Facing uncertainty by predicting risk reactions
Richard Murphy examines why it is important to accept the current pandemic reality and face the uncertainty head on. In ascertaining omnipresent COVID-19 trends, the situation may be approached as dealing with risk. This, in turn, has reactions that can be predicted.
Those of a certain age will recall Donald Rumsfeld, when he was US Secretary of State for Defence for the second time, saying that there were three types of fact. There were the known knowns, the known unknowns and the unknown unknowns.
As accountants, I suspect that most of us are quite keen on known knowns: that comes with the territory. We’re also fairly good at managing risk, which are the known unknowns. But what most of us will hate are the unknown unknowns, which represent straightforward uncertainty. What the coronavirus crisis has created is a surfeit of uncertainty. We are living with more unknown unknowns can anyone could describe as being good for us.
I would love to say that with my forty years of experience as an accountant and economist that I can reduce this uncertainty. I regret that I cannot. Right now, this is beyond anyone’s ability. What we have to do, however, is continue to manage within this framework, and that is where some clear heads are required.
All of us know about the immediate risk that we face. We can see the panic buying. We know that jobs are at risk. We know that we will see businesses fail. We know there will be redundancies. We know that people will be, according to the new jargon, ‘furloughed’. And as a consequence, we can be sure that, almost without exception, incomes are going to fall over the coming months, and maybe for a lot longer.
However, accepting this reality is important for decision-making. When facing the uncertainty head on, you can clearly perceive the pervasiveness of the trends – and then we are back to dealing with risk. And, in this case, we can predict certain reactions to that risk.
Reaction one: Government response
The first prediction is the government’s reaction. At the time of writing, I am not particularly impressed by the Chancellor’s response to what is happening.
The loan scheme will be unavailable to many smaller companies because bankers will not play ball with it. The so -called ‘furlough’ scheme does not help many small businesses by demanding that employees do not work. And the self-employed have not been helped as of yet. We had three budgets in nine days, in effect, and there will be many more until the government gets its reaction right.
Reaction two: Unlimited lending
Second, if the UK follows the US lead the amount of money to be thrown at this problem will grow. The US Federal Reserve (the equivalent of the Bank of England) has said there is money available without limit.
In the UK very few people noticed that last week the Bank of England announced that it now felt able to lend to the government at will. This effectively ended the charade of quantitative easing when it comes to money creation for the government: unlike everyone else, the UK government now has a bottomless overdraft limit to get through this crisis.
It is very likely the UK government will use this. But the question is when they will use it, and understanding this is now vital.
Fundamentally there are at last five stages to this crisis. In turn, they have been a supply-side crisis, as people either voluntarily or by force began to stop working, starting in China, markets began to close down.
As a result, people’s behaviour changed very rapidly, and with the exception of food and other essentials, demand crashed. This has then compounded the supply problem because companies have realised that even if they can make many of their usual products, people do not want them.
Reaction three: Financial crisis
This has, thirdly, created a financial crisis. This can be seen in the stock markets, but also amongst almost all of our clients, many of whom are facing an almost total collapse in their cash flows.
Reaction four: Debt
Fourthly, this has required the government to provide the already noted intensive care support for the economy. It is on this that it will spend an almost unlimited amount of money. Government debt has increased by more than £1 trillion in the last decade. I can see this happening again in the next year or so. For many of us, this stage will be profoundly uncomfortable.
Not only will we be locked down, despite which at some time we are likely to be ill but, as accountants, we will be doing tasks almost wholly alien to us, including working out how to claim and spend government money rather than work out how much our clients have to pay in tax.
Reaction five: Recovery
But the fifth, and crucial stage, is the one we need to already anticipate, however, overwhelmed we now feel. This will be the recovery stage, and although that might seem a long way off at present (and the wait may well seem interminable) it will happen. When it does, there will be at least as many problems as there or now, and in the immediate months to come. These need to be planned for, and good accountants will be doing that very soon.
Picking up a mothballed business and returning it to a thriving state is not easy. It demands a lot of working capital. Many businesses will have almost none. As a result, all the usual problems from overtrading will rear their ugly heads remarkably quickly when the recovery begins, and those businesses that might have made it through the immediate crisis might then discover that they cannot make it to the end of the year unless they begin to plan now.
Planning for the future
Many of us are facing enforced time at home, with too much Netflix for company. My suggestion is that anyone with responsibility for a business should use at least some of this time to think about their plans to reopening their activities when this crisis is over.
Deciding what goods, services, outlets and staff are key to that process, and working out how to phase the returns to normal is critical to survival. In particular, new product mixes, ways of delivery, supply chains and customer interactions all need to be thought about if success is to be likely.
This is not the time to sit and do nothing if businesses are to survive. There’s a massive amount to do. And now is the time to do it.
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Richard Murphy is a practising chartered accountant and professor of political economy at City, University of London. He is also director of the Corporate Accountability Network. After twenty years in industry and commerce, he co-founded the Tax Justice Network and Fair Tax Mark before taking his current positions. He co-authored the original...