Adam Tooze On Virus Crisis And Who Will Lead The Recovery
Adam Tooze laughed when asked what the world will look like when the worst of the coronavirus crisis has passed. The Columbia University history professor found the outlook “almost impossible to even sketch at this point”. And that in and of itself is really a remarkable state of affairs, he commented.
“I’ve never felt in my life so uncertain about how my own personal life, how my professional life and how the world would look come the autumn.”
Millions, or maybe billions, are thinking the same right now. In varying degrees.
Tooze, author latest of Crashed: How a Decade of Financial Crises Changed the World, is situated in one of the worst infected zones outside China. New York City, New York State. With over 100,000 cases and 2,900 dead, the state has the largest number of confirmed cases in the U.S. The country now has three times the number of patients as China, where the virus first took hold.
“I’m looking now at an empty Broadway, with sirens howling in the background. We know what the reports from New York hospitals are in the last couple of days. It’s apocalyptic out there.”
In contrast, the street outside my home in Mumbai has been silent all week. A nationwide 21-day lockdown has been in force in India since March 24. The country has so far reported just over 2,500 cases and 60 deaths. But there’s no shortage of tragedy here either. Of thousands of migrant workers walking hundreds of kilometers home. Of daily wage earners struggling to survive. Of farmers searching for markets to sell their produce in.
In the West it was the virus that triggered the financial crisis. In the large emerging markets of the world economy—the likes of Brazil, Argentina, sub-Saharan Africa, India, Thailand, and Malaysia—the virus has yet to arrive at full strength. For them, the financial shock wave is running ahead of the disease.”Adam Tooze in the Foreign Policy
It’s in this backdrop that Professor Tooze and I discuss
The Scale Of This Crisis
“It’s a weird disjuncture between chaos and shambles when it comes to the public health question...and, on the other hand, a really rather dramatic concerted action in the financial realm.”
Are Central Banks Doing Enough?
“They’re playing whack-a-mole and they’re playing it very fast.”
Fed Feeding Dollar Liquidity
“I think what is driving the Fed is not some sort of benign, altruistic, hegemonic impulse...”
Impact On Emerging Markets
“There’s a variety of different possibilities here and a range of different experiences.”
India’s Fiscal Situation
“One of the questions we should not be posing at this moment are nitpicking, penny-pinching questions about fiscal capacity.”
Lead Actors In The Recovery
“...so far, the Chinese stimulus is the dog that hasn’t barked.”
“We are seeing the single most dramatic implosion of the U.S. economy in history.”
“Longer-term and medium-term, I think the deeper anxiety is that this crisis, and the disparity in the ability of the European nation-states to respond to it, will deepen and widen the divide that already exists in Europe.”
Watch the interview or read the transcript for more...
Political leaders have evoked warlike similes, central banks have responded in manners similar to that of the global financial crisis of 2008. What is your assessment of the global pandemic-led crisis?
This is an extremely, almost schizophrenic situation because I think the political analogy of war is in fact in many ways quite misleading, because what’s actually required is not mobilisation but de-mobilisation, which is an absolutely unprecedented challenge. In essence, talk of mobilisation, especially when you think of the botched response that we have seen from the Western powers, puts a rather positive complexion on what frankly is a shambles of public administration and government, which will cost tens if not hundreds of thousands of lives here. We are yet to see, of course, what the fallout will be in the emerging market world and India is at the heart of that particular hurricane.
At the same time, as you say, the central banks have rolled out a playbook that does look like 2008, but it’s 2008 on steroids. It’s coming faster, it’s larger, it’s even more generous, it’s more comprehensive in the support that it provides to the different segments of the financial system. Now, with the announcements from the Fed yesterday (Tuesday), it’s also unprecedentedly comprehensive in global terms. There were the swap lines (liquidity swap lines) – first with the privileged Western groups, including Japan. Then with the slightly larger group of 14 central banks. And now, yesterday this facility of repo-ing treasuries with the Fed. These are unprecedented moves.
It’s a weird disjuncture between chaos and shambles when it comes to the public health question, especially in the West. And, on the other hand, a really rather dramatic concerted action in the financial realm.
In which case, how do we understand what the full implications of this crisis will be - because if we don’t that get that right, we won’t get the solutions right.
Absolutely. It’s extraordinarily difficult to read right now. I think it really doesn’t fit within any of our existing schema. The idea I’m helping myself with a little bit is that this is essentially dramatising and expressing conflict which has been evident for some time.
The tension you might say, if you like, between domestic politics- which is governed by a logic increasingly of nationalism - and on the other hand the realities of globalization which mean that our economies are (whether we like it or not) incredibly densely networked. And that network, insofar as we are talking about finance, revolves around the dollar. So in other words, the national currency of the United States.
For me, therefore, the extraordinary tension between the clownish farces of Trump’s news broadcast in the evening on the one hand and the extraordinary, laser-like focus of the Fed’s response so far expresses a longer standing problem - something that is really coming increasingly to the fore in the United States in recent years. But you could trace back probably to the 1990s, when bits of the right wing of the GOP, the Republican Party, began to radicalise and make national government in the United States increasingly difficult.
Are central banks across the world, both in Western and emerging economies like India, doing enough? Will the 2008 playbook serve them well? Do they need to think further out-of-the-box?
I think Augustín Carstens of the BIS, the former governor of the Bank of Mexico, had a very interesting argument recently, where he said, yes while the playbook of 2008 is fair enough, but what we need to think about is how global finance has changed. Above all, what we’re dealing with here is not principally bank actors. India may be a little different because of the fragilities in your banking sector, but you are relatively speaking, an outlier.
In most of the emerging markets, the question is not really about banks so much as financial institutions of a wide variety, various types of funds, but also enormous corporate borrowers. The ones particularly worried I think are the quasi state-owned enterprises - the Eskoms in South Africa, the Pemex’s in Mexico, Petrobas in Brazil. These are potentially quite fragile actors whose large dollar-denominated debts could potentially spill over into doom-loop dynamics with sovereign credibility. Those are new types of problems and it may be that, as it were to complete what Carstens calls the last mile of the plumbing, if you like, we need to innovate in terms of finding ways of channeling liquidity to those actors. It’s certainly a moment for emerging markets to use their foreign exchange reserves. This is a point Brad Setser, of the Council of Foreign Relations has been making. Those reserves are there. They can be leveraged to provide very considerable liquidity and what the Fed has enabled with this repo-ing facility - is one mechanism through which those exchange reserves may now actually be mobilised.
What other mechanisms do we have at hand? You referred to the corporate debt situation - that’s ballooned in the last several years. And that’s only one potential sub-crisis that we are facing. For instance, there’s been talk of private equity seeking a debt rescue - for collateralised debt they used to able to fund investments in countries like India. Can we look at the buckets of problems that you have identified as well as those that you think are still a little bit hidden?
, the mortgage lenders, which had actually piled up derivative bets against mortgage-backed securities to protect themselves and to hedge themselves against losses they expected on their loan books, only for the Fed to step in more quickly than they’d anticipated, to prop up the mortgage-backed security market, so those short bets went bad.I think what we’re seeing really is a scrambling effort. They’re playing whack-a-mole and they’re playing it very fast. In fact, the Fed is playing whack-a-mole so fast they wrong-footed a group of their own troubled lenders
So they had, as it were, a second or third-order problem, because their hedging strategies were being wrong-footed by the interventions of the central bank. That’s next-level stuff that we never saw in 2008. So there is definitely a need for concerted action here and for careful communication.
We are shutting down, by the estimates of the last couple of days, even as China comes back online, half of the world economy - it’s being subjected to massive restrictions. The latest estimates for potential GDP fall in the United States in Q2 go up above one-third. These forecasts are by reputable, major banks, not scare tactics. We are talking about an absolutely massive shock. There really isn’t a map which tells us in advance where the weaknesses are going to emerge. We are going to have to respond on an almost day-by-day basis. There’s no autopilot basis.
In which case, what you’ve seen the Fed do, as you’ve pointed out yourself, open up dollar swap lines, first with the Western banks, and now increasingly to many other central banks around the world. Do you see that as quick and sufficient action, or do you think the Fed is going to have be even more nimble in the days to come? And if you can explain to us the criticality of keeping these dollar flows running across the global economy.
I think what is driving the Fed is not some sort of benign, altruistic, hegemonic impulse, though there may be liberal-minded people like that in the Federal Reserve System I don’t doubt. But what is really troubling them is the disturbances they saw in the markets for U.S. treasuries. That market is foundational for the global, financial system. Those are the safe assets on which everyone’s portfolios ultimately have to rely. They were seeing so much distressed selling by major actors in the global financial system that rely on short-term dollar funding, or being able to hedge dollar positions.
From the point of view of the survival of the emerging markets themselves, a whole set of different arguments come into play. And it’s very difficult, I think, to imagine that the rolling out of central bank liquidity swap lines and these fancy repo facilities are going to be enough to reach the more distressed, poorer corners of the emerging market world. This is because those aren’t countries with large reserves of dollars which they can then repo with the Fed.
So there the IMF really does come into play. And with that, of course, the entire politics of the international financial institutions, the unresolved legitimacy questions which go back decades to the beginning of emerging market debt crises in the 1980s. There are very very serious questions there. Again, one has to say that some people are somewhat surprised that the Trump administration in the U.S. has moved quite rapidly to signal to the IMF that they approve the rollover of IMF funding so that the IMF’s lending capacity remains large. But those are last-ditch efforts with truly stressed borrowers, and of course, we hope that no large emerging markets sovereigns find themselves in a position that they have to go with a tail between their legs to the IMF.
Is there any way to tell what more the Fed will have to do to keep dollar-liquidity flowing across the world? Or like you said, it’s going to be “each day as it comes”?
“Each day as it comes.” They’re going to watch the various swap markets, where people exchange forward contracts on dollars, very, very closely to make sure that no tensions develop. What we’ve experienced with the swap lines to date is that it takes several days for them to come into effect and for the softening/calming influence to make itself felt. It would be very interesting to monitor in the accounts of the major central banks the way in which this new repo facility is used or not.
Are the large borrowers in China that now facing mad risks that they cannot manage? One think of the very large real estate developers have absolute huge dollar debt outstanding, much of which needs to be rolled over.
The Chinese, of course, also have huge reserves. But saying that doesn’t actually tell you how you actually channel the liquidity to the distressed borrower. So those games are all going to have to be played out. But you are right. This is very much a matter of day-by-day.
You’ve written a very interesting piece on emerging markets for Foreign Policy in which you make the point that - “In the West it was the virus that triggered the financial crisis. In the large emerging markets of the world economy—the likes of Brazil, Argentina, sub-Saharan Africa, India, Thailand, and Malaysia—the virus has yet to arrive at full strength. For them, the financial shock wave is running ahead of the disease.” - We’ve already seen unprecedented outflows when it comes to foreign investment money, let’s say from countries like India. How are you reading what the next few months for EM’s will be like?
There’s a variety of different possibilities here and a range of different experiences. It’s important to not over generalise and create some sort of bucket category into which states like India and South Africa all fall under the same rubric. That would be foolish. But I think we can isolate extreme cases of more or less strong categories.
I think South Korea bizarrely still fits in the emerging market category and clearly their coping is going to be very different from that say of the country arguably I’m most worried about, South Africa, because the epidemic there is already deeply bit in. It is nowhere near the same kind of financial position of a state like India. It has been downgraded to junk now, completely. It is very exposed to international finance. The Rand has collapsed. It has a huge immuno-compromised population living with HIV and mass, youth unemployment. This is a combination of pressures that makes a country like South Africa incredibly vulnerable.
Within India, I’m not an expert who can talk about development. But as an outsider, watching the drama of a state like India attempting to impose a lockdown on a labour force of over 450 million people, only 20 percent of which are in the formal sector, has been a truly staggering spectacle. How your society, politics, and economy digests that shock will be a crucial test. After all, India is not just a case of something, India is one-sixth or more of humanity. A huge part of the drama is at stake here. Some very serious questions will need to be asked in the aftermath about the relevance and applicability of models that were pioneered by the Chinese or the South Koreans to other societies.
Do you think it’s inevitable for countries like India to substantially expand their fiscal balance sheets, despite the incumbent problems that come with it - fiscal deficit, currency etc. These are questions being asked even as the government is yet to discuss or announce any large expansion of the fisc.
If not now, when? I mean, what is the reserve for? What is that fiscal capacity for, but to beat crises like this? It’s unimaginative and unhelpful to compare this to a war, but it’s nevertheless absolutely a fundamental, existential challenge to our capacity to cope. And it frankly, is just the beginning - because we’re really rather lucky at the form this particular virus takes, it could have been much worse. And we need to brace and understand how we are going to react to these kinds of challenges.
States like India, which do have the capacity to act, should act. We should ask the question of how we pay for the war against the virus afterwards. It should be a subordinate and subsidiary question. And, it is one that is going to have to be faced by the whole world and we know the terrible knots the Europeans have managed to tie themselves into over this.
India should mobilise its central fiscal capacity to manage this crisis. Of course, in India, the balancing of regional interests in this gigantic state will be absolutely crucial. But no, that’s not the first-order question here.
Neither is inflation.
Again this is a huge, mind-bending expansion of ultimately the money supply, the balance sheets of the central banks. It violates every first principle of simple monetarism that we would have grown up on in the 70s and 80s. But we’ve learnt that this kind of thing doesn’t by itself drive inflation. Not aggregate inflation. There may be spikes in the prices of particular things, but not aggregate inflation. That shouldn’t be our concern right now.
Who do you think is going to help lead the recovery out of this crisis? It’s interesting you mentioned that China’s finally somewhat coming back into economic activity and there’s much to be said about the fact that as yet we haven’t heard any announcement from China in terms of any kind of large fiscal expansion, although there has been monetary support coming in, from the liquidity point of view, by the PBOC. Who will lead the recovery out of this crisis?
It’s likely to be China I think, because they are way ahead of us. A, they contained the crisis much better than anyone in the West. They’re way ahead of us on the curve. They have the capacity I think to perform the famous dance back and forth with this virus to moderate the recovery in the way that’s necessary.
This is not 2008. We haven’t seen a massive, party-led effort to roll out nationwide infrastructure projects. I think we have to ask serious questions about why that might be. And, I think the answers are obvious. We know that Beijing is seriously concerned about the fragility of its financial system. We know they’ve piled up an enviable in some way but in other respects unproductive pile of infrastructure, which means their debt burden is less sustainable than it ought to be. They have the shock of 2015-16 when they haemorrhaged more than a trillion dollars in reserves, which even for a country with China’s reserves is a huge drain. And they don’t want to repeat that experience, and furthermore the rest of the emerging market world would be shocked in the worst possible way if the Chinese currency began to slide. So everyone’s probably relieved about the fact that that is one crisis we haven’t had to deal with.
But, all of those constraints mean that Beijing would have to move more gingerly than it did in 2008 when it simply put the hammer down, pedal to the metal, and went for one of the most gigantic expansions, if not the most gigantic expansion, we’ve ever seen in peacetime. That doesn’t seem to be our reality either. So, a kind of a constrained, emerging, hegemon in China, surrounded by Japan, South Korea, Taiwan, and Singapore, which more or less reluctantly will be dragged along by China’s recovery when it comes.
In the last decade, and you made that point in one of your columns, it was China that played a big role via fiscal expansion in lifting the global. And yes, of course, we know that maybe it has to play a more constrained role now. But, politically, what does that mean across the world? Given what we’ve seen a change in the relationship these last few years between the U.S. and China.
It’s too early to tell. We don’t know how this is going to play out. There’s obviously the potential to politicise the virus itself. We’ve seen a little bit of ping-pong between the United States and Beijing on that score.
What I think we really have to reckon with is not so much the talk but the sheer facts of this drama. If we take the number seriously, that the American President finally presented, soberly to the American public last night, and we take the best possible estimate of say a 100,000 deaths. And, If we assume that the Chinese have underestimated their deaths by a factor of ten. Say they’re engaging in an extraordinary propaganda cover-up.
Now, that’s not propaganda. Those are just the naked facts of public health about this disaster. And, those will speak very loudly, I think, in the aftermath of this crisis. There will, of course, be spin, there will be politics, there will be a return to the geopolitical contestation, the struggle for what the Americans call, “the Indo-Pacific region.” That will, of course, all come back. But it will be overlaid by this shattering failure of public health policy that we are beginning to see unfold in the West. And it can’t be emphasised strongly enough that we are only just at the beginning.
You’re convinced that it is going to be China and Asia that actually lead the world out of this crisis?
It’s a fact at this moment that the economy that is re-starting is the Chinese economy and the South Korean economy. And Western firms, whose businesses are beginning to ramp up, are those with businesses in China and Asia. That is where it’s de facto happening.
We, right now, are in freefall. We don’t know what the American jobs numbers on Thursday are going to be, but they’re likely to be apocalyptic, like the ones last week were.
That is our reality right now and that will continue to be our reality for many weeks if not months to come. It depends, of course, critically on how we get the public health crisis under control and you can hardly be optimistic about that at this point.
Of course, we are caught up in the drama, I may be being alarmist. I’m looking now at an empty Broadway, with sirens howling in the background. We know what the reports from New York hospitals are in the last couple of days. It’s apocalyptic out there. They’re building tent cities in Central Park. And, it isn’t the American government that’s doing it, it’s charities that are building tent hospitals. So, it’s an extraordinary mess.
And, this will prevail for weeks, if not months to come. And that, I think, must have an effect on our understanding of, if not the balance of power in a simple sense, then the question really of what modern governments looks like and who’s capable of delivering it. This is not a question of democracy versus authoritarianism, because South Korea and Taiwan have delivered extraordinary examples. And, who knows, the German numbers may stay good and it’s possible that Germany will emerge from this as the outlier in Europe. As the country which had the reserve capacity and had the tests on hand. So this is not going to be a simple lesson. But I think we have to take seriously what the implications of this drama are.
We’ve discussed European Union very little. You just mentioned Germany. What role do you think that’s going to play in the post-virus crisis scenario?
What we desperately hope that this doesn’t degenerate into either one of two nightmares. The most extraordinary and urgent would be if this spirals into a sovereign debt crisis in Europe. And, that’s what it looked like a couple of weeks ago when Madame Lagarde made her gaffe as ECB President and said it wasn’t the job of the ECB to manage spreads. The markets reacted the way they were reacting in 2010, 2011, and 2012. We were back to that situation - Italy taking the Eurozone down. That is absolutely the last thing the Eurozone needs right now.
Europe is not the driving, beating heart of economic growth worldwide. It in fact has a trade surplus that weighs on other people’s current accounts. But nevertheless, this would be an implosion that we don’t want to have to deal with. That may have been staved off. Again, the central bank, the ECB, is carrying the water essentially for politicians who may have failed to deliver the fiscal deal that we need.
Longer-term and medium-term, I think the deeper anxiety is that this crisis, and the disparity in the ability of the European nation-states to respond to it, will deepen and widen the divide that already exists in Europe. And, politically speaking, the damage may already have been done, in the sense that a group of nine leading European heads of government, led by the French, the Italian, the Spanish, and the Portuguese, explicitly called for the introduction of Corona bonds and they were turned down at least in the first instance by the Dutch and the Germans in no less explicit terms.
It’s difficult to see how you really roll back from that. That is the political challenge that now confronts Europe. The capacity now for populists across Europe, when the crisis has calmed a little bit, to take advantage of this, and to play it for all its worth, is really alarming. I think you really have to ask questions about the wisdom of decision-making both in the Netherlands and in Germany in opening that door to populism.
I know it’s early days, but I do want you to look out maybe a month or two from now, if that’s possible, and give us a sense of what the world will look like after the worst of this crisis has passed. Politically, financially, or even socio-economically.
I laugh only because it’s such an extraordinarily difficult question to answer. And, what we see right now is such stark divergence and so many gigantic open questions. We’ve spoken a lot about the divergence between Western Europe and the United States on the one hand and China and Asia on the other. But the drama (and I don’t need to tell you to tell this, speaking to you in India) is only just beginning to unfold in countries like yours, in sub-Saharan Africa. We simply don’t know how dramatic this crisis is going to become in terms of mortality and the damage it does to public health systems.
I think particularly on the fiscal side, we are going to see further waves of expansionary effort. Those then, in turn, will engender, 6-12 months down the line, an almighty hangover. It was profound, after 2008 when there was a huge blowup of fiscal deficits across the advanced economies and then a major pushback in the austerity wave of 2009-2010 that hit with such a vengeance. I would expect a similar oscillation to play out after this crisis as well. And, since it overlaps with other absolutely profound global issues like the relationship between China, Asia, and the West. Or climate politics, which also demands our urgent attention. I find the outlook almost impossible to even sketch at this point. And that in and of itself is really a remarkable state of affairs.
I’m sure this is true for everyone around the world. And in a relatively upholstered position, I can face this uncertainty with a kind of intellectual bemusement that if your life is on the line and you are living hand-to-mouth (less than $2 a day), the anxiety must be absolutely overwhelming.