Reality Bites: COVID–19 is Exposing a Huge Flaw in Our Financial System

Dear Reader,

What’s the main factor to consider when opening a restaurant?

Location, location….and more location.

Restaurants are a tough business. Take it from me, I used to own one.

The star product, food, has a couple of drawbacks.

For one, margins aren’t great, and it has a short shelf life. You only have a certain amount of time to shift the product before it goes into the rubbish.

That’s why restaurants bulk up profits with alcohol and coffee. They both have much better margins and last for a long time.

Then there is the matter of keeping consistency and staff. It’s hard to gauge how many clients will walk through your doors each day. You need enough staff to keep up good service on a busy day but also make sure you aren’t paying people to just stand around.

That’s why location is so important, to get foot traffic and visibility. But the better the location the more you pay.

Location is one of the most common reasons why restaurants fail. Until a pandemic like COVID-19 hits…

We’ve been stuck in our homes for a few weeks now, cooking and making do with what we have. I am sure that’s going to cause some long-term changes in our spending habits.

In a brand new report, market expert Vern Gowdie warns of the dangers waiting in a post-COVID-19 world. Plus, he outlines the steps you must take now to protect your wealth. Learn more.

Many of the restaurants we all love will not make it to the other side.

I truly feel for anyone who has a restaurant or café during these times. As I say, it’s a tough business already.

Restaurants along with clothing and department stores were some of the most hit in March with a 20% decline each.

The winners?

Here is The Age:

Hoarders of toilet paper and canned goods have delivered the biggest one-month surge in retail sales on record, but it won’t be enough to stop the economy from contracting.

The Australian Bureau of Statistics released partial data on Wednesday showing retail sales had soared by 8.2 per cent in March.

Supermarkets and grocery stores drove the lift along with alcohol and other specialised foods. Food sales were up 23.5 per cent or more than $2.7 billion.

Toilet and tissue paper sales more than doubled, as did flour, rice and pasta. There was a 50 per cent jump in canned foods, cleaning goods and medicinal products.

According to Australian Broadcasting Corporation, it looks like 780,000 people had lost their jobs by 4 April, with most of those losses coming from food services but also accommodation, arts and recreation.

There’s also been a lot of money thrown into the economy.

We’ve lowered interest rates and, rather quietly, the RBA has started quantitative easing for the first time.

The government has launched JobKeeper and JobSeeker to keep unemployment at bay.

A recent article in Forbes raised an interesting question on this (emphasis added):

[W]hat is the relevance of employment data as a predictive tool for the economy if the unemployed are still being paid? The swiftness with which monetary and fiscal policy was designed and implemented means any discussion of depression-like economic malaise should include stagflation and the effects of economic repatriation as much as it should deflation and the fallout of virus-fueled isolation.

After all the relief packages, unemployment benefits top out at an annualized [US]$53,200/year, and anyone making under [US]$26.60/hr on average can get more money from assistance than they would make in their original job, according to an analysis by Eiad Asbahi at Prescience Point Capital. And that calculation was done before the latest injection of stimulus.

Our rescue policy was designed based on the market’s expectation of an event worse than 2008 or the Great Depression, not in response to the event itself. Stimulus plans were laid out before the economic data even began and direct deposits hit shortly thereafter. This is great by many measures, but also means we may be distracted with risks we have already solved.

Have we staved off the coming crisis by throwing lots of money at it?

It’s true that many of the unemployed are still getting paid. Some may even be getting a better salary than when they were employed.

But there is something that has changed massively…

I’m talking about confidence.

We sometimes forget that our financial system is a house of cards built on confidence.

Our banks operate on the fractional reserve banking system and relies on the faith that not every depositor will want their money back at the same time.

It’s why keeping confidence is crucial, but also to make sure that people keep spending. Household consumption makes up around 60% of our economy.

Now hundreds of thousands have lost their jobs. We have household record debt and, as Compare the Market reported last year, 13.4 million Aussies didn’t have emergency savings to live for more than three months if they lost their job.

We have no idea what could happen tomorrow, let alone next month. Or how long this stimulus will last.

Plus, there is probably some scarring there. What I mean is, people have the toilet paper wars and empty supermarket shelves fresh in their minds. They won’t forget that quickly.

Do you think people will open their wallets and keep on spending as they did before in a scenario like this?

Consumption will surely take a hit as people become more risk averse.

Famous economic forecaster Harry Dent warns of a ‘crash of a lifetime; coming in 2020… Get the Free Report Now.

COVID-19 may have been the catalyst, but the virus is exposing a huge flaw in our system. It feeds off more debt while discouraging savings through low interest rates.

Our system is based on confidence…and debt. No system can go on forever based on increasing debt. It’s not sustainable.

As people stop spending and start paying off debt, it looks like we are heading for a period of deflation.

There is a silver lining in all this. That is, that your dollar will be worth more, and that it will bring on opportunities and bargains.


Selva Freigedo
Editor, The Rum Rebellion

Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

The Rum Rebellion