Why do world governments address the new coronavirus pandemic in so many ways? Some of them spend billions of euros or trillions of dollars to support the national economy of their countries; some introduce tax holidays and unprecedented benefits to the business. On the other hand, in some countries governments are eager to add more value to their currency by raising the interest rate as well as levying new taxes that hurt the middle class. Why?
Central banks worldwide do not use one single way to address the crisis because of one simple truth – the consequences of the crisis are both common and absolutely unique. As they say, everyone is equally happy, but everyone is unhappy in his own way.
When people are talking about Western countries, they should understand the purpose of all monetary and fiscal incentives that developed economies take into action. The governments of those countries well know that an effective economy needs a high level of trust between all actors.
Businesses want to make sure that potential customers will have enough money to consume their goods and services and businesses will be able to get affordable loans whenever they’re needed. People have to trust their business partners’ solvency and believe in the power of economy, its ability to survive any unforeseen events or crises and support those businesses that are most vulnerable to market turbulence but otherwise can work as usual. Society needs some reserves to survive lower production and problems in supply chains for several months.
Therefore, when the Federal Reserve buys government debts, it tries to regain some confidence. In the atmosphere of all this panic, sell-outs and absence of investors, people should know that government bonds are a very secure tool to save money.
During the last huge financial crisis in 2008, all mortgage lenders were so scared and just stopped their activity; thereby the Federal Reserve began to provide mortgage loans and buy bonds secured by a mortgage. Doing this, the central bank just took all the risk upon itself. It was absolutely important for a country where the average working American still dreams to live in his own house.
If the central bank is sure that cheap money will stay in the home country to support the local economy and will not be invested abroad, it can cut the interest rate. In this situation, people believe that keeping national currency is a good idea.
Trust is a very complicated element of the Social Contract that is more common for developed economies where the main point is the rules, not leaders. To keep the trust, all actors have to make an effort, for example, to save good relations with a partner or achieve a compromise between the society and business. This kind of trust might be a little bit uncomfortable because businesses use the money of others and should think about feedback from lenders and investors.
Rich people know that you need to keep an appropriate level of spending because if you reduce it, you will be on the way to poverty. This step may kill confidence and trust, first of all, inside the team. Of course, it’s a good idea to temporarily reduce costs if the company can live well without it. However, I don’t think that people should waste their time and resources to prepare for the apocalypse here and now.
If you try to save money, you can easily destroy trust and trigger a chain reaction. As a result, the business can lose key professionals and other advantages which in turn might result in a smaller market share, a loss of clients and a decline in revenues.
The businesses that increase spending now can get huge advantages for further development when the economy passes through the crisis. However, only those companies with consumers, staff and key business partners who trust each other can increase spending while profits of all business is in decline.
I think it would be a huge mistake for authorities to underestimate this crisis. For instance, the government of the United States decided to spend two trillion dollars two weeks after the pandemic was declared. If the same measure would be done after a month, even five trillion dollars would not be enough. It’s a chain: the weak firms affect middle size businesses and those undermine the work of huge companies. If authorities do not lose time and do support weak businesses, the price might not be so big and conversely, if big companies fail, the price is much bigger.
In Kazakhstan the local authorities have many tools: foreign currency and gold reserves, as well as the money of the National Fund, can provide Kazakhstan with a huge amount of cash comparable to many developed economies. However, if all the trust is based only on this money, society might not be happy to lose these reserves.
In order to save national reserves, the authorities have to make sure that trust is on a very high level. If there is no trust in the economic policy effectiveness, all the money the government pours into the economy will flow out abroad.
If the society believes that the situation is under control, the businesses continue to work and invest inside the country. If the state fails to get this level of trust, no money would be spent here in Kazakhstan. In this case, the money would simply put pressure on the national currency and capital outflow. This is a result of how people think: “Anyway, business here will be much worse and any investments will be lost, so let’s make investments abroad.”
Therefore, I think it’s very important to correctly assess the level of trust in Kazakhstani society because if it lowers, all economic experiments during a crisis might fail. As a result, everyone would lose; the economy would enter into recession and all the money reserve would disappear.
In fact, the logic of how the economy develops in countries with high and low levels of trust is differentiated drastically. This is why local analysts and decision-makers may come to incorrect conclusions. If you continue to think there is no help, that doesn’t mean that the whole world thinks the same.
In many countries, it’s okay when weak and ineffective companies give up and leave the market. However, modern society should be wise and use all the necessary tools to avoid economical suicide. I don’t think that on the whole this crisis will result in the collapse of any economic sectors or even entire states. Nobody wants this. The society is ready to support those who were not silly and lost money only because of the crisis. It doesn’t want bloodshed; therefore, the bright dawn will be soon. Do not bet against humanity. This bet fails every time.