[Marxism] Adam Tooze on the pandemic’s consequences for the world economy
POSTING RULES & NOTES #1 YOU MUST clip all extraneous text when replying to a message. #2 This mail-list, like most, is publicly & permanently archived. #3 Subscribe and post under an alias if #2 is a concern. * LRB, Vol. 42 No. 8 · 16 April 2020 Shockwave Adam Tooze on the pandemic’s consequences for the world economy In March, as Europe and the US began to apprehend the scale of the Covid-19 pandemic, investors panicked. Financial markets plunged. The rout was so severe that on several occasions in the second and third week of March, normal market functioning was in question. The prices of US Treasuries, the ultimate safe asset for investors all over the world, swung wildly as fund managers, scrambling for cash, sold everything they could sell. In the foreign exchange market, through which more than $6 trillion normally swirl every day, the traffic was all one way: out of every currency in the world, into dollars. No market can function for long like that. Sterling plunged. Even gold was sold off. This was not a banking crisis like the one in 2008, but, had it not been for the spectacular intervention carried out by the US Federal Reserve, the Bank of England and the European Central Bank, we would now be facing not only the ravages of Covid-19 and the disastrous social and economic consequences of the lockdown, but a financial heart attack as well. Instead, we are experiencing a shockwave of credit contraction. Production and employment have shrunk dramatically. Huge programmes of government spending have been set in motion, not to create new jobs but to sustain the economy on life-support. The challenge isn’t merely technical. This is a global crisis, which affects virtually every community on the planet. And it has exposed stark differences between the major economic blocs, such that it is now more difficult than ever to understand how the thing we call the world economy actually fits together. The three great centres of production, exchange and corporate activity are the US, China and the Eurozone. These economic hubs are tied together through flows of trade, organised through complex supply chains that span the globe. Each of the three hubs has a hinterland extending into neighbouring regions in Latin America, East Central Europe, Africa and across Asia. They are all stitched into a global financial system that uses the US dollar as its currency of trade and credit. Each of the three hubs has characteristic weaknesses. The worry about China is the sustainability of its debt-fuelled economic growth. The basic weaknesses of the Eurozone are that it still doesn’t have a backstop for its rickety banking system and that it lacks a shared fiscal capacity; what’s more, Italy’s finances are so weak that they continually threaten to upset European solidarity. In the US, the national institutions of economic policy actually work: they demonstrated this in 2008 and are doing so again now. The Fed and the Treasury exert a huge influence not only over the US economy but the entire global system. The question is how they stand in relation to a profoundly divided American society and how their technocratic style of policymaking is received by the know-nothing nationalist right wing of the Republican Party and its champion in the White House. Over recent years, each of these weaknesses has at various times seized the attention of the fund managers and business leaders who direct global business, and the experts and technicians who advise them. It isn’t a secret that China’s debt bubble, Europe’s divisions and America’s irrational political culture pose a challenge to the functioning of what we know as the world economy. What caused the panic last month was the realisation that Covid-19 has exposed all three weaknesses simultaneously. Indeed, in Europe and the US the failure of government has been so severe that we now face a public health catastrophe and an economic disaster at the same time. And to make matters worse, Donald Trump appears tempted to juggle the two. Since 2008, the world economy has come to depend to a disconcerting degree on government stimulus. No one can pretend that our reality bears much resemblance to the pristine market models so popular in the 1980s and 1990s. But anyone who took those at face value was missing the point. All along, the state was actually involved, whether as a creator of markets, or as a distributor and enforcer of property rights. What is new is that the central banks are now permanently on call, adding further stimulus whenever growth flags. And they have been called on regularly because productivity growth has been so slow. At the same time, in an age of austerity, we have not been able to count on politicians to deliver adequate fiscal stimulus. The EU has until the current moment been deaf
[Marxism] Adam Tooze on the pandemic’s consequences for the world economy
POSTING RULES & NOTES #1 YOU MUST clip all extraneous text when replying to a message. #2 This mail-list, like most, is publicly & permanently archived. #3 Subscribe and post under an alias if #2 is a concern. * LRB, Vol. 42 No. 8 · 16 April 2020 Adam Tooze on the pandemic’s consequences for the world economy In March, as Europe and the US began to apprehend the scale of the Covid-19 pandemic, investors panicked. Financial markets plunged. The rout was so severe that on several occasions in the second and third week of March, normal market functioning was in question. The prices of US Treasuries, the ultimate safe asset for investors all over the world, swung wildly as fund managers, scrambling for cash, sold everything they could sell. In the foreign exchange market, through which more than $6 trillion normally swirl every day, the traffic was all one way: out of every currency in the world, into dollars. No market can function for long like that. Sterling plunged. Even gold was sold off. This was not a banking crisis like the one in 2008, but, had it not been for the spectacular intervention carried out by the US Federal Reserve, the Bank of England and the European Central Bank, we would now be facing not only the ravages of Covid-19 and the disastrous social and economic consequences of the lockdown, but a financial heart attack as well. Instead, we are experiencing a shockwave of credit contraction. Production and employment have shrunk dramatically. Huge programmes of government spending have been set in motion, not to create new jobs but to sustain the economy on life-support. The challenge isn’t merely technical. This is a global crisis, which affects virtually every community on the planet. And it has exposed stark differences between the major economic blocs, such that it is now more difficult than ever to understand how the thing we call the world economy actually fits together. The three great centres of production, exchange and corporate activity are the US, China and the Eurozone. These economic hubs are tied together through flows of trade, organised through complex supply chains that span the globe. Each of the three hubs has a hinterland extending into neighbouring regions in Latin America, East Central Europe, Africa and across Asia. They are all stitched into a global financial system that uses the US dollar as its currency of trade and credit. Each of the three hubs has characteristic weaknesses. The worry about China is the sustainability of its debt-fuelled economic growth. The basic weaknesses of the Eurozone are that it still doesn’t have a backstop for its rickety banking system and that it lacks a shared fiscal capacity; what’s more, Italy’s finances are so weak that they continually threaten to upset European solidarity. In the US, the national institutions of economic policy actually work: they demonstrated this in 2008 and are doing so again now. The Fed and the Treasury exert a huge influence not only over the US economy but the entire global system. The question is how they stand in relation to a profoundly divided American society and how their technocratic style of policymaking is received by the know-nothing nationalist right wing of the Republican Party and its champion in the White House. Over recent years, each of these weaknesses has at various times seized the attention of the fund managers and business leaders who direct global business, and the experts and technicians who advise them. It isn’t a secret that China’s debt bubble, Europe’s divisions and America’s irrational political culture pose a challenge to the functioning of what we know as the world economy. What caused the panic last month was the realisation that Covid-19 has exposed all three weaknesses simultaneously. Indeed, in Europe and the US the failure of government has been so severe that we now face a public health catastrophe and an economic disaster at the same time. And to make matters worse, Donald Trump appears tempted to juggle the two. Since 2008, the world economy has come to depend to a disconcerting degree on government stimulus. No one can pretend that our reality bears much resemblance to the pristine market models so popular in the 1980s and 1990s. But anyone who took those at face value was missing the point. All along, the state was actually involved, whether as a creator of markets, or as a distributor and enforcer of property rights. What is new is that the central banks are now permanently on call, adding further stimulus whenever growth flags. And they have been called on regularly because productivity growth has been so slow. At the same time, in an age of austerity, we have not been able to count on politicians to deliver adequate fiscal stimulus. The EU has until the current moment been deaf to any
