CORRESPONDENCE FROM AUSTRALIAThe economics lesson "taught" in the Southern hemisphere, during the pandemic

Eugen Ionescu (TRANSLATED BY COSMIN GHIDOVEANU)
English Section /

The economics lesson "taught" in the Southern hemisphere, during the pandemic

In the battle with Covid-19 virus, various policies have been adopted around the world, of which I would mention the two extreme positions. Thus, some states followed the Darwinian theory of "Survival Of The Fittest". Others considered human life to be higher than the economic cost and opted to suppress the virus.

With the mention that those countries as well have made efforts to provide healthcare at the highest standard, while encouraging and propagating preventive measures in society, in the Darwinian category I would include Sweden and the USA, where the number of infections and deaths reached very high levels. The justification for the policies adopted was the very high cost of shutting down the economy, even for a limited time. Indeed, I do not know if anyone has calculated the cost of quarantine and hospitalization of millions of citizens (where, of course, there are still places in hospitals), those who die in intensive care or because the health system is collapsing. Not to mention the "contribution" of deniers and those who do not respect the health rules, thus contributing to the suffocation of the hospital system ...

The situation in Europe is obvious to everyone, with the peoples of the "old continent" facing a second wave more catastrophic than the first. And in Romania it seems to me that it is even worse, as half-measures are being tried, the government seeking to invoke a tolerable state of infections and deaths in order to hold parliamentary elections in December.

Things were done differently in the southern hemisphere. Australia and New Zealand have passed the policy of eliminating the virus at any cost. Like in most countries across the world, the virus was also imported via tourism - especially from the cruise ships which brought in infected travelers from various areas of the world.

The population obeyed, the effect occurred!

The Australian prime minister has said from the outset that in the fight against the pandemic, the budget deficit no longer matters, and the cost "will be as high as it will be." Draconian measures were introduced: "total lockdown", total closure of the economy - except for shops and food markets, drug stores and utility services. The population was forced to quarantine at home.

Only one family member was allowed to go shopping. A one hour walk per day was allowed, no farther than 5 km from the home. Leaving the house after 9 p.m was prohibited. Visits - completely forbidden, wearing a mask - mandatory from the time of going out the door, punishments - just as draconian, AUD 1500 minimum fines.

The country was shut down, and citizens returning home from abroad were quarantined for two weeks in hotels to prevent spreading within the community.

Nota bene: in the first six months, staying in the hotel was borne by the government.

Every infection case was tracked to identify the source of the infection, and when it was not found, it was classified as "a mystery case", which would continue to be tracked by the authorities. Free testing centers were set up and every citizen was encouraged to test themselves, on the most insignificant symptom, be it a simple cold. For instance, in Melbourne 60% of the population was tested, with the cost borne by the government (many millions), and on November 1st the city no longer saw any case of infection.

Social peace and financial skill

In order to avoid a collapse of the functioning of the society, the government paid to each citizen whose economic activity was stopped via government decision an amount of 3000 dollars per month. Thus, social peace was ensured, guaranteeing each family their daily lives. There were also losers, such as temporary workers, citizens of other countries or owners of commercial space who could no longer collect rent. The government also compensated them to some extent by offering them various tax breaks and some aid in the form of working capital. However, those owners came out of the pandemic with quite large losses, which they eventually accepted.

Specifically, it is mainly money borrowed by the government on behalf of the people. It is estimated that several generations will have to pay off these debts. Since all countries, from all over the globe, have had to resort to loans, the question many ask is where does this money come from, as the world banking system does not have such a capital surplus?

All of the aforementioned efforts have so far amounted to costs for the Australian economy of around 15% of GDP. Specifically, it is mainly money borrowed by the government on behalf of the people. It is estimated that several generations will have to pay these debts. As all countries, from all over the globe, have had to resort to loans, the question many ask is where does this money come from, as the world banking system does not have such a capital surplus?

The first thing to mention is that the global interest rate is very low, so the cost of borrowed money is very low. In Australia, the governor of the national bank has said the Bank was willing to buy unlimited amounts of government bonds or bonds issued by banks to finance the economy. Where does the central bank get so much money from? Simple: it prints it.

What implication does the massive increase in liquidity on the market have on the economy? This form of financing has a negligible influence on the internal market, because the amounts paid by the government to citizens to stay at home are overall lower than the income they would have earned had they if they were employed in a productive activity. It can be said that these payments did not put pressure on demand, thus not being inflationary. Citizens spent mostly on food and utilities, industries that saw no declines. In Australia, agricultural production has even reached a record high!

Where can the negative effects be felt? On imports, should their level remain constant, while export demand decreases at the same time as the economic decline in the countries which Australia exports to.

In conclusion, the Canberra government can pay off long-term debt by rolling debt to the central bank indefinitely and possibly by creating inflation, which would have the effect of increasing government revenues. At the same time, the debt remaining constant, it is diminished by devaluation. I think the Australian government's policy has been very creative and without major long-term negative influences. In addition, there is the advantage of maintaining, for the time being, a sufficiently high level of exports of raw materials and agricultural products to protect the foreign trade balance.

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