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Musings Report 2020-11 3-14-20 The First-Order Effects Tsunami Comes Ashore
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The First-Order Effects Tsunami Comes Ashore
Before I begin today's commentary, I want to share a bit about my personal situation. My wife and I are responsible for caring for her 89-year Mom, who lives with us.
Her health is pretty good for someone of her advanced age, but the consequences of her catching the Covid-19 virus would very likely be severe; and so the virus is not an abstraction to me, it is a very real threat.
As a result, we are very aware that if we inadvertently bring the virus home, it may result in the death of her Mom. (The death rate for very elderly people runs between 15% and 80%, depending on how overwhelmed the healthcare system is and the patient's overall health.)
My 91-year old Mom is in an assisted living facility, and while I am deeply worried about the probabilities that the virus will enter her building, there is nothing I can do about it except advise caution and prevention.
We're both over 65 as well, so the goal in our household is not to bring it home and not catch it. We cannot afford to be cavalier, careless or complacent. Fortunately, younger people have a much less threatening risk profile.
OK, let's get started.
I've written a number of posts on the direct (first order) and indirect (second order) effects generated by dynamic non-linear systems such as pandemics and financial markets.
First order effects: every action has a consequence. Second order effects: every consequence has its own consequences.
There are two basic difficulties is assessing the first and second order effects of the Covid-19 pandemic:
1. Incomplete information / knowledge
2. The lack of equivalent pandemics to use as models
Decisions made on incomplete information / knowledge are intrinsically fraught with risk, as even informed guesses and projections can so easily be wrong.
Experience is a great teacher, and so equivalent crises offer useful lessons, if not on what to do then on the limits of reaching conclusions too early in the process.
But there aren't any recent equivalent pandemics to use as models; the closest historical analog is the 1918 flu pandemic, but drawing conclusions on the coronavirus from this one event creates its own risks of incorrectly assessing the key dynamics.
The Covid-19 virus has three features that make it difficult to control:
1. It is highly contagious
2. A high percentage of patients develop severe symptoms that require hospitalization (roughly 20%). A high percentage of these severely ill need intensive care to avoid dying.
3. Once the healthcare system is overwhelmed by the large number of severely ill patients, the system cannot provide care to many and possibly most severely ill people. As a result, the death rate rises the moment the healthcare system is overwhelmed / breaks down.
This is what happened in Wuhan: the healthcare system broke down as the number of newly infected soared, and the number of severely ill people dying due to lack of care skyrocketed. This is what prompted authorities to lock down much of the country.
Authorities around the world face an impossible trade-off: locking down the country to limit the contagion disrupts the economy, yet letting the virus run unabated will eventually disrupt the economy anyway.
A consensus seems to be growing around two responses:
1. Attempt to slow the contagion so the healthcare system isn't overwhelmed, a disaster that generates a very high death rate.
2. Distribute cash to households and interest-free loans to businesses so the lockdown doesn't cause defaults / damage that cannot be restored after the crisis passes.
It's not at all clear that the balancing act between restricting human interactions and economic damage can be optimized; indeed, it's clear that there is no way to completely limit human interaction and therefore no way to completely end the pandemic.
But it's also clear that letting "normal life" continue only hastens the medical catastrophe. Here is a cautionary account from Northern Italy: A coronavirus cautionary tale from Italy: Don’t do what we did.
It's also clear that beyond a certain point, the lockdown causes severe economic damage while failing to eradicate the pandemic.
Here's a case in point: my 91-year old Mom lives in a building with several hundred other elderly people, served by dozens of employees, the vast majority of whom are young (under 40).
Even in a lockdown, the employees will have to come and go just to provide food and basic care for the residents. Given the contagiousness of this virus, and the reality that asymptomatic carriers can infect others without even knowing they have the virus, some employees will inadvertently catch the virus outside and bring it into the building, and some of the elderly residents will catch it.
Since the first wave of infected residents won't know they harbor the virus, the residents will gather in the dining room as usual until the first resident develops symptoms and tests positive for the virus. By that date--days or weeks after the virus first entered the building--a high percentage of the residents will have already been exposed to the virus.
Quarantining everyone in their rooms will be too late to limit the number of people who already have the virus. A high percentage will develop severe symptoms and very possibly die. This tragic result will occur despite everyone's best intentions and a citywide lockdown.
It seems authorities will try to limit the initial wave with lockdowns, but these will have to be lifted when the economic damage becomes too great to ignore. Lifting the lockdown won't restore the tourism trade or pre-pandemic confidence, so the results will be economically underwhelming.
Governments will have no policy options other than printing/borrowing huge sums of currency into existence and distributing it to households and businesses sliding into insolvency due to lost wages and declining sales and profits.
Here's a typical article discussing this option: What Would a Proper Coronavirus Stimulus Plan Look Like?
Clearly, this is the moment to print/borrow several trillion dollars into existence and distribute it to every household and struggling small business.
This won't replace the wages and profits that have been lost, but it will keep the economy on life support.
This is where second order effects start to enter the picture. I will be devoting my attention to these second order effects, including financial/economic effects. Though that may seem callous given the human tragedies and suffering, survivors will still need to deal with the financial/economic fallout.
Financial analysts are united by the confidence that interest rates can only go down once central banks start creating money and buying government bonds.
But this might not be what happens. In a climate of fear and uncertainty, cash is the only truly safe option. Everyone who bought 30-year Treasuries under 1% this past week --a supposedly "safe" investment--just had their head handed to them on a platter as yields quickly rose to 1.59%.
The point here is that in a risk-averse environment, yields may have to rise a lot to persuade risk-averse investors to trade the safety of cash for the gamble of buying government bonds. This will crimp future borrowing and/or trigger rising inflation that will unravel all the assumptions (low inflation and yields forever) currently propping up the global financial system.
There are many other second order effects, both short-term and long-term, that I'll discuss next week.
Highlights of the Blog
Goodbye to All That: The Demise of Globalization and Imperial Pretensions 3/12/20
And Then Came the Lawsuits: Pandemic in a Litigious Society 3/10/20
What the Fed Can Do: Print and Buy, Buy, Buy 3/8/20
Best Thing That Happened To Me This Week
Tested my prevention protocol and found it was was pretty easy and quick. When in confined public places (Target, Safeway, etc.), wear an N95 mask (not perfect but far superior to not wearing a mask), limit touching anything other than what you're buying and your credit card; when you return to your vehicle, disinfect your hands, the interior and exterior door handles, your credit card, wallet, steering wheel, controls, etc. When you get home, disinfect your mask and hang it outside (weather permitting), wipe down the car surfaces you touched just to be sure, and then wash hands and face before entering the house.
In other words, disinfect everything after every trip to confined public places, with the goal being to avoid bringing the virus into your house. (I was the only customer wearing a mask. Nobody wearing a mask on the Chinese bus described in the link below caught the virus. Thirteen passengers without masks caught the virus. That tells us N95-type masks do work, even though they're far from 100%.)
From Left Field
If you can only bear to read three more articles about Covid-19, I would recommend these three:
Coronavirus can travel twice as far as official 'safe distance' and stay in air for 30 minutes -- this is one of the very few fine-grained analyses of precisely how the virus spreads in confined spaces. Even though many questions remain, this study tells us a great deal about the contagion, especially if we read between the lines a bit. How one asymptomatic passenger infected 13 others in 5 hours is worth pondering.
The U.S. Isn't Ready for What’s About to Happen -- this projection is by someone with relevant experience: "I am a former federal and state homeland-security official. I study safety and resiliency issues in an academic setting, advise companies on their emergency-response plans, and trade ideas with people in public health, law enforcement, and many other disciplines."
Coronavirus: Why You Must Act Now -- this is the best statistical presentation I've come across, and the conclusions seem common-sense.
* * *
Top 10 Best FREE WEBSITES to Watch Movies Online (via LaserLefty) -- for those self-quarantining....
'Don't believe the numbers you see': Johns Hopkins professor says up to 500,000 Americans have coronavirus
Are Treasury Bonds Forming Largest Bearish Reversal Ever?
What Will You Do If You Start Coughing?
What Turing Told Us About the Digital Threat to a Human Future
Singapore Was Ready for Covid-19—Other Countries, Take Note
Florence Hit by the Coronavirus: The Curse of Hyperspecialization
The Great American Shale-Oil Bust Turns into Massacre
It is easy to overdo COVID-19 quarantines
Mike Davis on COVID-19: The monster is finally at the door
All that is solid melts into air
'It's Just Everywhere Already': How Delays in Testing Set Back the U.S. Coronavirus Response
"If you have a garden and a library, you have everything you need." Marcus Tullius Cicero
Thanks for reading--
charles |
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