Quantitative Easing

COVID-19 and the structural crises of our time

The COVID-19 pandemic, as devastating as it is, is not simply a health crisis. It is the product of an interwoven network of diverse problems that have accumulated over time. Given the structural nature of this crisis, even as the embers of the immediate fire of infections and deaths burn, the fallout from the conflagration will continue, taking different forms in its wake, including the rise of a new pandemic.

At the societal level, COVID-19 has exposed many fractures and flaws: the inability of public health systems to cope with calamities; huge socio-economic disparities that are widening as the pandemic hits the poor and lower working class harder than the rich; the growing fragility of an inherently unstable financial system; and the political polarization between those who are economically left behind and the privileged minority who continue to benefit disproportionately from growth.

The pandemic has landed on a shaky financial scene. It hit the global economy hard as it struggled to emerge from the catastrophic 2008 Global Financial Crisis (GFC). GFC, the most severe financial crisis since the Great Depression of 1932, is the result of four decades of excessive financialization – the build-up of an inherently unstable and parasitic financial system – encouraged by financial deregulation and neoliberal economic policies.

Financialization meant that the economic center of gravity shifted from production to financial circulation, from value creation to value extraction.

Finance not only dominated the real economy, but sawed it off like the proverbial tail wagging the dog. Growth has been driven more by debt than by productivity and income gains. Speculation and investment in financial assets have fueled repeated booms and recessions.

Financialization breeds inequality and inequality contributes to the financial crisis, the two reinforcing each other. The complex interplay of all these factors has produced an unstable financial system that moves from one financial crisis to another, as happened during the savings and lending crisis in the United States in the early years of the United States. 1980s, the Latin American financial crisis of the 1980s, the Asian financial crisis of 1997, and the global financial crisis of 2008.

To get out of GFC, central banks lowered interest rates and released massive liquidity into the financial system through quantitative easing. While these policies have bailed out the banks, they have been less effective in reviving the real economy. It took 11 years after the GFC for the global output gap to turn slightly positive again before falling back into negative territory in 2020.

Companies borrowed cheap money for financial activities such as mergers and acquisitions and share buybacks rather than to invest in production. Cheap money has also enabled the wealthy to borrow at low interest rates to invest and speculate in financial markets, pushing the stock and bond markets to new highs exceeding pre-GFC levels. The results were higher levels of inequality and debt, the very mix that led to booms and recessions and recession in 2008.

In 2019, global debt had reached $ 253 trillion (320% of global GDP), 70% more than before the GFC. Inequality has also reached an all-time high, with the richest 1% of households owning more than 50% of the world’s wealth.

It was against this backdrop that the COVID-19 pandemic struck, causing the biggest drop in economic growth since the Great Depression.

The governments of most countries have gone into emergency mode, imposing unprecedented fiscal and monetary measures in response. As of May 2020, the G10 countries and China had spent $ 15 trillion on fiscal and monetary plans to save their economies.

Tax expenditures in the form of government grants and subsidies to businesses forced to close and to people who have lost their jobs or whose income has been reduced have cushioned the negative impact. Central banks have lowered interest rates to near zero and stepped up quantitative easing, this time buying not only government securities, but also mortgage-backed securities and corporate bonds.

But repeating the same monetary policies that were used to fight the last financial crisis is sowing the seeds of the next financial crisis. Ultra-low interest rates and massive liquidity are once again pushing companies into debt, supporting zombie companies, misallocating capital, and putting savers and people dependent on wages or fixed incomes at a disadvantage. profit of financial investors and speculators. Global debt has jumped 10% in one year to reach $ 281 trillion at the end of 2020, and is expected to rise further in 2021. Global financial markets have reached all-time highs, pushing valuations to dangerous levels.

The monumental bailouts allowed a rapid rebound in the first half of 2021 mainly due to the low base effect. But a full recovery is still provisional. It’s also very asymmetrical, K-shaped rather than V-shaped, with large swathes of the economy and population still very much submerged.

Policymakers are caught between the Scylla of possible inflation and the Charybdis of rising interest rates. Longer-term structural factors, such as an aging demographics and a reshaping of the global supply chain, combined with unprecedented bailouts, will lead to inflationary pressures forcing central banks to raise interest rates? ‘interest? Yet with the mountain of cheap debt weighing down on governments and businesses, rising interest rates will threaten debt servicing and repayment, not to mention huge losses of $ 16 trillion in bonds. negative return worldwide.

Like a horseman trying to get off the back of a tiger, the most difficult challenge facing policymakers is whether they are able to come up with an exit strategy from these extraordinary injections of monetary and fiscal liquidity without plunging the bank. world into another financial crisis.

Unlike the fight against COVID-19, there is no vaccine to deal with the quagmire of deep structural issues that are both cause and effect.


Lim Mah Hui is an economist and a former banker. Michael Heng Siam-Heng is a retired management professor. They are the authors of an upcoming book, “COVID-19 and the Structural Crises of Our Time,” which will be published by the ISEAS-Yusof Ishak Institute. This article first appeared in The Straits Times, Singapore, September 1, 2021.

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