OPINION: This Time is Seriously Different

BANGKOK (ANN Desk) - History does not repeat itself, but there are patterns that may give lessons on how to handle the next one.   Reinhart and Rogoff argue that it is excess debt accumulation that “poses greater systemic risks than it seems during a boom”. 

The WHO has declared COVID-19 a global pandemic.  Wall Street has marked the largest drop since the October 1987 stock market crash.  Gold is breaking record highs, oil prices are back to 19-year lows and bond yields are getting close to zero even in the US.   

In 2009, after the global financial crisis, economists Carmen Reinhart and Kenneth Rogoff wrote an influential book called “This Time is Different”, but their real message was the opposite – “we have been here before”.  History does not repeat itself, but there are patterns that may give lessons on how to handle the next one.   Reinhart and Rogoff argue that it is excess debt accumulation that “poses greater systemic risks than it seems during a boom”. 

Well, since then global debt has increased very significantly, largely because central banks have used quantitative easing (QE) that lowered interest rates, making debt affordable to governments and private borrowers.   Everyone knew that asset bubbles are inevitable, but no one cared enough about the social inequality that such excessive monetary policy created.  

The asset bubbles had many side-effects that we are all just beginning to appreciate.  One obvious symptom is that finance became cheaply available to experiment and invest in technology, creating the biggest tech bubble in history.  Consumer tech products reduced in price and tech platforms had astronomical price-earnings ratio, whilst traditional businesses have valuations sometimes lower than book value, such as banks.  But without the tech platforms, social media, China could not have employed the AI and Big Data to deal real-time with the epidemic in terms of coordinating complex relief measures.

Second, excess debt has also enabled excess consumption, which in a fossil-based world drove climate warming through carbon-emission.  The old Charles Dickens dictum was that debt is misery because you have to eventually pay for what you borrow.   But when even governments don’t have debt discipline, borrowers enjoy at the expense of savers.  When you become the Too Big To Fail borrower, all savers are hostage to keeping you alive. 

In sum, we have consumed more than our fair share of limited planetary resources, financed by history’s largest debt and left the next generation to pay the bill.   No wonder the young like Greta Thunberg are protesting.

Third, climate warming from excessive carbon emission, growing urbanization and freedom to consume combine together to induce changes in the biological environment.  Viruses evolve all the time, but they jump from animals to human beings (the zootonic effect) when humans and animals are brought closer together in dense urban clusters.  The zika virus is another threat transmitted through originally tropical-bound mosquitoes, which spread northwards through climate warming.

Fourthly, most experts today are specialists, because almost all academic and professional disciplines have become silos, that are unable to connect the dots that form the complex system-wide picture, that can change from a novel coronavirus.  Viral pandemics are the true Black Swan events that have massive system-wide impact. 

The Centre for Economic Policy Research (CEPR) has published a timely eBook called the Economics in the Time of COVID-19, where different economists comment on the different dimensions of the crisis. Some argue for more monetary policy, whilst others call for fiscal policy and disaster relief.  But this crisis is profoundly different, because it calls for systemic solutions to a global system-wide problem.  

The 2007 global financial crisis was wasted, because the rich countries refused to undertake deep, painful structural reforms, including cleaning up the scams in finance, opting for the political easier task of lowering tax for the rich as “fiscal stimulus” and relying mostly on monetary policy.   Both tools are now seriously running out of bullets.

This crisis is seriously different in terms of speed, scale and scope.  

First, less than three months from the outbreak in mid-December, the numbers infected are escalating by the day and already in 113 countries.   There is very little time to prepare and respond, including in delivery of medicine and medical supplies when the pandemic can breakout simultaneously in different cities, overwhelming the hospitals and medical facilities.

Second, the scale is unprecedented.  Never before have half of China’s population spent more than one month in home confinement and working from home.  As lockdowns are implemented in Italy and possibly elsewhere, we will experience a massive slowdown in global production, consumption and income at the same time. 

Third, most analysts initially thought that the epidemic in China would impact on the production (global supply chain) side.  But the dramatic fall in oil prices came from the demand shock, as China is the world’s largest oil buyer.  Even as China poured fiscal and monetary resources to deal with the medical and humanitarian effects, plus the draconian lockdown, it dawned that these are only short-term measures, because the stoppage in cash flow and incomes for wage-earners, small-scale business and multinationals have dire impact on everyone’s livelihood. 

In less than three months, the rest of the world will have to address what China is facing today.  This is like an earthquake/tsunami that has the hardest hitting shocks in the epicentre, that spreads globally in concentric waves and then reversing.   This is happening both virally, as well as financially, economically, politically and ultimately socially. 

The individual distress calls from those caught in the epidemic in real-time tell a profoundly human tragedy.  This time is truly different.  Business as usual is now out of the window.   The market alone will not be able to solve the crisis, because most people living at the edge of lower middle incomes cannot afford the expensive medicines and healthcare.  Government healthcare and hospital beds are not enough.  This pandemic has exposed the myth of false binaries, that complex modern problems can be solved either by purist markets or governments alone.  State-market-civil society cooperation is the only viable way forward.   

The blame game serves no purpose.  That is for history to decipher.  A variant on the internet joke is apt: pandemic (like war) is not about who is right, but all about who is left. 

The opinions expressed are solely those of the author.


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