Professor of political economy City, University of London
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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.

24th Mar 2020
Professor of political economy City, University of London
Columnist
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A businessman is consulting a crystal ball to foretell the future.
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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. 

Replies (12)

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By johnjenkins
25th Mar 2020 09:51

You're quite right in assuming the furlough and bank lending will not work for the small business. My son works in a call centre with, normally 85 people. 50 have self isolated but can only claim sickness benefit. The Boss, who is self isolating, has a set up so that the call centre is essential (selling phones for BT). As the employees still have to work the 80% wage guarantee is out of the window. I see this sort of thing being replicated. So my son has to choose between safety and wages. He has rent and two children to support. Not much of a choice considering his only alternative is to leave and apply for universal credit (who have said it will take 6 weeks to process). So, as normal the big boys will make money while others lose out. just as a tangent. yesterday and today I have never seen as many police patrolling the streets, either walking or in cars yet there are 6 winos who, everyday, swig alcohol in public and in the park. Priceless. I could go on but I've got figures to prepare for clients who think the banks are going to give them loads of dosh.

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By johnjenkins
25th Mar 2020 09:51

You're quite right in assuming the furlough and bank lending will not work for the small business. My son works in a call centre with, normally 85 people. 50 have self isolated but can only claim sickness benefit. The Boss, who is self isolating, has a set up so that the call centre is essential (selling phones for BT). As the employees still have to work the 80% wage guarantee is out of the window. I see this sort of thing being replicated. So my son has to choose between safety and wages. He has rent and two children to support. Not much of a choice considering his only alternative is to leave and apply for universal credit (who have said it will take 6 weeks to process). So, as normal the big boys will make money while others lose out. just as a tangent. yesterday and today I have never seen as many police patrolling the streets, either walking or in cars yet there are 6 winos who, everyday, swig alcohol in public and in the park. Priceless. I could go on but I've got figures to prepare for clients who think the banks are going to give them loads of dosh.

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By pisoto3446
25th Mar 2020 10:02

This is not a very helpful article. A mixture of political diatribe and statements of the obvious.

For example: "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."

Brilliant, Mr Murphy, brilliant.

If we are to run political articles then please let them be more insightful. And if practical articles then please let them have practical recommendations for those of us at the sharp end.

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Replying to pisoto3446:
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By AndyC555
25th Mar 2020 14:02

You may be being unfair on the unhelpfulness of Mr Murphy's article here. As he tells us on his website today;

"I have had coronavirus and am still very tired as a result and am not working normally."

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By S Orchard
25th Mar 2020 10:08

Looking forward to the follow up blog on Planning for the future, Mr Murphy. That's where companies need the help. So many of them will have absolutely no idea how to tackle the "massive amount" you hint at.

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Replying to S Orchard:
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By Simon Clarke
25th Mar 2020 14:57

It's not clear to me whether you are being sarcastic, so I'll treat your comment as though you are serious. The idea that a part-time lecturer at university (if he still is) should be asked to advise those who have succeeded in business how to plan for the future is absurd. Business is like life, as explained by the Jeff Goldblum character in Jurassic Park: it will find a way. It certainly needs no assistance from clowns.

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By AndyC555
25th Mar 2020 13:37

It's not fair to say that Mr Murphy doesn't have any concrete proposals. He does. On his blog he made these quite clear. Any company which wants government help would have to accept these conditions:

"*Zero-hours contracts must be abolished;
*Trade union rights must be recognised and supported;
*A true living wage must be paid in the future;
*Its gender pay differential must be published, and it must have a policy for reducing it;
*Put its full accounts on public record, whatever its size;
*It may not use any tax avoidance schemes of any sort whatsoever;
*It must never use a tax haven;
*If it is a large company it must publish country-by-country reports;
*No one must be paid more than ten times UK median earnings;
Every large company involved must have a plan for becoming net-zero carbon and must include the cost of that plan in its accounts, and make annual reports about progress on this issue;
*Publish information annually of the type required by the Fair Tax Mark;
*Dividends must be based on group retained earnings;
*No dividends should be permitted if group retained earnings would as a result be less than the last three years (in smaller companies, with five years being required in larger ones) average net profit after tax to encourage balance sheet resilience.

To enforce these conditions it would be reasonable to require that every single company taking advantage of these tax holidays should by legal automatic obligation be deemed to have issued 25.1% of its share capital to the government in exchange for the package that guarantees its survival, which proportion guarantees the government the right to block many shareholder actions in these companies.

An automatic right to appoint a majority of the board of directors in the event that the conditions of the bailout, as noted, are not met should also be implicit in the tax holiday terms."

What of companies that don't accept these terms? Mr Murphy has an answer.

Question - "Just to be clear..,So if a perfectly solvent and productive business in normal time , through no fault of its own and because of a catastrophe of which it has no part to blame, does not agree to your long list of demands you would just let it die and all it’s staff lose their jobs?"

Richard Murphy says:

Why not? If they need help they have a price to society to pay for it"

I, personally, am very pleased that Mr Murphy is many miles away from any position of power.

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By AndyC555
25th Mar 2020 13:45

It's not fair to say that Mr Murphy doesn't have any concrete proposals, he does. On his blog he makes clear that any company which needs government help must agree to the following proposals.

"*Zero-hours contracts must be abolished;
*Trade union rights must be recognised and supported;
*A true living wage must be paid in the future;
*Its gender pay differential must be published, and it must have a policy for reducing it;
*Put its full accounts on public record, whatever its size;
*It may not use any tax avoidance schemes of any sort whatsoever;
*It must never use a tax haven;
*If it is a large company it must publish country-by-country reports;
*No one must be paid more than ten times UK median earnings;
*Every large company involved must have a plan for becoming net-zero carbon and must include the cost of that plan in its accounts, and make annual reports about progress on this issue;
*Publish information annually of the type required by the Fair Tax Mark;
*Dividends must be based on group retained earnings;
*No dividends should be permitted if group retained earnings would as a result be less than the last three years (in smaller companies, with five years being required in larger ones) average net profit after tax to encourage balance sheet resilience.

To enforce these conditions it would be reasonable to require that every single company taking advantage of these tax holidays should by legal automatic obligation be deemed to have issued 25.1% of its share capital to the government in exchange for the package that guarantees its survival, which proportion guarantees the government the right to block many shareholder actions in these companies.

An automatic right to appoint a majority of the board of directors in the event that the conditions of the bailout, as noted, are not met should also be implicit in the tax holiday terms."

What of companies unable to accept these terms? Mr Murphy has an answer

Question "Just to be clear..,So if a perfectly solvent and productive business in normal time , through no fault of its own and because of a catastrophe of which it has no part to blame, does not agree to your long list of demands you would just let it die and all it’s staff lose their jobs?

Richard Murphy says:

Why not?

If they need help they have a price to society to pay for it"

I, personally, am very pleased that Mr Murphy is many miles from any position of power.

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Replying to AndyC555:
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By pisoto3446
25th Mar 2020 20:46

Is this satire?

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Replying to pisoto3446:
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By johnjenkins
26th Mar 2020 09:36

Is this the real life? Or just fantasy?

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Replying to pisoto3446:
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By AndyC555
26th Mar 2020 15:19

Absolutely not satire

The Accountingweb columnist is suggesting that help from the government should be conditional on a company giving up 25.1% of its share capital to the government, being given a list of orders on how to run its business and that an army of government officials will be standing by to be appointed as majority directors of any company that does not obey the rules.

He's quite content that any company that can't accept these impositions would get no help at all and if it went bust, so be it.

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By Simon Clarke
25th Mar 2020 14:53

What, precisely, are your qualifications in economics, Murphy?

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