The Great Shutdown
COVID-19: The return of the state
The response to the pandemic has seen governments intervene in economies, financial markets and everyday life with unprecedented speed and reach. I...
Apr 24, 2020
A new series from the Ninety One Investment Institute
Self-filmed at home by our authors, during the Great Shutdown.
COVID-19 and its aftermath is a “general crisis.” It touches on politics, economy, society, and culture all at once. Describing one such period in the seventeenth century, historian Hugh Trevor-Roper said it was “as if a series of rainstorms had ended in one final thunderstorm which has cleared the air and changed, permanently, the temperature of Europe.”1
Clearly COVID-19 has the potential to do the same for the world. Consider it in comparison with our last crisis:
This is already a much deeper economic downturn than the global financial crisis (GFC) of 2008-09. Then, world output declined by 1.7%, whereas today it is projected to decline by more than 2.5%. The US equivalents are -2.5% and -5%, and the eurozone equivalents are -4.5% and -5%. These figures are likely to end up larger since economic forecasts are typically slow to adjust to paradigm shifts.
Meanwhile, monetary stimulus enacted by the G20 group of countries during the GFC were around 30% of output, whereas recently announced US and eurozone monetary stimulus is 40% and 33% of output respectively.2
On fiscal stimulus, the GFC figure was around 2% of GDP, whereas the equivalent figure for the US and eurozone are multiples that—13% and 17% respectively. 3
During the GFC, we were reminded that the state was the lender of last resort. But today the state is also the employer of last resort and the purchaser of last resort. Not since the Second World War has this been the case in the Atlantic economies.
China, where fiscal policy, monetary stimulus and industrial policy are centralised, now looks less of a deviant aberration and more a reminder of what wartime Western state capacity looked like.
The GFC highlighted a deep network of cooperation among the largest economies at the G20 summit in London in April 2009. This crisis has revealed profound disunity among state actors, as countries compete to secure protective equipment, close borders, and spread misinformation.
The GFC, for all the wreckage it wrought, was primarily a financial crisis that could be solved by financial means. It did not transform relations between employee and employer, citizen and state. COVID-19 is already doing both. We are, for now, returning to a much older, more Hobbesian, conception of priorities.
Nevertheless, not everything changes at once. Parsing the medium-term trends is not as simple as extrapolating forward observations made at the peak of the catastrophe. For example, we are unlikely to see tax increases until the economy is back to full employment, precisely because we are trying to encourage full employment. Just as pre-COVID-19 financial markets were extreme in ignoring the biosecurity structure upon which economic prosperity rested, today many are extreme in assuming all aspects of life are going to change at once.
The deepest effects of COVID-19 will primarily play out over years—not months—and are going to be subject to political choices made by leaders and societies. It is just as important to know what will not change as much as what will change.
In the research we are sharing over the coming weeks, we carefully examine a number of dimensions around the potential medium-term transformation brought about by COVID-19. We will not just consider the extremities of what may happen, but also what is likely to happen. Our research is interdisciplinary, using history, economics, political and social analysis, to demonstrate our thoughts.
We start by focusing on the policy choices for dealing with historical debt overhangs (Dealing with the debt burden). The conflict between creditors and debtors, which had already revealed itself pre-crisis, is now likely to intensify. We imagine the ways in which government policy will affirm Philip Coggan’s conclusion that “the massive debts accumulated over the last forty years can’t be paid in full, and they won’t be paid.”
Following this, our weekly topics will cover:
The owl of Minerva spreads its wings only with the falling of dusk. Hegel’s famous line implied that we can only understand or appreciate historical events after they pass. Market practitioners do not have such a luxury. Instead, they need to understand history while it is being made, which is ultimately what this series sets out to do.
1Trevor-Roper, H., The Crisis of the Seventeenth Century, Liberty Fund, 2001, first published 1967, p. 46,
2Silberston, R., “Fast and furious: policymakers react to COVID-19,” Ninety One, 6 April 2020.
3Silberston, R., “Fast and furious: policymakers react to COVID-19,” Ninety One, 6 April 2020.