The writer is the author of ‘Crashed: How a Decade of Financial Crises Changed the World’
It’s a surprise, but 2020 is not ending on a totally gloomy note. Perhaps it will be a V-shaped recovery after all, where V stands for vaccine.
By holding out the promise of an imminent return to the “before time”, the news of the vaccines has transformed the outlook. Markets are exuberant and there is brave talk of a global economic rebound next year.
Never has the world depended to such a degree on the success of a single scientific research programme. It is hard not to think of Winston Churchill’s immortal line about the Battle of Britain: never was so much owed by so many to so few.
The problem with that glorious mythology is that it downplays the defeats that put the UK in the perilous position it was in in 1940 and made the road to victory so arduous. As a counterpoint, consider the disturbing associations brought to mind by Robert Harris’s latest novel about Adolf Hitler’s last-gasp miracle weapon, the V2 rockets.
Hurtling across the English Channel at three times the speed of sound, there was no defence against these ballistic missiles. Besieged Londoners got by with a mixture of superstition, obliviousness and the latest in radar and ballistics. But for all the terror they instilled, the rockets could not save Hitler’s war.
In 2020, it was our disastrous mishandling of the Covid-19 pandemic that left us needing a miracle. With the arrival of vaccines, we may be able to tame coronavirus through mass inoculation, but that will not shield us from the wider consequences of our failure or simply reset us to pre-pandemic prosperity.
Too often when we think of historical “restarts” — whether Franklin Roosevelt’s New Deal of the 1930s, the 1944 Bretton Woods conference that underpinned so much of our system of global economic governance, the Marshall Plan to kick start postwar recovery, or the UK’s own postwar welfare state — we remember the sunny highlights while ignoring the bombed-out, exhausted, contentious, financially stretched background from which reconstruction was launched.
In 2021, the aftermath of the pandemic may not be as bad as that. But it is going to be tough — and we should recognise that now if we want to have any hope of making a sustained recovery.
The pandemic has greatly intensified existing inequality. In the US this winter, millions face unemployment and destitution. The social crisis in Europe, so far contained by furlough schemes and emergency loans, is only just beginning. Businesses in their tens of thousands have gone under.
Not only is Brexit likely to cause more chaos in January, but national lockdowns around the world have thrown the global trading system out of sync. Mountains of containers are piled up in the wrong places. In the poorest parts of the world hundreds of millions face intensifying hunger. And supervening all that is the largest surge in public debt since the war.
We cannot count on rapid growth to help us pay that debt. Nor will inflation come to our rescue to eat away at its real value. Europe, like Japan before it, lives under the shadow of deflation. But what we do have going for us, in the absence of serious inflationary risk, is a newfound freedom in setting monetary and financial policy.
For all the influence of John Maynard Keynes and the introduction of welfare states, those who dealt with the financial aftermath of the second world war were conventional in their attachment to a modified version of the gold standard — currencies were pegged to the dollar, which was convertible to gold. This stemmed the risk of inflation but the results were repeated crises, as foreign exchange reserves ran perilously low. To contain those risks, fiscal discipline was tight in the decades after 1945.
We, by contrast, are heirs to the collapse of Bretton Woods in the 1970s. The money in which today’s governments owe their debts is fiat money: in other words, they make it themselves.
Interest rates are at rock bottom. There is no rush to repay the bonds. Central banks have warehoused vast quantities of them, which means that we effectively owe the debt to ourselves. The cash they conjured into existence to buy debt, sits idly on their balance sheets in the form of bank reserves, which show no sign of spilling over into real spending that might trigger inflationary pressure.
How we choose to handle this fragile equilibrium poses the most important decision facing global economies as we look for paths to recovery. The answer will be a test of our politics as telling, in its own way, as the response to the pandemic itself.
There will be those who are uncomfortable with this fact. They will claim, as the UK prime minister Margaret Thatcher did in the 1980s that “there is no alternative” to returning to a path of financial sustainability by way of urgent austerity measures. But the slogan masked a choice then, just as it did in 2010, when the UK’s coalition government, along with the rest of the G20, engaged in a disastrous round of belt-tightening. The result was to stunt the recovery.
We should learn from that mistake this time around and forgo austerity measures in favour of generous crisis relief for those most in need, and long-term investment in the transition to green energy.
Scientists may have provided much of the world with a miraculous fix for its botched handling of the pandemic, but there is no magic bullet for the problem of recovery. The next financial move is up to us to decide. Let us avoid embracing false necessities for a second time.