In today's newsletter, we talk about why a lockdown is the only viable strategy we have right now.


The Anatomy of a Slowdown

Before we get to the heart of the story, a quick detour.

Economic slowdowns are not necessarily uncommon. But what we have here right now is a very special case. A slowdown triggered by a collapse of demand and supply in tandem. Let me explain…

Think of all the things you like in this world — movies, pizzas, perfumes, fancy cars, etc. The entities that produce all this stuff together constitute the supply side and it just so happens that they can continue work, on a day to day basis because of two key sources of funding.

  1. Operational cash-flows: money companies receive when you make a purchase.
  2. Credit: Money they borrow from banks, their suppliers, etc.

Unfortunately, when countries go into lockdown, operational cash flows tend to zero. Meaning they will have to rely on credit (loans) from financial institutions to tide over the crisis. And if they don’t have access to a line of credit, they’ll have to dip into their existing reserves. Here’s a handy graph to show you how long each industry can last with the cash buffers they have as on date.

JP Morgan Chase Institute

Yeah, it’s not a good look. So the supply side will have to see some pain when we go into lockdown. But then, we have the demand side to contend with as well. We are talking about people that do all the buying in this country and lockdowns don’t bode well for this lot either. When people don’t get paid regularly, they hold on to their purse strings. And as consumption takes a hit, the supply side suffers a double whammy.

So in essence, the longer we take to contain the infection, the more protracted the slowdown.

And this has led some people to suggest that we are resorting to excessive measures to contain the virus. As one doctor succinctly put it — “Operation Successful, but patient died” (Patient here referring to the economy of course).

So the larger question is this — are we condemning a large base of the population to poverty by choosing to go into lockdown for 21 days or is this an eventuality that we cannot stall anymore.

To answer this we must first look at the containment strategies themselves.

Perhaps the most ineffective and straightforward strategy to implement is to do nothing and let the virus spread.

Now if you are under the impression that this will lead us to a point where the entire population will be infected by the time we are done, then you are most likely mistaken. The thing about doing nothing is that eventually, infection rates will slow down, in most cases. This is because of a transition that happens mid-outbreak.

Think of it this way- In the early stages of an epidemic, there are lots of susceptible people — people who are likely to catch the virus. As a result, the number of people who become infected each day is larger than the number who recover, and the epidemic grows. But once a sufficient number of people are infected and they recover, this little group becomes immune to the virus. And when there are enough immune people out there, they will act as points of contact that will break the chain of transmission. At this point, we assume, that the population has acquired herd immunity. Also, it’s at this point you will start seeing more recoveries each day, and fewer new infections. As the rate of recovery picks up, the threat of the virus will die down (in most cases) and the epidemic will become a thing of the past. They call this the SIR( Susceptible, Infected, Recovered) model in epidemiology.

Point of Interest: Now, bear in mind we are not sure if people infected by Covid-19 will also turn immune once they recover. But here is an example to show you how most epidemics will die down without affecting the entire population even if you do nothing. Excerpt from the book- The Rules of Contagion.

People also contest that we won’t have to tinker with lockdowns during this period. Meaning the economy will see a swift recovery (even if there is a temporary downturn) and this should allow us to follow the path of least resistance.

However, there is a big problem here. Even though we won’t have the entire population fall prey to the virus, we will have a large number of people falling sick across the board in a relatively short period of time. This will inevitably overwhelm the national healthcare system. We won’t have enough ventilators. We won’t have enough oxygen masks. We won’t have enough doctors. We won’t have enough medical supplies and people will die, needlessly. The human cost of the pandemic will be unthinkable!

So, anybody who is out there suggesting that we do nothing and let the economic engine chug along without excessive intervention should be ashamed of themselves. Period.

The other strategy is to implement partial lockdowns and ensure we limit human interaction to a point to where we never overwhelm the national healthcare system. This way we won’t have to bring the economic engine to a grinding halt. And we won’t lose as many lives either. The best of both worlds they say.

Unfortunately, this little strategy is an implementational nightmare. Small countries with significant resources to expend, can try and attempt to contain the virus without shutting down the country completely. They could implement large scale testing programs for the country's populace and cordon high-risk groups using contact tracing. But in a country like India, doing this would be near impossible.

And even if we somehow manage to contain the virus, we will have to keep up the efforts until vaccines show up. In the meantime, we will be putting multiple industries on life support barely allowing them to function seamlessly. And eventually, when their cash piles run out, more businesses will go bust than originally presumed. So anybody wishing for a swift economic recovery is perhaps being a bit too optimistic.

So this isn’t an optimal strategy either.

And that leaves us with one final option — The one that we’ve adopted right now. Full lockdown for 21 days to break the transmission chain completely.

The downside is that this will bring all economic activity to a grinding halt. But remember, that most of the supply side will have enough resources to tide over for a month. And with enough government stimulus (funding), we can hope that they can keep the shutters open for a little bit longer. And the demand side. Sure… this won’t be easy on us but that is precisely why we need to come together during these dark testing times and help each other out. It’s not just incumbent on the government to keep unemployment levels in check. It’s on each and every one of us. And if during this time, we somehow miraculously manage to bring down infection rates to near negligible levels, we could see a sharp and swift economic recovery in tandem. Granted, we will have to be extra vigilant for the next few months. Granted, we could see more lockdowns beyond the 21 days. Granted, that it could take a while before we reach normalcy, but it’s the best shot we have right now.

Doesn’t matter if you are pro-government, if you are anti-government, you are a conspiracy theorist or somebody who doesn’t care about the economy. We need to lock ourselves down and hope the infection dies out. Because it’s the only way we can fight the virus right now. So let’s buck up and do it right, eh?

Until then…

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