris? When people don't buy when there is no demand, how much of that is real? How much of that is psychological? Oh, I think it's real at this point. I mean, you mentioned the restaurant sector going into deep freeze, as well as basically the retail sector, clothing, everything, electronics. I mean, some people are still buying stuff online, but for the most part, as you said, there's also psychological factor where people just feel it's so uncertain they're not willing to purchase any big items. But at the same time, there's really this lockdown that is shutting down so many retailers and so many service businesses that you're getting a real demand shock. And it's not just in the U.S. it is global for this part. Yeah, I'm thinking of a fellow who either he has no money in reserve, which is a good part of the U.S., maybe the U.S. more than other places, but also the fellow who has a little money. But now he's sort of getting economically depressed. He's saying, gee, this isn't going anywhere good. So I better hold on to my bank account. I can't spend it now. So I'm just going to be on the sidelines. Just so that I'm staying at home, I'm going to stay at home in terms of consumption. So things that have a certain discretionary factor to them will stop. And that, to me, that's psychological too, isn't it? It is. It is. But I would argue that the psychological effect probably will really just kick in a year or two when this whole affair is over and people still are shell shocked and not willing to consume at the same level they did prior to this pandemic. At this point what you're seeing is just a lot of people getting laid off or be fearing they will get laid off, as well as a lot of businesses shuddering down for individual entrepreneurs, you know, owners of small and medium-sized businesses. These are highly uncertain times. So the demand shock is real. I mean, there's a psychological component to it, no doubt, but it is real. We are shutting down the economy in many parts of the country as I mentioned globally as well. Yeah. Then we could discuss this in the context of all of these factors that we need to talk about, the financial factor. But it seems to me that the dynamic that's working under all of this is the time factor. You know, so some people, including Dr. Trump, they believe this is going to be over a couple of weeks. Other people don't believe it's going to be over till August, say. Other people, you know, say, well, it'll take the vaccine. So maybe that's a year and a half. Nobody knows for sure. But we know that, you know, there is a time factor. And I wonder if you could describe how that works. These things, do they get worse? Do they compensate for themselves? Do they somehow improve internally as the time goes on? Do they evolve into other phenomenon that are worse? Well, the other phenomenon that is perhaps the worst is the financial shock. The Federal Reserve has done its utmost to forestall this. It's been pumping money into the economy at an absolutely unprecedented rate beyond what happened in 2008, 2009, 2010. The Fed has really backstopped the whole economy. But it cannot help, you know, individual consumers who are laid off, who might go on an appointment, therefore take a big pick out and otherwise face huge uncertainty. And there's quite a few people who are getting laid off who don't qualify for unemployment insurance in the first place and for a lot of small and medium-sized businesses who are not as involved in financial markets and therefore cannot take as much advantage of the backstop that the Fed has put in for the time being. And as you said, there's a time factor. So let's say this whole thing blows over by the end of May. We probably could get quite a rapid recovery without too much damage done. However, if it lingers on and that does tend to be more likely given what we're seeing in the Southern Hemisphere, so it doesn't really seem to be stopping with warmer weather, which is one series of summer. It's just going to drive it away. It also doesn't look likely that we're going to get effective treatment or an effective exceed in this very short time span. So if it goes beyond May, then, you know, all banks are off basically because a lot of businesses go back, they can really disrupt the economy long-term and then this could ripple back into the financial system. So although you have a backstop, increasingly many borrowers are going bankrupt. They're going belly up. And as a result, the financial institutions are taking a hit as well. They can wall set off to stomachs then out to the government. The Fed as well as fiscal spending will help with this. But there could be enormous disruptions to the financial system in the sense that more and more companies go insolvent and, as a result, more and more of their financial institutions go insolvent as well. And then there's basically going to be a slow motion freeze basically what we've just been seeing in the last two weeks is going to happen in a slower way but in a much more fundamental way and it will be difficult to get out of. Yeah, you know, one thing that strikes me is that we seem to be printing money. I mean, right now, if that is doing it, and I guess the Fed can do that without legislative action because right now there is no legislative action, can that continue forever? And Congress is doing trillions on this. You know, and I'm not sure what they're going to do. That's a huge disappointment to find that they're locked up about that. And I personally blame the Republicans, but that's just me. In any event, they haven't taken action. When they do take action, it's going to involve multi trillions of dollars. Can we keep going like that? Is it a bottomless pit? Doesn't that have a huge fundamental effect on everything? Where is the bottom? Where is the end of it? Where is the last nickel? Or is this something that we can kid ourselves about forever? Well, I think you're going a bit further ahead. At this point, it's probably an excellent idea to engage in massive fiscal spending to get the economy, or at least to keep the economy from falling off an absolute cliff. And then at some point, you probably have to engage in another round of massive fiscal spending to keep the economy moving up again. This will leave an enormous amount of debt. However, what the consequences of that are going to be, that depends on your economic view, on your economic perspective. Some in modern monetary theory would say that we as the United States own the US dollar, where the world's reserve currency, we basically can print money for as long as people use the dollar. And since there's not much of an alternative, that could be a long time. Other than the more conservative side would argue that such massive amounts of debt will lead to ultimate bankruptcy, not only of individual companies, but of the country as a whole. That is a debate we probably should be having a few months from now. At this point, I think it's better to really keep the economy from falling off a cliff. Yeah. By the way, you mentioned that we have the reserve economy. There are people in the last few years, under Trump actually, who have questioned whether we should continue with it. We will continue to be the reserve currency in the world. What effect do you think this crisis has, or will have, or like it, on our position as the world's reserve currency? Again, I would suspect for the short term, not too much. Not too much of an effect, because there's really no viable alternative, unless the Chinese really step up and internationalize to relieve the Chinese yen in the meantime. There's been some comments out there that, you know, they could use this as an opportunity to price oil in their own currency in Chinese yen, especially from the Saudis, because they're now engaging their price war with the Russians. And so the OPEC cartel, basically, it's arrangement with Russia has fallen apart. Everybody's pumping oil like that. The price of oil obviously has been going down a lot. So, you know, there is that possibility. But again, I don't think it's something we should worry about, because honestly, China doesn't look that good as well. They are, you know, just coming out of this pandemic, they're searing a second wave, and they've already seen second and even third waves in places like Singapore and Hong Kong. So, nobody's really out of the woods. I mean, everybody looks bad. So, the state is throwing the dollar as the world's reserve currency, and the Federal Reserve has enacted accordingly. I mean, it's really been pushing dollars into other economies from South Korea to Australia to Brazil. So, you know, there's been very responsible leadership in Washington we don't hear much about. You talk about China, and you are a China expert for years and years and years. You are a global economist. I don't know any other global economist like you, and I really appreciate that, Chris. So, you know, the thing about China is, you know, they have found a way to, I'm sure it's the right way, not sure it's the right way, you know, to send people back to work to start the, at least the supply demand, the supply chain going again. And I guess it has suggested to Mr. Trump that he should do the same thing. But if it backfires, and it may in China, and I think more likely in the U.S., going back to work too early, what happens then? Is the second wave of contagion, is the second wave of economic duress the same or different as the first? It's difficult to say, but I would argue that once you get to the second wave of direct, let's say, the goal in the United States right now is not to stop the pandemic. The goal in the United States is to flatten the curve, to keep the health care system from collapsing under the weight of an enormous amount of patients. And for that purpose, if you look at where the curve is right now, and especially in the place of New York, and Governor Cuomo came out and said, you're probably 14 to 21 days away from hitting the peak, and after you hit the peak, you have to keep up. So we're very, very about to please five weeks in continued lockdown, and it's possible that we'll get away spreading from the coast into the interior of the south of the country that can, you know, long this substantially. So the Chinese were somewhat lucky because of Chinese New Year, which is basically everything shuts out anyway for about two weeks. We prolonged that by another two weeks in many cases for another few more. So they were able to basically get the industrial economy back on track within six weeks, but the service economy in China is still suffering, badly, badly suffering. So China is not out of the woods, not in any way, not economically. So, you know, that we talk about the curve and flattening the curve. We talk about, you know, helping people in hospitals and the medical industry, you know, to service people who are sick and to test them and to find medicines and all that. But it seems to me that that's not necessarily directly connected to the economics, because if you flatten the curve or not, you get the same number, one way or the other, you get the same number of illnesses. And so it's really a question of whether you have enough hospital beds. But at the end of the day, this thing is going to go rampaging through our population nationally and internationally, and it's going to hit the same number of people, either way, flat curve or sharp curve. I don't know if you agree with that. I'll be interested in your view. But does that, okay, good. How does that, how does flattening or sharpening the curve give you a different result economically? Well, for why, you know, I'm not a physiologist, but I do study, you know, dynamic systems basically, in this case, political economies. But the trick is, the earlier you test, the more rigorously and effectively you test, the more you can get a handle on where the disease is, who is a potential carrier, and isolate these people, quarantine these people through contact tracing, and then do effective treatment. So basically, what so far, Singapore, Hong Kong and South Korea have been doing quite effectively. And don't forget, Singapore just today announced they're shutting down their bars. So they actually have been able to go through this without the kind of lockdowns that, you know, we've been instituting, and certainly nowhere close to what the Chinese have been doing, especially in Wuhan. So there is actually a way to deal with this that is less economically disruptive, but that both has failed for the United States. So the trick now is to keep the numbers as low as possible for when you reach that peak. And you're probably right, but at this point, we might have the same amount of people who are afflicted by this, but we just want to spread it out over time so that our health care system doesn't lapse. Economically speaking, you could argue that maybe you want to get a quick peak but then you're going to be killing a lot of people. And just psychologically, if you look at what's happening in northern Italy, I don't think that's going to be very good for the economy long term, one way or another. So I think the human cost here supersedes the economic cost. I just saw this President Trump very deeply on this. And we should keep flattening the curve. Now it's absolutely possible that we'll flatten the curve. We'll go from maybe several thousand cases per day down to several hundred, and then it's just going to go on like that. And then the question becomes, what are we going to do? Are we going to try to go back to work? How much are we going to go back to work? What kind of social distancing measures are we going to use? So these are going to be questions that we're going to be facing within one or two months. But again, at this point, I would say keeping in past some social distancing measures, maybe not going fully overboard and some advocates are going on a total lockdown and doing basically what the Chinese did. They allocated up people's apartments and people's blocks, not letting them out. I mean, basically putting them in prison. I think that goes too far. And I think really what we need to do is get testing going. And that is just, for what I've seen so far, for all of us, but especially the medical community, that has been a massive failure. And you get, you know, city-level measures that have not gone directly to the South Korea. Why 500,000 tests? Well, it's probably what we should be doing, but we should probably have our, you know, 30 million tests for this next month for April. We need to test about 10% of our population to get a handle on this. Yes, agreed. You know, the other thing about this is, well, I'm going to give you a hypothetical. My hypothetical is, say, at January 1st, within a year, the curve goes way flat. And that there's hope. There's medicines. There's new techniques, new ways of containment, whatever we need, we find. And we start going back to work. My question to you, and, you know, I just can't visualize this, but I'm sure you can. How does the economy knit back together? What starts the recovery economically? How does this sequence work so we get back to normalcy economically as a national economy? Well, this was, as I mentioned before, you could have a situation where the economy really, really crashes and then kind of bottoms out for a few months. And one, as you said, one thing, you know, when people's psychology change as well, and, you know, maybe there's a vaccine, but at least there could be more effective treatment and then the case flow really diminishes to an extent that the healthcare system can deal with it. Once you reach that point, there is going to be somewhat of a snapback, just people, there's going to be some pent-up consumption and people going back to working and off itself will change things. You know, all of them gas consumption is going to go up and things like that. But at that point, the economy still is not going to be back to normal and probably what you would need is a massive infrastructure spending and indeed an income replacement policy yet again. So at that point, probably the only thing that really could jumpstart the economy is fiscal spending, even though our interest rate is already at zero and supported by the Fed. So you could even issue special-purpose bonds that are not, you know, on the books of the Treasury directly. There are some infrastructure banks or some UBI, Universal Basic Income Bank, that issues these bonds directly to the Fed. The Fed basically monetizes them, buys them up, you know, eight of money. And that's how you get the economy back on track and you worry about how this all plays out later on in terms of the debt that's been accumulated. And we should do that in the international coordination. So every single country on earth should be doing this at the same time. Yeah. But what about, you know, that period before we get to this bottom-out point? I mean, do you see, and the bottom-out point, you know, on the way up, by the way, sounds like a new deal to me, FDR all over again, WPA, all that. But, you know, before we get there, are we going to be in what existed before the new deal kicked in here in the United States? Are we going to be on soup kitchen lines? Are we going to be out of work, out of homes, out of money? Are we going to be suffering the same way we did in the Great Depression? Well, I hope it's going to be better. For the simple reason that a lot of our policymakers and academics have studied the Great Depression. And the Federal Reserve has been doing things that are quite the opposite of what the Federal Reserve did in the Great Depression so far. So it's really put a backstop under what would be immediate freezing up of the financial system. But as I mentioned, as you get more and more bankruptcies and layoffs and unemployment going through the economy, the specter of the freezing of the financial system rises again. And at that point it's going to be more difficult to counteract it. So what you need from the federal government are very sufficient income support going beyond unemployment. Obviously they're thinking about this. But the system we have is not set up very well to do so. A lot of European countries have a system where basic companies, formal people, and the government takes care of 80% of the salary. And these people technically actually stay on the payroll. So as soon as things move back to normal, companies can rehire them. And it's much less disruptive to the economy. We will need to see how much we can do to create a somewhat similar situation in the United States. But ideally that's the way we should be going as we kind of bought them out. So we need to keep people on payroll. Otherwise, as you said, you're going to have mass individual bankruptcies. Most of the bankruptcies are small and medium-sized companies that could trickle up the food chain, go to big corporations, go into the financial system. And in the end, yes, we end up with a great depression. But I really do hope we don't get there. And so for the moves by policymakers, at least the Federal Reserve have given me some cause for optimism. I have many more questions for you, but we only have a little time left. I want to ask you my most interesting question to an economist. The depression, why does the word John Maynard Tain's company created a new kind of thinking in economics? New economic concepts, new way of looking at national and global economics in many places. So do you see that happening again? And my question, to go one step further, is it happening already? Are economists thinking new concepts here in a new time? Yes, it's been happening actually since the global financial crisis. I mean, to put it quite succinctly, we're all Keynesian again. So you mentioned whether we're going to have a new economy in economics. I think actually we're going to revive, and in many ways, revisit Keynesian economics for the simple reason that the neoclassical credo would be telling people to do nothing at this point. And just let the economy collapse and clean it. This is exactly what people were saying under Hoover in the early 1930s. We're not doing that. I mean, Congress is debating a $2 trillion fiscal stimulus. This is the biggest in US history, at least in one single item. It had bipartisan support. They're going to get it done. There's obviously a big difference about how to do so. And some of the debates are relevant and should be had. I don't think doing a massive corporate giveaway will help the economy. Most of the money should be spent on workers directly because those people would be suffering first and those are the people who consume. And that's how you can avoid a massive demand shock that's worse than what we're going to be having anyway. And then you get modern monetary theory that I just mentioned, which is basically Keynesian on steroids. It says we have a reserve currency. We can print money out into e-commerce. And yes, that's actually what we're doing right now. And the consequences of that... I really don't know. Some people would say it's going to cause massive runaway inflation or we would end up, so we'd end up in the 1920s in Germany. Others are saying we could end up in the 1970s, so we could have inflation but no growth and very high unemployment. And that is indeed the possibility. And the third group would be saying, no, this is good. This is what we need to do and we won't be getting any inflation because the demand shock is going to create a deflationary spiral. So prices are going to drop across the board, except for some things like face masks, for example, right now. And we're actually on safe ground. History will tell us. This will be the case of the 1920s. And it will transform economics but don't ask me how. We'll ask you how later. We'd like to keep up with you, Chris. And I would like to check in with you from time to time to see how this fantastic shift in global history and economics works out. Chris McNally, global and political economist, par excellence at Chaminade. Thank you so much for joining us, Chris. That's it. Thanks for having me. Aloha.