Adam Tooze: The current financial and economic crisis

Adam Tooze, Professor of Economic History at Colombia University ran a seminar this evening on the global economic crisis. Here are some of his key points.

Keeping the lights on

This is an economic crisis unfolding by the minute. How deep is the scale of the destabilisation for the world economy? This is a shock that has affected the real economy immediately which is a deliberate act of policy (lock-down, shut-down) with the aim of addressing the crisis facing public health.

Over 3 million Americans signed on for unemployment insurance in a single week and this figure is likely to be exceeded in the weeks to come. Sharp rises in unemployment also expected throughout Europe.

Life-support programmes by governments and central banks are all directed towards cushioning this shock. They are not stimulus policies per se, they are there to allow the economy to get through this period with the minimum amount of scarring effects.

Financial markets have behaved very unusually - with a sell off of risky assets and also safer government bonds. The safest asset to be in is US government debt, a deep market with huge liquidity. But in March there was a global sell off of US Treasury debt.

The surge of money towards US dollars (there was only one trade in mid March ... "buy dollars") causes the dollar to appreciate and squeezes everyone who owes debt in dollars. In the emerging world there has been a huge expansion of dollar-based credit, companies and governments have borrowed in dollars to invest. There is a danger that a financial squeeze could reach havoc in these countries just as the coronavirus spreads into these same countries with health care systems that are massively stretched.

The capitalist system is a rickety ship constantly being patched up before the next bad weather arrives.

A shut-down in consumption

Consumption is normally fairly stable during the cycle but not in this shock. Services have taken a huge hit (again normally more stable in cycles). Will these hundreds of thousands (perhaps millions) of retail jobs come back when the public health crisis is over?

There could be a further wave of contraction.

Another big risk in the months ahead is the huge amount of corporate debt in Europe, the United States and Asia that is due to be repaid in the next year or two.