The world we knew as normal three months ago won't be coming back ever, a Great Reset or debt jubilee could be brewing, and aspects of globalisation are reversing as the COVID-19 pandemic grips the world.
Watson, who is based in Austin, Texas, says many countries are learning that being dependent on other countries for critical medicine, medical equipment, even something as simple as swabs to take nasal samples, isn't ideal.
"All these goods that for a long time seamlessly flowed around, were there when we needed them [but] aren't there now. Governments are going to want to make sure that doesn't happen again. So we will see pressure for a lot of those sort of things to be produced locally, or at least stockpiled locally, and that's going to raise costs," says Watson.
"You're going to see the price of some goods rise because they're not going to be manufactured in the place where they can be made most efficiently. That's going to be a partial reversal of globalisation. And globalisation is already reversing in my view due to technology. Robots don't care where you put them. They will work equally hard, and they cost about the same, whether they're in Christchurch, or Shanghai or Chicago. So the lower labour cost that allowed developed countries to save money by outsourcing manufacturing to Asia, that's going away anyhow. So it won't be a straight line, I think it will happen in fits and starts, but globalisation is on the downswing for sure."
In terms of the economic impact of the COVID-19 pandemic, Watson says this will be a severe recession, and a much slower economy until there's a vaccine or effective treatment for the virus.
"And I don't know how long that will be, it could be a year or two. Once the most immediate threat passes, within the next month or two, we'll probably be able to leave our homes a little bit more freely but it's still going to be different. We're going to be wearing masks everywhere we go. We're not going to have mass gatherings of concerts and sporting events. Restaurants are going to have to space out their tables more widely."
"All these things add up to a cost. Unemployment's going to run very high. So that's going to last for a while and we may yet get more waves of this pandemic. It's coming back in Singapore for instance, they thought they'd beat it down and it seems to be coming back, same in Japan. So we don't know medically how this is going to play out. But economically I think the best case says we're going to have a deep recession here for a while," Watson says.
"After that a lot depends on how attitudes have changed and how businesses have reorganised, The world we saw as normal three months ago is not going to come back ever. We are going to go through a transition period here and then we're going to have something different. It's not yet clear what that will be, but I certainly think it will be unlike what we have seen before."
In terms of the response to the economic downturn from US authorities, Watson describes it as a strange blend of things.
"There's 50 states each of which is independent in some ways but only the Federal Government can run deficits and it controls the currency. So it is really the ultimate backstop. You have the strange situation where state and local governments are bearing many of the expenses - the hospitals and a lot of the social payments. But at the same time their tax revenues are falling because people aren't spending money and generating sales tax so they're in a pickle."
"And there's a big bind in Washington of whether the Federal Government will help them. Meanwhile you have the central bank, the Federal Reserve, now working in partnership with the Treasury ...using an amount of taxpayer money as a backstop that they can leverage to buy all sorts of corporate bonds and other assets, private assets. And that is proving helpful to the markets. [But] I'm pretty sure it's not going to be helpful to the economy in the long run because they're simply encouraging businesses, some of which probably should fail, to keep them alive and they'll become zombie companies not being efficient in the way that the economy needs to grow. So this is going to be a big problem," says Watson..
"And all this money that they're spending is adding to our debt which is already quite huge. So where that's going to be paid no one knows. It's all quite unprecedented and hard to say where this ends."
Is a Great Reset looming?
The Federal Reserve's balance sheet has now passed US$6 trillion, and the US national debt, which measures how much the US Government owes its creditors, has topped US$24 trillion. Mauldin Economics' John Mauldin has written extensively over recent years about the idea of a Great Reset, which would see global debt rationalised through some form of non-payment.
Watson says the current recession may accelerate a Great Reset.
"I think it was coming anyway but this is probably going to accelerate it. Prior to all this John was saying that he thinks the 2020s are going to be the run-up to a Great Reset and in 10 years or so worldwide debt would grow to a point where it's simply un-payable. And if it's un-payable then it won't be paid," says Watson.
"So how do you organise that? What he calls the Great Reset would be a kind of global coordinated debt jubilee as was done in the Old Testament times, that periodically all debts are just forgiven and we wipe the slate clean and just start over. And that would be really ugly in some ways because there would be winners and losers, but it would be possibly the best of a bad set of options."
Such a scenario would require some form of international co-ordination and Watson acknowledges there's currently a stark lack of this in combatting COVID-19, describing this as a terrible complication.
"We don't have co-ordination between nations to the degree we should and have in previous crises. That may yet come because it's necessary if there's to be any sort of good outcome to this. So hopefully the people who are preventing that will come to their senses or be replaced with someone who sees it differently," says Watson.
Privatising profits, socialising losses
Watson recently wrote an article entitled coronavirus socialism and says he's disappointed at the way US authorities are bailing out major private companies.
"I think we have to make distinctions here. There are large numbers of very small businesses that operate on the edge already - restaurants, shops, small professional businesses, and I think it's the government's role to take care of them as best ít can. They are the ones who deserve help."
"Then you have large profitable companies that had plenty of money to buyback their shares and pay dividends and pay bonuses to executives who supposedly should foresee risk and prepare for bad things to happen, build cash cushions and be able to withstand unforeseen emergencies like this. But they did not do that. So now they are being saved and the argument is this is not their fault either. It's not their fault the virus came along. It is their fault that they don't have any cushion, and they are running so close to the edge that now they're at great risk of default," Watson says.
"We have a system for this. In the United States a company, just like an individual, can plead bankruptcy, we have a court system for that... I think that's a much better way to handle these large companies like the airlines who have found themselves in these positions. But that's not what we're doing and the precedent that sets is that you can take crazy risks and the taxpayers are going to be there to save you from it."
"Okay, well where does that end? Well, if you're not the one taking the risk why should you be the one to bear the reward? That has all sorts of implications for markets because a corporate bondholder gets a higher interest rate than a government bondholder because they are taking credit risk because the company could conceivably go out of business. But if they're not taking credit risk, why should they continue being paid a premium interest rate? And that's kind of the situation we're headed to, the same thing with stockholders. Why should stocks perform the way they have historically if the risk that supposedly justifies that reward isn't there anymore? So where all that ends I don't know but it's a real problem," says Watson.
"We had similar things happen in 2008 and thereafter and it was hoped we had learnt some lessons but I fear we didn't."
Watson has also written about how COVID-19 could increase wages.
"Employers gained the upper hand in wage negotiations because after the last recession people were happy to have any kind of job and they were afraid of losing their job. So they didn't push very hard. And we saw for many years the unemployment rate was very low but wages were not rising very much, which didn't make sense and was never going to last forever. And I think we may be reaching the point where that curve's going to bend," says Watson.
"The San Francisco Fed looked at historic pandemics going back to the Black Death in the 14th century. And they were able to see that the result of these has very often been higher wages, years and even decades later which makes sense if you think about it because in a war you have both people killed and you also have physical infrastructure destroyed - roads, buildings, those sorts of things, and those have to be rebuild and that's at great expense."
"In a pandemic the labour supply shrinks as people die. So when it's over the surviving workers are able to command higher wages. Situations like this historically have been positive for labour and negative for capital, which is the opposite of what we've seen the last 30, 40, 50 years in the United States and much of the developed world. So that could be a really important change."
*This is the fourth interview in a series looking at reactions to and potential policy responses to the coronavirus pandemic and evolving economic downturn.
The first interview, with staunch critic of the economic mainstream Steve Keen, is here. The second interview, with director at economic advisory firm Landfall Strategy Group David Skilling, is here. The third interview, with Motu and Victoria University's Arthur Grimes, is here.