The coronavirus cash crunch

This recession is affecting strong and weak firms alike.

Phil Mullan

Topics Politics UK World

The UK Treasury’s number one priority, with support from the Bank of England, must be to get unlimited money swiftly to businesses and individuals who are losing income because of the government’s coronavirus containment measures. This applies both to providing firms with cash to avoid bankruptcy as well as to ensuring that all their staff – employed, self-employed and gig workers – continue to be paid when they go into unpaid quarantine or are laid off either temporarily or permanently.

But however successful the government is in this vital support task, the British economy is already in recession. And the more extensive the lockdowns are, the deeper the immediate falls in economic activity will be. Some of the lost enterprise will be compensated after the pandemic by the ramping-up of production. Some will be irrecoverable: not all the abandoned cinema, concert and theatre outings, restaurant meals or travel will be made up later.

Long before the Covid-19 outbreak many economists had been correctly anticipating another downturn. This has nothing to do with Brexit, either. Britain, like most other advanced industrial countries, has been in a state of precarious sclerosis ever since the stabilisation which followed the financial crisis. Western economies have been producing too little new wealth for decades. They were only functioning as well as they have been by borrowing from the future. Now this precarious, debt-dependent economic life has suffered a sharp and unexpected disruption.

The collapse is largely due to a cash crunch. At the moment this is primarily a cash-flow recession, rather than a ‘balance sheet’ recession or a classic ‘crisis of profitability’. Rarely has the ‘cash is king’ adage been more apposite. Hence, the ubiquitous search for liquidity, and the strange happening of gold – a traditional safe haven in a crisis – falling in price. Some institutions are selling everything they can, including gold and ‘safe’ government bonds, to obtain cash.

Journalists and analysts have already begun to speculate over the longer-term economic consequences of this recession. Some ponder if there could be any economic upside from this health crisis and human tragedy. For instance, part of the froth has already been blown away in the financial markets. For years, equity markets have been pushed up and up, courtesy of easy monetary policies.

Many recognised this as a bubble waiting to burst. Now, after falls of about 30 per cent, with possibly more to come, lots of company shares are perceived to be ‘fairer’ priced. Financial Times columnist John Plender flagged this up as ‘good news’ because ‘risk is no longer as seriously mispriced as it was earlier’. It is suggested this shift could ameliorate one source of financial instability – even though it comes at the expense of devastating many people’s pension funds.

Similarly, loose central-bank policies had for years blurred the distinction between corporate debt issued by strong and by weaker firms. Now prices and yields have started to discriminate a little bit more between companies with different prospects for survival or failure (subject to the common drive for institutional liquidity). Some conjecture that such alleviation in asset ‘mispricing’ might assist the better allocation of resources after the recession is over.

A few commentators are going further and wondering whether this whole affair could act like a world war in forcing economic transformation. Even if things don’t go quite that far, the destructive implications could still be profound. For instance, Marc Ostwald, chief economist at ADM Investor Services, explained that a degree of ‘catharsis’ in credit markets would be a ‘painful but not bad thing from a longer-term perspective for a world mired in debt’. A rise in corporate defaults could have a cleansing effect, clearing away beleaguered, loss-making firms – so-called zombie companies – that have overextended themselves with state-promoted debt.

The Bank for International Settlements defines zombie firms as those which, over an extended period, are unable even to cover their debt-servicing costs from current profits. More colloquially, zombies are companies that earn just enough money to scrape by in meeting their operational overheads. They generate no spare funds to pay off their debts, and some of them rely on increasing their exposure to banks and debt for their life support.

Zombies have no means of their own to invest in new technologies, thereby holding down the productivity levels which, over time, underpin our incomes and living standards. More significantly, just by continuing to exist, these zombies take resources and revenues from stronger businesses, inhibiting the latter’s capacities to invest, upgrade and expand. The deadening impact of the zombies smothers creative impulses and chokes up activity. This economy-wide congestion effect has been an important driver in weakening productivity growth over recent decades.

Insolvency experts – who of course have a direct commercial interest in this – are suggesting that the ‘coronavirus recession’ might make a difference here. It could kill off struggling companies that have only survived this long because of the super-low interest rates. Might this recession be the catalyst for dispatching those living-dead firms that have been clogging up the economy for so long?

It is helpful to start such forward-looking conversations now, not least because they break from a myopic obsession with the immediate economic chaos. However, with regard to fixing the zombie economy, because of the character of this self-generated recession, it is unlikely to have a precise effect in cutting out only the deadwood.

This cash-flow recession is affecting just about every firm, starting with the hospitality, leisure, retail and travel sectors, whatever their specific level of commercial robustness or fragility. When people are mostly staying at home, or only going out to work and back, lots of over-the-counter takings disappear. As a result, firms quickly become unable to pay their employees, their suppliers and other operating expenses. The ripple effects mean that the cash crunch spirals across the business world.

All of this impacts on sturdier as well as zombie firms. Workers are already facing tough times with layoffs regardless of the strength or otherwise of their employers. No doubt many businesses that were already contemplating contractions or insolvencies will use the virus circumstances to implement these decisions now. Carphone Warehouse and Laura Ashley are among those to announce closures this week. But stronger businesses are feeling the cash effects just as quickly.

Only the relatively few companies with big cash reserves can continue to pay wages and other bills with some ease. But even those resources can become stretched if the lockdown lasts more than a few weeks. The survival of most firms in this recession will therefore depend on the government’s ability – or not – to deliver on all those ‘whatever it takes’ pledges. If governments fall short, difficulties will intensify quickly across the board.

Whatever happens – effective emergency government relief to firms and individuals, or mounting corporate collapses because of the government’s failure to deliver – it will be hard to distinguish zombie firms from solvent but cash-stretched businesses. Either the zombies will be protected by the same state support measures as viable businesses, or strong and weak firms will go under together. Thus it is unlikely that this recession will, on its own, resolve the zombie problem: certainly not in an easy, smooth manner, where the ‘bad’ go under and the ‘good’ survive and prosper.

Another economic matter we should start to consider is to what extent things return to the ‘new normal’ after the recession. By ‘new normal’, I mean the sclerotic, debt-based, state-dependent economies that have predominated in the West, particularly since the 2008-09 financial crisis. Or will some containment-induced measures and behaviours persist longer, for economic better or worse? Economic crises usually bring change and this one is unlikely to be different.

For instance, will we be allowed to return to undertake previous levels of consumption and travel? Or will the experience be used to accelerate aggressive measures to combat climate change? Will companies avail of working-from-home practices to cut back further on office costs? Or will they invest in high-tech virtual meeting rooms to make video-conferencing easier to conduct, saving some people wasted travel time going to meetings? Will supply chains actually become diversified, as so many business continuity plans had (unreliably) assured was the case?

One guide for such forethoughts is to distinguish economic factors caused by coronavirus-containment actions from pre-existing trends. Both developments can have longer-term effects, but they will have different dynamics.

One important example is how will the coronavirus-accelerated resurrection of government fiscal activism pan out? The acceptance of an enhanced economic role for the state has been building for some years. Now that it is being realised openly in the USA, Britain and even in ‘balanced budget’ Germany, how quickly or slowly will this run into its old troubles?

Little that is economically fundamental has changed since ‘Keynesian’ state spending collapsed under its own contradictions in the 1970s. But the political conditions in the West are now very different to then, potentially giving governments a lot more room to manoeuvre economically in the post-virus world. One consequence could be the opposite of ‘killing off the zombies’ if state subsidies and other financial support for business become even more widespread than before Covid-19 arrived.

Phil Mullan’s new book, Beyond Confrontation: Globalists, Nationalists and Their Discontents, will be published by Emerald Publishing later this year.

Picture by: Getty.

To enquire about republishing spiked’s content, a right to reply or to request a correction, please contact the managing editor, Viv Regan.


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Morona Virus

20th March 2020 at 9:59 am

It is hard to see how every crisis of capitalism is not in some sense a crisis of profitability given that capitalism is a profit-driven economic system. Obviously I am not going to attempt some grand mathematical equation to demonstrate the necessity of that ultimate outcome. Capitalism has already ceased to function as a profit system. Businesses survive not because they are profitable but because the state supplies them with a ready stream of cheap money to make up their profitability and to keep them afloat. The ‘zombie’, unprofitable and low profitable economy is first and foremost a problem of profitability. Zombie-ism is not caused by state support, rather it is maintained by it, in the sense that capitalism is now maintained by it. You now cannot have capitalism without zombie-ism. Capitalism is dead, or living dead. It is on constant and permanent life support. It has ceased to be a progressive economic system that is able to improve the quality of the means of production, through profitability and investment, and to raise real wealth and living standards.

Productivity growth has been in constant decline for forty years in mature economies and it has flat lined at zero for the last 12 years since 2008. Capitalism is done. The capitalist states are just doing more of the same in this crisis, lower interest rates that are already at historically low rates, pumping hundreds of billions into unprofitable businesses and bringing in addition workers for some overall growth. It is out of tricks. It is already doing that and there is little more that it can do to make any difference to the downward trend. Capitalist states are borrowing from the future to prop up the present, not as a temporary measure but as a permanent strategy. The outcome is going to be more and more zombie-fication. It is not a strategy to improve the situation but to perpetuate the situation. It is the desperation of an already living-dead economic system.

At some point civilisation is going to have to look to replace capitalism with something else, which will likely be socialism as the only other option. The economy is already heavily socialised with state life support for businesses, and it will largely be a matter of admitting that the economy is already fundamentally socialised rather than functioning any more as a profit-based capitalist system. But the resistance to that will be immense, and a lot of private interest is invested in the continuation of an economic system that stratifies wealth. So I expect a continuation of the same; likely it would take a complete collapse to focus minds but even then it is doubtful. Habits are hard to break and people can tend to confuse the social status quo with ‘reality’ rather than with an historical, social construct. So, no mathematical models here but the trends do look pretty stark. Capitalism has not recovered from the 2008 crisis and it remains to be seen whether it will survive this one. There seems to be little hope for any improvement in any case.

Melissa Jackson

20th March 2020 at 10:20 am

I agree with your analysis, but you are missing a critical point – State intervention into free markets is what creates zombie companies. State intervention into money supply creates “cheap” money. State intervention distorts risk perception, which encourages dangerous decision making.

The problem is not capitalism, it’s that our governments just can’t help but meddle with it.

The problem of zombie companies can only exist because the landscape of lending is not a free market. Who the hell would lend to a client who intends to use it to pay other creditors? In a free market, no-one. It’s just too risky. But the risk is hedged out by the government, such that ridiculous lending is profitable.

We have seen negative bond yields appear over the past decade – Paying people to borrow money, effectively. Does that sound like a capitalist approach? Or one that the paws of central economic policy is all over?

Morona Virus

20th March 2020 at 12:48 pm

Well yes, that is the crux of the matter. The situation of falling and vanishing profitability is stark. Capitalism is on constant life support in mature economies throughout the world. Not just in this or that country but experts in all of them have determined that state support for capitalism is the only way to go. From USA to UK, from Japan to France to Germany, to Australia and back again, economic experts agree that there is no alternative to massive state support of businesses. That is our situation. Productivity growth has been downward toward zero since the 1970s in ‘mature’ economies across the world, and it has flat lined at zero since 2008. Experts have no solution but to continue with the same measures of state support. Governments everywhere are in agreement that there is no alternative but to continue policies of historically low, zero or near zero, interests rates; massive periodic bail outs of banks, sectors and businesses, or of entire economies like now; the constant introduction of additional workers from abroad to scrape some overall growth in the face of zero productivity growth.

I do not claim to be an economist or to have the ultimate mathematical model that explains everything, I merely observe the trends and acknowledge the agreement of the experts. Life support is necessary now to capitalism and the alternative would be a complete collapse of the global and local economy. State support is not the cause of the situation, rather it is the only measure found to avoid collapse and to perpetuate capitalism for some further, indeterminate and unclear period of time; they perhaps fancy that capitalism can avoid collapse indefinitely with these measures, and only time will tell on that one. You on the other hand suggest that the experts, and governments throughout the world, have simply got it wrong; state support is not an essential support for capitalism in the face of falling productivity growth and falling profitability, rather it is the ’cause’ of the zombie economy. The patient, global capitalism, is not on life support because it is decrepit and failing; rather it is decrepit and failing because it is on life support; the thing to do is to switch that life support off, and to let the patient get up out of that bed and get back on his feet. “Pick up thy bed and walk”, as Je sus put it. Well, I do not claim to be an economist, let alone to have a better and ultimate insight than all other economists, but the consensus of experts and governments seems to be that that would be a disastrous course to take.

One might add, that even if you were correct and that state support was a bad idea in the first place, it may nevertheless now be necessary as a consequence of its own effect, and that it would still be disastrous to withdraw the treatment after it has continued for so long. A patient long on a treatment may be in a very different condition than if had never had the treatment in the first place.

To summarise, we are in agreement that capitalism is no longer functioning as capitalism; the experts insist that is unavoidable; you argue that there is an alternative, to go back to capitalism; the experts and governments say that would be a disaster. I suggest that capitalism has run its course, it has ceased to function on its own terms and states have had to resort to an increasing socialisation of the economies in order to avoid collapse, with increasing state support and supervision of the economies. Capitalism is decrepit, moribund. Its day is done. It is dead, or living-dead. The only thing that remains to be seen is how long this patient can remain in its vegetative state without any vital signs of life. How long before we sign the death certificate and flip the switch. We have another option in socialism, which would be an acknowledgement that the economy has gradually become socialised, that capitalism has evolved into socialism, into a socialised state economic system. Once we do that, we can fully socialise and reorganise the economy on the terms of its new socialised reality, rather than imagining that we can wipe out two centuries of economic history and revert back to capitalism in its incipient ‘free market’ period. We will have to accept the course of historical social and economic evolution, rather than attempt to get into some time machine and revive early capitalism. We will have to be non-dogmatic and historical, and work with the course of history, rather than attempt some ahistorical dogmatic idealisation of what was only ever temporary and transitional in historical evolution. Forwards ever, backwards never.

steve moxon

20th March 2020 at 2:24 pm

‘Capitalism’ is an abstraction from what is just trade.
It’s no magic system bogie as the Left’s religiosity couches it.
Sure, it’s complicated. Trade is complicated when you get beyond such as exchanging a surplus of hand-axes for surpluses of arrow-heads.
Quit making a religion of politics.


20th March 2020 at 4:58 pm

Absolutely Steve. We’re not living through the ‘death throes of capitalism’ or anything like it. We’re in a phase when the problems and challenges of running a market economy are clashing with the imperatives of democratic government. The crash of 2008 was so bad largely because governments had relaxed controls on the market. In this country it began with Thatcher, the final shackles being smashed by Gordon Brown with his enthusiasm for ‘light touch’ financial regulation. At the time the Tories only reaction was: ‘you’re not going far and fast enough’. At the end of the twentieth century the US repealed the Glass-Steagall Act, largely to make sure that New York wasn’t left behind by London. Before those changes, with merchant banking split from high street banking, the only consequence of a merchant bank going tits up was likely to be a number of wealthy individuals losing a lot of money. Boo hoo. But when the crash came the high street ‘real economy’ banks were totally bound into the merchant banking system, and all would have come crashing down together. Northern Rock, for example, was pissing about with fancy financial instruments that were wholly inappropriate for a retail mortgagee. Pumping huge quantities of cheap money into the economy has certainly kept the economy going, but it has also kept ‘zombie’ companies afloat and inflated the value of assets (in this country especially housing). Nevertheless, it was clear at the time that the threat to democratic societies of letting the market sort itself out was too big a risk for democratic governments to take. Heavens alone knows how and when a more sensible and reasonably stable system can emerge, but if it’s socialism or anything like it then I’m the next Dalai Lama.

Gareth Edward KING

20th March 2020 at 9:30 am

Yes, I agree totally with Steve’s assertions above, yet the UK’s response has been muted in contrast to the rest of Europe. There has been a total lack of a sense of proportion. In Spain, there have been 14,000 Covid-19 cases with c.800 dead, in Portugal: 465 cases with 2 fatalities! Yet both are ‘locked down’. The Spanish government has injected 200 billion Euros to help the ailing economy which is now in tailspin! It was already unproductive and heavily in debt. With Brexit (at last!) and the ‘missing’ c.21 billion Euros annually from the EU’s Budget, Spain will enjoy a reduction of c.16% in subsidies received from the EU’s largesse in term of the CAP. Sánchez was already having problems from the agricultural sector before Coronovirus hit at the end of January. Spain’s GDP in association with agricultural production is at EU levels c.3% of GDP, with subsidies seriously reduced, I can’t see how this anomaly can be maintained. Spain’s agricultural production was ‘out-sourced’ to Morrocco at the EU’s behest, if I remember correctly.

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