Don’t bet on a quick global resurrection

 The speed of the economic recovery will be more tortoise than hare

Easter never felt more Eastery. The world economy looks dead. Can it be resurrected? Just over a century ago, amid the worst flu pandemic in history, the greatest economist of his generation fell ill. John Maynard Keynes was in Paris, attending the peace conference that would in time produce the Treaty of Versailles. Having collapsed on May 30, 1919, he wrote to his mother: “Partly out of misery and rage for all that’s happening and partly from prolonged overwork, I gave way last Friday and took to my bed from sheer nervous exhaustion, where I have remained ever since.”

He remained prostrate for close to a week, getting up only for meetings with the prime minister, David Lloyd George, and “a daily stroll in the Bois [de Boulogne]”. Did Keynes have the dreaded Spanish flu, as Lloyd George did? His biographer, Lord Skidelsky, says we cannot be sure. If so, he was lucky to survive it. According to the latest estimate, that pandemic killed 39 million people — 2% of the world’s population — dwarfing the battlefield fatalities of the First World War.

Among the victims of the pandemic were the South African prime minister Louis Botha, the Bolshevik leader Yakov Sverdlov, the German sociologist Max Weber and the grandfather of the current US president Frederick Trump.

It was shortly after his recovery and return to Britain that Keynes wrote the inflammatory tract that made him famous, The Economic Consequences of the Peace. In it he deplored the punitive terms of the Versailles treaty — which imposed on Germany an unspecified but potentially vast war reparations debt — and prophesied an inflationary economic disaster, followed by a political backlash.

Who among today’s great economists will write The Economic Consequences of the Plague? Large parts of the world’s economy have been brought to an abrupt standstill by the Covid-19 pandemic. To contain the contagion, countless businesses have been told to cease trading and millions of workers have been told to stay at home. To offset this “supply shock”, and to prevent a catastrophic downward spiral of shrinking demand and debt deflation, the world’s central banks and finance ministries are injecting even more “liquidity” — that’s money, to you and me — than they did in the wake of the 2008-9 financial crisis.


The effects of these measures can be seen in the remarkable performance of corporate stocks and bonds. As I write, the S&P 500 is just 18% below its peak on February 19. At its low point — March 23 — it was down 34%. Those who expected carnage in the low-grade, or “junk”, bond market are amazed. Who could have foreseen that the Federal Reserve would buy even junk?

Yet I feel a bit like Keynes did in 1919. Of course, I see the need to get money to those workers who will be unemployed for as long as it takes the scientists and pharmaceutical companies to find and distribute a Covid-19 vaccine. But the Fed’s current policy would appear to be a generalised bailout of investors, even those whose positions were known to be risky.

And the US Congress has, in great haste and amid frantic horse-trading, passed legislation that commits taxpayers to writing down hundreds of billions of dollars of “loans” to businesses large and small. Moreover, the legislation would appear to make more than half of American workers better off being unemployed than they would have been working.

Turning to some of today’s leading economists, I became more despondent. For the arch-liberal Paul Krugman, this is “the economic equivalent of a medically induced coma”, but the Keynesian remedy of government borrowing can provide the necessary relief and stimulus. “There may be a slight hangover from this borrowing,” he wrote on April 1, “but it shouldn’t pose any major problems.” (Was the date of this blog post significant?)

By contrast, Kenneth Rogoff — one of Harvard’s few conservative professors — wrote last week of an “economic catastrophe . . . likely to rival or exceed that of any recession in the last 150 years”, with lingering effects, potentially leading to a “global depression”. The pandemic, Rogoff argued, was akin to an “alien invasion”.

Larry Summers, who lies somewhere between those two ideologically, chose a more grisly metaphor. “Physical isolation is chemotherapy,” he said, “and the goal is remission. The problem is that chemo is . . . increasingly toxic over time.” He foresees an “accordion-like dynamic” until a vaccine is generally available in 12 to 18 months.

I am with Rogoff and Summers. This is a disaster, the economic consequences of which cannot be offset by even the biggest monetary and fiscal splurge. Over the past three weeks 16.8 million Americans — slightly over 10% of the workforce — have filed for unemployment benefits. According to our best estimates at my macroeconomic and geopolitical advisory firm Greenmantle, GDP has declined by even more and is currently running at 75%-82% of its level in the last quarter of last year.

Our estimates, based on state-by-state assessments that allow for the share of the population who can work from home, suggest a slight drop in GDP for the year’s first quarter (-1.45% quarter on quarter), followed by a lockdown-driven collapse (-10.8%) in the second quarter. We expect a partial rebound of 6.5% in the third quarter, as lockdowns are partially relaxed but social distancing measures remain in place — as they must, until a vaccine is available.

There has been loose talk from some of the banks about a “V-shaped” recovery. That prediction was wrong after 2009 and it will be even more wrong in 2020. The shape we have in mind is something like an inverted square root or a tortoise’s back. Certainly, the speed of recovery will be more like a tortoise’s than a hare’s.

The key is that in the protracted “post-lockdown, pre-vaccine” period, there will inevitably be a reduction of capacity in all sectors of the economy that depend on some level of social proximity, such as retail, air travel, education, live entertainment, hotels and restaurants.

An economy without crowds is not a “new normal”. It may be more like the new anomie, to borrow Emile Durkheim’s term for the sense of disconnectedness. For most people, the word “fun” is almost synonymous with “crowd”. The coming year will be a time of depression in the psychological as well as the economic sense.

Note that our calculations above omit the effects of lockdowns and social distancing on the demand side, including domestic consumption and investment, and the pandemic’s effect on global trade. While Krugman seems confident deficit-funded relief measures will prop up demand, I am not so sure. Panicking people are going to save as much of those benefits as they can. Broke businesses will pocket the government cash and still downsize. And don’t get me started on the enduring hit to trade.

In short, I can’t honestly wish my readers a happy Easter. In the Bible, Christ’s resurrection happens in just three days. The resurrection of the world economy will take far longer. I only wish Keynes could rise from his eternal rest to tell us exactly how long.

Niall Ferguson is the Milbank Family senior fellow at the Hoover Institution, Stanford, and managing director of Greenmantle

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