But as we try to disentangle the complexities of the COVID-19 pandemic’s impact, we may be observing a powerful economic force exacerbated by the promise of a long stretch of low-interest loans.
Effectively what we are seeing is that while parts of the economy weaken, the weakness is not shared equally. A similar process applies to people who have kept their jobs — and thus their incomes — flowing and to businesses, both able to profit from their short-term budgetary advantage.
While many smaller corporations and even more small businesses, such as corner stores and restaurants, go under, companies and individuals with a solid base and a strong cash flow can borrow at historically low rates — allowing them to stock up on assets they expect will keep their value once the crisis is over.
House prices not falling
National figures on house prices from the Canadian Real Estate Association are out a week from today. But early speculation that property prices would fall has certainly not been borne out in Canada’s hottest markets.
And that comes despite new figures on Friday that show 1.3 million Canadian jobs have disappeared since the pandemic struck.
Even while rental properties face a glut, sales and prices for homes in Vancouver and Toronto are both up sharply. In Toronto, real estate board figures show detached home prices in July rose more than 25 per cent year over year — increases similar to the biggest boom years, from 2010 to the spring of 2017, of what many described then as a growing real estate bubble.
“We’re seeing the results today of pent-up activity, from both homebuyers and sellers, that had been accumulating in our market throughout the year,” Colette Gerber, chair of the Real Estate Board of Greater Vancouver, said last week. “Low interest rates and limited overall supply are also increasing competition across our market.”
Mortgage brokers report that banks have tightened their requirements for who can get a loan, but for those eligible, five-year fixed mortgages can be two per cent or lower.
And of course that’s the trouble with cheap money, especially at times when people are in danger of losing their jobs and businesses: It tends to go to those who need it the least — in other words, those most certain to pay it back.
Research in the United States shows that while small businesses owned by Black people failed at an astounding rate of 41 per cent — almost double the still very large decline of 22 per cent for all small businesses — there is evidence that government support did not go to the areas of greatest need. The smallest businesses received less support, as did businesses owned by people of colour.
In those cases, poorly designed aid programs that were rushed out the door to stave off a crisis may have been part of the problem, wrote Gillian Tett in the Financial Times.
“The more the pandemic spreads, the more it risks exacerbating inequity in unexpected ways, particularly, but not exclusively, in the U.S.,” Tett suggested.
There are increasing signs the same thing is happening in the corporate world. There were reports that mergers-and-acquisition activity, as company takeovers are called in the business world, slumped early in the pandemic when fears for the economy were highest.
But last week as Microsoft made a bid to buy TikTok, the U.S. news site Axios declared, “Mergers and acquisitions make a comeback,” citing a list of deals underway, many of them from tech giants that have prospered during the pandemic downturn.
“COVID-19 could further exacerbate concentration, with many larger incumbents able to purchase distressed companies cheaply — as we’ve seen with the U.S. tech giants, which continue with their mergers-and-acquisition activity, even while under investigation for antitrust violations,” said Denise Hearn, co-author of The Myth of Capitalism, writing in Canada’s Hill Times last week.
Corporate (or capital) concentration, a well-known Marxist critique of capitalism, is not a conspiracy but a natural free-market effect that is in many respects benign and part of the process of creative destruction.
When businesses whose finances have been stretched too far go broke during a downturn, some die and disappear. But other companies with stronger cash flow or deeper pockets step in to pick off the companies or portions of companies they think will be worthwhile following the crisis — effectively preserving value to the economy created by the previous owner.
Just as in the housing market, low interest rates matter because stable companies with cash flow and deep pockets have access to all that cheap money created by central banks. Quite reasonably, for lenders, bankrupt companies already deep in debt are not such good prospects.
While this capital concentration may be natural, fulfilling the proverb “them that has, gets” — which traces its origins at least as far back as the New Testament (Matthew 25:29) — making the rich richer and big companies bigger is not necessarily politically desirable.
There was speculation early in the pandemic that the crisis might be the catalyst for a move away from wealth polarization. But just as they did after the 2008 crisis, lower-for-longer interest rates have once again flowed straight into the pockets of the wealthiest.
As governments brainstorm on how to phase out support for the financial victims of the coronavirus, it appears they may not be able to depend on low rates alone to solve the long-term trends toward greater inequality and capital concentration.
Follow Don on Twitter @don_pittis