THIS pandemic invites concerns and discrepancies vis-à-vis its magnitude of social and economical implication, causing variations in economical response from different countries to counter the predicaments the pandemic had introduced.

There is, however, one obvious consensus, that is the need for stimulus initiatives from the government to help businesses and individuals to weather this ongoing health crisis, especially to keep food on everyone’s table.

Looking across the ocean at many stimulus programmes, one may find multiple similarities as many of them include one-off or progressive cash handouts; tax cuts and/or deferments; or financial assistance via the form of soft loan to corporations, in the hopes that the wilting economy gets a strong backdrop and stays resilient amid efforts to contain the outbreak.

Nevertheless, in countries that shy away from a robust job protection scheme (JPS), serious economic repercussions will entail, and will potentially further exacerbate this prolonged crisis where businesses have to deal with an unconventionally and impulsively weak and movement-discouraging market condition.

The start is a natural deflationary pressure triggered by a limitation in mobility, hence, an adverse impact on business activity and revenue that causes a severe drop in consumption.

Now this is a crucial point, while cash advances, one-off or progressive one, can temporarily alleviate the cash flow problems for people to satisfy basic needs or settle their debts repayment, thereby supporting demand mildly, remains to be insufficient when it doesn’t protect them from massive layoffs and job losses.

One also has to question the lacklustre effects of these direct cash support and its intended durational and economic impact. The reality is no governments of the day can effectively restrain private enterprises from not firing, legally or illegally, when they have legitimately suffered losses and workers have no bargaining power in terms of securing their jobs.

We witness a worrying trend of dramatic increase of unemployment, piling to tens of millions in the US despite a US$2.2 trillion stimulus plan. Therefore, without a direct and punchy intervention from the government in providing a robust JPS, that instil confidence within the business communities to retain their workers for the benefits of their own when the economy restores to normality, business owners will do the contrary, albeit with a possibly sombre heart, in efforts to salvage their business and wealth as they see their business numbers dip to an unseen bottom.

Many JPS rolled out are at best lip service than what is truly required by businesses and the economy. A commendable model is Singapore, where it provides an up-to 75% wage support programme running across 9 months. However, even with such robust and supportive JPS in place the direness of businesses dying cannot be fully evaded as the nation recently recorded the highest number of bankruptcies, individual and corporations, since 2004, exceeding the same during the 08-09 financial crisis.

As soon as majority in the business communities replicate after their peers in termination of their workers, a vicious cycle begins. This becomes the new norm as deflation and recession officially kicks in. Spenders will act extremely frugally and economic growth will be marred.

Soaring unemployment will cause shortage and reduction in consumption of goods and services, and forces each business owner to undercut each other in their pricing in order to survive. The worst-case scenario is this persisted price war will eventually hurt their own wealth, on top of all the possible loans they have undertaken, if they resort to predatory pricing in order to retain market share.

Soon many businesses will be forced to cease operations, inflaming further the already horrendous supply disruption by reducing competition and substitutes, and the other ugly side of the coin would see entrepreneurs with the deepest pockets gaining monopolistic market share.

This upends benefits like lower prices and diversity of substitutes that result in consumers having a better standard of living. This makes unemployed workers at an even worse bargaining position in wage negotiations when they seek re-employment and they will face immense competition from an oversized labour market.

Can the government then nationalise these new monopolies as a temporary measure and provide everyone a job when it is constrained by a habitual fiscal deficit and growing debts? Will constant monetisation of fiscal deficit solve the problem or worsen the debt bubble, especially in emerging markets, like Zimbabwe, Argentina or Venezuela, which are beleaguered by hyperinflation?

This means it is probably wiser to leave to the mythical invisible hand of the market and maybe the government can intervene and provide fiscal or monetary aid to spur demand, in the hopes of causing reflation and potentially reigniting the needs for employment.

There is another inherent danger. It is clear that lockdown measures slow economic growth due to physical constraints, and demand and supply are equally oppressed.

However, we see a constant revised monetary policy to the lower end of the spectrum to anticipate unguaranteed consumption. Its effectiveness on the economy is questionable at the material time, to spur demand, create or secure job opportunities.

In light of high volatility and uncertainties on the future outlook of the pandemic, no one can give a clear answer on the eventuality of this health crisis. Where will this new liquidity go? For businesses, the danger lies at the potential wastage of precious cash flow into operation expenses, especially when it is clear that the demand of their business production is oppressed by lockdown.

Businesses that still make a profit during lockdown will see no need to be exposed to extra debts and liabilities and make unnecessary investments when the future is uncertain. We see a revival of the bull market in the US stock market, probably contributed by hot cash created by low interest rates, but they do not help to save jobs and lift the economy out of recession.

The point is, the lowering of interest rate must be used at the right time. When the market reaction does not reciprocate the dropping of interest rate due to external factors, it is simply an act of dumping a good hand as it diminishes the remaining gas or bullet at the disposal of the Central Bank, reminding a jest of, how low can you go?

Is it possible to lower it into negative territory? It is uncharted water that must be stewarded by global prime leadership, which is something we seriously lack.

The reckless lowering of interest rates at the wrong time will see jolted demand against a disrupted supply chain that sees meagre and sluggish progress to recovery.

Coupled with a near certainty that these new monopolies will take their time to meet these surging demands in order to gain maximum profit, serious demand-pull inflation will ensue and possibly the same old conflict of capitalists against the proletariat.

In fact, this sounds awfully a lot like an economic phenomenon called stagflation, coined to describe a convergence of two seemingly unrelated phenomena, a recession and serious inflation.

In such a situation, the government will face a serious dilemma in deciding the appropriate countermeasures as an adjustment in interest rates in either both directions will mean putting salt in either corresponding wound. The longevity of this trouble will depend on how quickly growth resurges and reemployment restores.

There will be, presumably, an uncertain period before beaten businesses return and provide competition for the benefit of lower prices and job opportunities. The deep pockets also will be conscious in spending or would even prefer to secure their wealth in foreign asset havens in light of the bleak domestic economic landscape.

Such behaviour embitter those hoping for trickle-down economics to work. The governments in deciding successive stimulus packages must not take one step forward and many steps back. 

Also not to forget that this pandemic is a global problem. In a wider context, no one economy can operate at full utility and potential when the rest of the economies remain to be chain-locked and plagued by the pandemic. That is why it is entirely perceivable to expect the emergence of new monopolies in emerging markets, especially with their paths cleared by the lack of competition from both domestic and international players. – May 5, 2020.

* Alex Kong reads The Malaysian Insight.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.