Since 1975
  • facebook
  • twitter
  • Home
  • Business
  • Coronavirus threatens to savage an already ailing global economy

Coronavirus threatens to savage an already ailing global economy

Jasper Koll speaks at the event while Anthony Rowley takes notes.
Jasper Koll speaks at the event while Anthony Rowley takes notes.
Short Url:
24 Mar 2020 04:03:33 GMT9
24 Mar 2020 04:03:33 GMT9

Antony Rowley

Special to Arab News

Did "panic reactions" by the world's major central banks and governments themselves trigger the panic seen in financial markets recently, creating a negative feedback loop of stock and bond selling followed by official rescue measures and thus further alarm and more selling?

This is a theory put forward last week by veteran Japan investment analyst and government advisor Jesper Koll at the Foreign Correspondents Club of Japan. There is no reason to panic, Koll insisted, but the damage had already been done as stock markets plunged vertiginously by 20 or even 30 percent.

It is arguable that financial authorities and governments may have got ahead of the game in the size of the monetary and fiscal stimulus they began rolling out as the coronavirus reached epidemic and then pandemic proportions. And it is possible that this, in itself, helped to panic markets.

But it is equally arguable that the reason why central banks and finance ministries seemed so desperate to out a floor under the global financial system was that they knew full well what a shoddy condition the structure was in after a decade of being undermined by cheap money and bad policy.

This should be kept firmly in mind now as people blame the mayhem in financial markets on the "coronavirus crisis" when that is only the trigger and not the cause. Just as coronavirus strikes hardest at the already sick, so it is now threatening to savage an already ailing global economy.

Diagnosing accurately the pre-existing condition in global financial markets that made them vulnerable to devastatingly sudden and profound collapse is essential to rebuilding the system on a more sustainable basis once the bottom is reached. And there will be more pain before any cure takes effect.

Couple the damage done by trade wars and financial trauma to production, investment and consumption in advanced economies with record outflows of capital from emerging economies and you have the makings of a perfect storm that could force the world to close its doors to commerce and investment.

There is something grimly ironic about the outbreak at this time of the coronavirus pandemic which is forcing people and countries into quarantine and isolation mode. It mirrors a trend toward economic autarky and trade protectionism already being promoted by populist national leaders.

A situation that requires the closing of national borders, the locking down of major cities and even a kind of mass "house arrest" of populations (along with official promotion of social distancing, teleworking and online shopping) could become the final nail in the coffin of globalisation.

Throwing fiscal stimulus, which could be better employed elsewhere, at stock markets now in an almost certainly vain effort to restart these wealth creation machines does not seem a wise thing to do.

Apocalyptic scenarios abound as stock prices plunge into a seeming abyss and sovereign bonds slide as investors hoard cash rather than putting money into anything other than short term securities. There are even suggestions that financial markets could be shut down in order to avoid implosion.

The very fact that authorities are competing hard now to pump unprecedented amounts of monetary and fiscal stimulus (including even "helicopter money" in the case of the Trump administration in the US) into their respective economies suggests that they recognize their guilt in conniving at excess.

They used unconventional monetary policy, in the form of slashed interest rates and direct injections of funds into the financial system as a way to bail out major financial institutions and avoid a global economic crash in the Global Financial Crisis of 2008, and then became addicted to the remedy.

No matter that stock prices climbed over the following decade to clearly unsustainable levels (and ditto real estate value) while household, corporate and government borrowing in advanced and emerging economies alike assumed mountainous dimensions while interest rates stayed on the floor.

It all served to keep economic growth going, even if that growth was based in many cases on debt-fuelled personal consumption at the expense of investment in things like basic infrastructure or (as coronavirus is proving now) essentials like health services and social welfare.

It is revealing that of the collectively trillions of dollars being thrown now by panicky governments and central banks (guilty at what has happened), a substantial part of it is going into propping up stock prices, not least by the Bank of Japan in doubling its purchases of exchange traded funds.

Stock markets have grown into gigantic money creation dynamos (primary generators and not just auxiliary suppliers) through the "wealth effect" of rising stock prices. This in turn has served to collaterize borrowing and supercharge consumption.

Throwing fiscal stimulus, which could be better employed elsewhere, at stock markets now in an almost certainly vain effort to restart these wealth creation machines does not seem a wise thing to do. Too many billions have been wiped off stock values by the crash to allow the tactic to work.

Worryingly, such is the inflated value of assets at risk now and the level of outstanding government corporate and household debt, that key financial institutions (already hobbled in their market-making ability to regulatory changes) may be unable to cope with the sudden collapse in asset prices.

A parallel rescue operation being mounted now to keep these market-critical institutions from failing (as they threatened to do in the Global Financial Crisis a decade ago) by supplying them with liquidity should prevent a seizing up but it will not restore buoyant financial activity.

For a corporate sector facing slumping domestic and external demand (due largely to Trump trade and wars and supply chain interruptions, and not to the coronavirus) the fact that central bank are going to buy up short-commercial paper is no substitute to shrinking order books.

Central bank financing of government debt will help in getting spending going again in traditional areas of Keynesian stimulus (like infrastructure or health). The benefits will take time to appear and will not help stock market darlings. But that is no bad thing if we want more sustainable growth in the future. 

Anthony Rowley is a veteran Tokyo based journalist who specializes in East Asian affairs

Most Popular
Recommended

return to top