If we are really unlucky, a series of debt defaults and the disintegration of government coherence in some fragile states could seriously damage the multilateral global order. Now it is Coronavirus.
The Coronavirus begins in Asia, rips through the capital cities of Europe and wipes out at least a third of all human beings in its way. When it is all over, revolts begin, cherished institutions fall, and the entire economic system has to be reconfigured.
That is a short history of the Black Death, a bubonic plague pandemic caused by the bacterium, Yersinia pestis, which spread from Mongolia to Western Europe in the 1340s.
Because the economy then was based on local agriculture and crafts, ordinary life bounced back relatively quickly.
That, in turn, started a process of economic change that brought an end to the feudal system and, some argue, triggered the rise of capitalism.
Today, capitalism faces its own plague nightmare. Though the Coronavirus may kill between 1 percent and 4 percent of those who catch it, it is about to have an impact on a much more complex economy than the one that existed back in the 1340s – one with a much more fragile geopolitical order, and on a society already gripped with foreboding over climate change.
Let us consider the massive changes the Coronavirus has already forced.
First, the partial shutdown of daily life in large parts of China, India, most of Europe and numerous states in America.
Second, significant damage to the reputations of governments and political elites who either denied the seriousness of the crisis, or in the initial stages proved incapable of mobilising their healthcare systems to meet it.
Third, an immediate slump in consumer spending across all major economies which is certain to provoke the deepest recession in living memory: share prices have already collapsed and this, in turn, hurts middle-class families whose pension funds have to invest in shares. Meanwhile, the solvency of airlines, airports and hotel chains is in doubt.
In response, states have launched economic rescue packages so massive that most people have not yet got their heads around the implications. The US government will inject two trillion dollars into the economy – through a mixture of direct payments to citizens and loans to business – more than half of what it collects in taxes in a year.
Meanwhile, the central banks have switched to a new and aggressive form of quantitative easing. Just as after the last global financial crisis in 2008, they will create new money to buy up government debt – but this time, it is not going to be gradual, or focused on the safest government bonds. Introduced as a panic measure in 2008, it seems quantitative easing could be with us for decades.
To understand why that is over-optimistic, let us use the metaphor of a building.
In the 2008 financial crisis, it looked like the “roof” – the finance system – had collapsed onto the main structure which, though it was damaged, stood firm and we eventually rebuilt the roof.
This time, by contrast, it is the foundations that are collapsing – because all economic life in a capitalist system is based on compelling people to go to work and spend their wages.
Since we now have to compel them to stay away from work, and from all the places they usually spend their hard-earned salaries, it does not matter how strong the building itself is.
In fact, the building is not that strong. Much of the growth we have experienced during the 12 years since the last financial crisis has been fuelled by central banks printing money, governments bailing out the banking system and debt.
Instead of paying down debt, we amassed an estimated $72 trillion more of it.
Unlike the time of the bubonic plague, 21st-century trade and finance systems are complex – which, as we learned in 2008, means they are fragile.
Many of the assets circulating in the finance system are – just as in the run-up to the 2008 crisis – complicated bundles of IOUs issued by banks, insurance groups and other financial companies. Their value lies in the fact that they give the holder a claim on future income.
Our gym memberships, our student loan repayments, our rents, our car repayments this year, next year and beyond are already counted as “paid”, with people in the finance system taking sophisticated bets on how much they are worth.
But what happens when we do not go to the gym, do not buy a new car? Some of those IOUs become worthless and the financial system has to be bailed out by the state.
Let us understand why economists have been so hostile to Coronavirus crisis measures upto now.
With universal income payments, British conservative politician Iain Duncan Smith pointed out, the problem is they might “discourage people from going to work”.
When it comes to state ownership and attempts to plan production (for example, the current scramble for ventilators), free-market economists believe such attempts at human control get in the way of the market, which, in their opinion, functions as an intelligent machine, bringing order to the world in a way no planning agency or government can ever do.
As for the funding of state debts by central banks, this is seen as an admission of moral defeat by capitalism: It is entrepreneurship and competition that are supposed to drive growth, not the Bank of England or the Fed printing money and lending it to their treasuries. Therefore, a capitalism permanently reliant on these mechanisms is unthinkable to most traditional economists.
The capitalism that emerges from this in the mid-2020s will have already paid out tens of billions of dollars in basic income payments; it will have seen airlines and hotel chains nationalised; and the government debts of the advanced economies, currently averaging 103 percent of their gross domestic product, will be way above that. We do not know how much higher, because we do not know yet how far GDP will fall.
If we are really unlucky, a series of debt defaults and the disintegration of government coherence in some fragile states could seriously damage the multilateral global order. Security planners fear that if states like Venezuela, North Korea or Ukraine were to fall into chaos, the temptation for neighbouring giants like the US, China and Russia to “rescue” them by sending in troops would be strong.
Lockdown is placing pressure on the global economy. We face a serious recession. This pressure has led some world leaders to call for an easing of lockdown measures.
The economics of collapse are fairly straight forward. Businesses exist to make a profit. If they can’t produce, they can’t sell things. This means they won’t make profits, which means they are less able to employ you. Businesses can and do (over short time periods) hold on to workers that they don’t need immediately: they want to be able to meet demand when the economy picks back up again. But, if things start to look really bad, then they won’t. So, more people lose their jobs or fear losing their jobs. So they buy less. And the whole cycle starts again, and we spiral into an economic depression.
In a normal crisis the prescription for solving this is simple – the government spends, and it spends until people start consuming and working again.
But normal interventions won’t work against Coronavirus because we don’t want the economy to recover (at least, not immediately). The whole point of the lockdown is to stop people going to work, where they spread the disease. One recent study suggested that lifting lockdown measures in Wuhan (including workplace closures) too soon could see China experience a second peak of cases later in 2020.
To them, both the Coronavirus and the climate crises look like asteroids hitting a planet: external shocks requiring a temporary and reversible response. In fact, they are shocks generated by “planet capitalism” itself – or at least in the form we have adopted it.
We do not know what an industrial capitalism without carbon would look like because our institutions, practices and cultures are all based around fossil fuel extraction.
Likewise, we do not know what globalisation would look like without a billion people living in slums, without deforestation, live animal markets and without widespread diseases of poverty in the developed world – again because these have become fundamental features of capitalism as it really exists.