Why cash injections aren't enough to prop up post-coronavirus economies
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Central banks, treasuries and chancelleries have responded to the economic impact of Covid-19 by injecting — or proposing to inject — over $5 trillion into western economies. It’s a classic Keynesian response to an unprecedented shock to national economies and to the global economy. But it doesn’t go nearly far enough.
A recovery dependent on central banks printing money in exchange for pretty well any kind of paper ‘security’ is not a ‘recovery’. We have been here before. We have no way of modelling how a broken-back international economy, built around globalisation and just-in-time supply chains, will respond. Nor do we know, for example, whether long-dormant inflation, arising from a tsunami of monetary stimulus hitting supply side constraints, may re-emerge.
What we do know is that unpredictable consumer behaviour, including panic, is much closer to the surface than we had thought.
Economic crises — booms and crashes — are nothing new. In 2009, at the cusp of the Great Recession, Rogoff and Reinhart published This Time is Different. Their point — at least in part — was that it’s never different.
But this time it really is.
Incremental strains have accumulated within our globalised financial markets and institutions over the last decade. The post-2008 financial crisis was caused by a rogue banking and financial system. Regulation imposed in the wake of that crisis hasn’t fundamentally changed a system that is essentially directed by private interests rather than the public good. One day the floor falls out of the markets — next day, some participants exit with billions of profits. Today we are relying on those same institutions and markets to channel credit in the public interest, generating a level of debt that our children and our children’s children will have to pay for. It makes no sense.
International trade is distorted by the economic and political interests (think of politically motivated ‘sanctions’ and arms sales) of the dominant countries and by the short-term strategies of a small number of multi-national companies on which exchequers and treasuries are increasingly dependent. What makes all of this worse is that the international governance which girds all of this is not just deficient: it is riven by the self-interest that is intrinsically biased against emerging countries.
At some stage, sensitised by a new awareness of our shared vulnerability induced by the still unfolding impact of Covid-19, there must be an insistence on a new global financial and trade architecture. Leaders, from President Macron to former ECB governor Mario Draghi, have evoked the metaphor of ‘war’ in responding to this crisis. In the wake of World War Two, when the world was emerging from a different kind of existential crisis, the US and the UK constructed a set of principles across finance, trade and international solidarity — the Bretton Woods Agreement, on which post-war economic stability was built.
It was brought down by US printing presses funding the Vietnam war. We need a “Bretton Woods” for our times. Printing trillions of pounds and dollars without rethinking and reforming the institutions and markets which have left our world so vulnerable in the face of this crisis — the most recent and surely not the last — is a recipe for future disaster.
