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The coming economic winter

The Coming Nuclear Winter

by Victor Adams

We don’t know the specifics on the financial impact of COVID-19 yet, but the signs are pointing to something akin to a financial nuclear winter. Anecdotally, I know an American renegotiating a commercial lease in Bangalore, India[1]. The US firm is offering to stay for a 50% rent decrease. The landlord thinks that will probably work. If you’ve ever tried to re-negotiate a commercial lease, this doesn’t happen. Period.

COVID-19 is clearly a virus, and a clearly dangerous one for certain groups of people. Whether it was hatched in a lab or is a naturally occurring virus isn’t germane for the purpose of determining its financial impact. After all, if anyone really believes that China is going to pay reparations for the virus’ impact, well, we’re nearly 20 years into the 9/11 lawsuit against Saudi Arabia. I’m not taking a side on the moral justification, just the reality of the thing.

But let’s get back to the commercial space in India. To understand just how deep this rabbit hole goes, you have to walk with the money through the lifespan of the transaction. In India, the landlord’s income just dropped by 50%. That reduction will trickle through his own commercial ecosystem. The HVAC repair guy, the plumber, and all his vendors are going to have to accept lower bids for the same reason the landlord did; that business has dried up. That’s less money for each family and their ecosystem. The government is now collecting less in taxes from the landlord and his vendors. How could a government support social programs (for their record unemployed) when they’re collecting ½ the amounts from personal, corporate, and service taxes?

In the US, the renter’s side of the ledger, corporate profits are down so spending is down. This means hiring freezes, layoffs, or the suspension of internal bonuses. Reuters published an entire article in May 2020 just on the financial cuts among big law firms[2]. Externally, that means massive reductions in business travel. That means airline staff, hotel staff, restaurant staff, taxis, and a slew of informal businesses that will see their incomes dry up. Can people afford private schooling for their children if they’re forced to take a salary cut? University tuition doesn’t seem to be dropping. What about that daycare and its employees? Now you’re into teachers, schools, and that associated ecosystem.

And this anecdote leads us into why I describe the after-effects as a nuclear winter. Not only will it linger for years, but this will likely be the greatest widening of the global wealth gap in generations. If you have a fallout shelter, in this case a specific job type or pile of money, this won’t bother you to anywhere near the same extent. And although the haves will always make out better, this isn’t something they did. This isn’t about blame.

The have nots are facing a financial slowdown that could push generations lower on the financial ladder. They won’t even have lateral employment flexibility to go along with lower wages.

Consider that 24-Hour Fitness filed for bankruptcy and plans to close 133 stores. If you’re a survivor of the cuts, what are your chances of making a lateral move to a similarly slimmed down staff at another gym? For that matter, what are the prospects for striking out on your own in search of a shrinking number of people with the free cashflow to support a new fitness concept.

If you’re that commercial plumber or in his ecosystem, everyone just took a 50% pay cut. Corporations are now focusing on remote work thanks to the digital economy, so even if business travel returns, it won’t recover to pre-COVID levels for years.

This is the nuclear winter of COVID-19. An economic malaise that’s going to draw a stark line above the middle class, and widen the wealth gap all the way to Pluto. Which, for the record, should still be a planet.

Can the economy rebound?

To an extent. The most recent GDP numbers look great, and that’s something to celebrate. But if you drop a dozen eggs, you lost the week’s breakfast. If it turns out that 1 survived, why that’s a 100% increase in your egg count! 100% is a lot, but it’s still just tomorrow’s breakfast.

We have to force our leaders to do more, to do better, and do it right now. COVID’s nuclear winter is approaching. We know the impact. It isn’t just going to last for a year or two. The wealth gap doesn’t need more bureaucratic help. Lockdowns aren’t the answer. Ignoring the virus isn’t the answer. Something else has to be done or the response to this virus will be the greatest separator of the haves and have nots since…perhaps the black death itself.

Victor Adams is a retired franchisee, independent business owner, and Siberian husky breed snob. He is the author of the new satirical adventure, The Last One Out, available on Amazon.

[1] In 2018, Housing.com rated Bangalore, India as one of the most expensive commercial markets in the Asia Pacific Region at roughly 28.6$ per square meter.

[2] https://blogs.thomsonreuters.com/answerson/coronavirus-crisis-cost-cutting-and-other-law-firm-responses-to-the-pandemic/

Author of The Last One Out, former entrepreneur, financial analyst, and Siberian husky breedist. Auburn & Vanderbilt alum.

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