The Coming Greater Depression of the 2020s

While there is never a good time for a pandemic, the COVID-19 crisis has arrived at a particularly bad moment for the global economy. The world has long been drifting into a perfect storm of financial, political, socioeconomic, and environmental risks, all of which are now growing even more acute.

Nouriel Roubini

roubini139_Richard Baker  In Pictures via Getty Images_UKcoronaviruseconomynews


NEW YORK – After the 2007-09 financial crisis, the imbalances and risks pervading the global economy were exacerbated by policy mistakes. So, rather than address the structural problems that the financial collapse and ensuing recession revealed, governments mostly kicked the can down the road, creating major downside risks that made another crisis inevitable.

And now that it has arrived, the risks are growing even more acute. Unfortunately, even if the Greater Recession leads to a lackluster U-shaped recovery this year, an L-shaped “Greater Depression” will follow later in this decade, owing to ten ominous and risky trends.

The first trend concerns deficits and their corollary risks: debts and defaults. The policy response to the COVID-19 crisis entails a massive increase in fiscal deficits – on the order of 10% of GDP or more – at a time when public debt levels in many countries were already high, if not unsustainable.

Worse, the loss of income for many households and firms means that private-sector debt levels will become unsustainable, too, potentially leading to mass defaults and bankruptcies. Together with soaring levels of public debt, this all but ensures a more anemic recovery than the one that followed the Great Recession a decade ago.

A second factor is the demographic time bomb in advanced economies. The COVID-19 crisis shows that much more public spending must be allocated to health systems, and that universal health care and other relevant public goods are necessities, not luxuries. Yet, because most developed countries have aging societies, funding such outlays in the future will make the implicit debts from today’s unfunded health-care and social-security systems even larger.

A third issue is the growing risk of deflation. In addition to causing a deep recession, the crisis is also creating a massive slack in goods (unused machines and capacity) and labor markets (mass unemployment), as well as driving a price collapse in commodities such as oil and industrial metals. That makes debt deflation likely, increasing the risk of insolvency.

A fourth (related) factor will be currency debasement. As central banks try to fight deflation and head off the risk of surging interest rates (following from the massive debt build-up), monetary policies will become even more unconventional and far-reaching. In the short run, governments will need to run monetized fiscal deficits to avoid depression and deflation. Yet, over time, the permanent negative supply shocks from accelerated de-globalization and renewed protectionism will make stagflation all but inevitable.

A fifth issue is the broader digital disruption of the economy. With millions of people losing their jobs or working and earning less, the income and wealth gaps of the twenty-first-century economy will widen further. To guard against future supply-chain shocks, companies in advanced economies will re-shore production from low-cost regions to higher-cost domestic markets. But rather than helping workers at home, this trend will accelerate the pace of automation, putting downward pressure on wages and further fanning the flames of populism, nationalism, and xenophobia.1

This points to the sixth major factor: de-globalization. The pandemic is accelerating trends toward balkanization and fragmentation that were already well underway. The United States and China will decouple faster, and most countries will respond by adopting still more protectionist policies to shield domestic firms and workers from global disruptions.

The post-pandemic world will be marked by tighter restrictions on the movement of goods, services, capital, labor, technology, data, and information. This is already happening in the pharmaceutical, medical-equipment, and food sectors, where governments are imposing export restrictions and other protectionist measures in response to the crisis.2

The backlash against democracy will reinforce this trend. Populist leaders often benefit from economic weakness, mass unemployment, and rising inequality. Under conditions of heightened economic insecurity, there will be a strong impulse to scapegoat foreigners for the crisis. Blue-collar workers and broad cohorts of the middle class will become more susceptible to populist rhetoric, particularly proposals to restrict migration and trade.1

This points to an eighth factor: the geostrategic standoff between the US and China. With the Trump administration making every effort to blame China for the pandemic, Chinese President Xi Jinping’s regime will double down on its claim that the US is conspiring to prevent China’s peaceful rise. The Sino-American decoupling in trade, technology, investment, data, and monetary arrangements will intensify.

Worse, this diplomatic breakup will set the stage for a new cold war between the US and its rivals – not just China, but also Russia, Iran, and North Korea. With a US presidential election approaching, there is every reason to expect an upsurge in clandestine cyber warfare, potentially leading even to conventional military clashes. And because technology is the key weapon in the fight for control of the industries of the future and in combating pandemics, the US private tech sector will become increasingly integrated into the national-security-industrial complex.

A final risk that cannot be ignored is environmental disruption, which, as the COVID-19 crisis has shown, can wreak far more economic havoc than a financial crisis. Recurring epidemics (HIV since the 1980s, SARS in 2003, H1N1 in 2009, MERS in 2011, Ebola in 2014-16) are, like climate change, essentially man-made disasters, born of poor health and sanitary standards, the abuse of natural systems, and the growing interconnectivity of a globalized world. Pandemics and the many morbid symptoms of climate change will become more frequent, severe, and costly in the years ahead.

These ten risks, already looming large before COVID-19 struck, now threaten to fuel a perfect storm that sweeps the entire global economy into a decade of despair. By the 2030s, technology and more competent political leadership may be able to reduce, resolve, or minimize many of these problems, giving rise to a more inclusive, cooperative, and stable international order. But any happy ending assumes that we find a way to survive the coming Greater Depression.


Nouriel Roubini, Professor of Economics at New York University's Stern School of Business and Chairman of Roubini Macro Associates, was Senior Economist for International Affairs in the White House’s Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank. His website is NourielRoubini.com.

Oil Price Shock: What It Means for Producers and Consumers




With drastic declines in consumer demand, the coronavirus pandemic has created a difficult new world for the oil industry. On April 20, prices for futures contracts expiring on April 21 for the U.S. benchmark crude oil – West Texas Intermediate (WTI) – turned negative to minus $37.63 a barrel.

Spot prices also fell below zero, and panicky oil producers and traders dumped a large volume of futures contracts. Prices for Brent, the benchmark for crude from the North Sea, also crashed, although they stayed in positive territory.

By April 21, prices for the benchmark WTI crude were back in the black. But its brief stay in subzero levels raised new questions that were beyond how long and how deep COVID-19 would cut demand.

For producers, the negative prices had them worrying briefly about paying buyers to buy their oil, but now they face longer term concerns, such as having to curtail output; shut down producing wells and defer new well openings; put off exploration; and file for bankruptcies or get acquired in a wave of consolidation, according to experts at Wharton and elsewhere.

In late March, when WTI prices fell from the year’s opening at $61 to some $23 a barrel, the Penn Wharton Budget Model (PWBM) estimated that if oil stays at $23 a barrel through the end of 2020, it would eliminate about 0.25% of GDP, and growth in business investment would be 1.9 percentage points lower.

“Historically, cheap oil was great for American manufacturing,” said Kent Smetters, Wharton professor of business economics and public policy and faculty director of PWBM. “In fact, the major recession in the mid-1970s was caused by the OPEC oil embargo.

Today, however, oil supports a large production network in the U.S.” In a blog post, Alexander Arnon, a senior analyst at PWBM, shows the close relationship between oil prices and business investments in the U.S.

“The biggest concern may be a lack of capital across all industries – including clean tech – due to a steep recession, and fewer consumers who could afford new vehicles and thus are holding on to their fuel-inefficient older gasoline vehicles longer,” said Arthur van Benthem, Wharton professor business economics and public policy.

Why Oil Crashed

Last week’s negative price shock occurred in the wake of anxiety that had gripped traders and investors over reports that storage capacity was running perilously short at Cushing, Oklahoma, the sole delivery point for WTI crude. The impulse was a rush to sell. “Investors and traders were so desperate not to receive oil that they were willing to pay others to take the barrels instead,” a Wall Street Journal report noted.

The panic over the shortage of storage capacity led to a rush to dump futures contracts, said Charles F. Mason, University of Wyoming professor of petroleum and natural gas economics.

“If you enter into a futures contract, then there’s an obligation for the product to change hands at a specified point in time.

But you have time to plan for that,” he explained. “What we’ve seen here is that the people who held futures contracts and therefore were obligated to take possession of the crude at a certain point in time had no place to put it because storage capabilities were filling up. Maybe they waited, expecting things to loosen up. They didn’t and then they were very panicky.”

The April 20 price crash “emphasized how much oversupply there is at the current time,” said Wharton finance professor Jeremy Siegel. “It was a terrible misestimate by traders of the storage capabilities in Cushing, Oklahoma,” he added. “Otherwise why would people be buying long contracts?”

The COVID-19 pandemic has battered the oil markets in a way that hasn’t been seen before.

“Energy analysts are pretty good at explaining how certain shocks would affect the oil market if they were to happen, but of course they cannot predict when such shocks happen, or with what intensity,” said van Benthem. “COVID is simply outside what even the most far-reaching energy market scenarios had considered.”

“Given current demand and storage, it seemed likely oil would have to sell for negative,” Smetters said. In a LinkedIn post, he clarified why: “[The] intuition is that future markets expect oil to return to $30+ by November, and so it is cheaper to sell oil for zero or even negative once storage capacity is exhausted than to cap wells now and uncap in November.”

The U.S. crude oil storage capacity is about 91 million barrels, according to the latest report of the U.S. Energy Information Administration. Nearly 80% of that capacity is booked “by smart and generally well-heeled companies that saw this coming,”

Tom Kloza, global head of energy analysis at IHS Markit’s Oil Price Information Service told MarketWatch last week. Current oil production is about 90 million barrels per day, but demand is only 75 million barrels per day, the report pointed out.

President Trump had said in early April that he had spoken with leaders of Saudi Arabia and Russia to cut production, and a week later, OPEC and its allies announced cuts of 10 million barrels a day.

“What [Trump] did not foresee, but some of the oil market did foresee, is that U.S. output would drop much more precipitously because there simply would be no place to put it in,” Spencer Jakab from The Wall Street Journal said in a video report.

The panic also caused some overreaction by traders and investors. Mason found it “puzzling” that spot prices paralleled futures prices in swinging wildly Monday last week. Unlike with a futures contract, “you enter into a spot trade when you need the stuff,” he said. “It might just be a behavioral thing that people are overreacting – and there definitely was some overreaction.”

Siegel said that wrong calls by automated trading may be the culprit behind last week’s dramatic price fall. “It could have been – and I’m speculating here – that a lot of computers were looking at the spreads between the current [prices] and the [futures] and noting that they were very large, and that historically, you would do well if you buy. A lot of that might have been basically computer buying, not realizing there are special circumstances there that could cause the price to go negative.”

One fallout from that episode could be a greater reliance on Brent as a more reliable benchmark than WTI, said Siegel. (The three benchmarks for crude oil are Brent, which refers to production from the North Sea; WTI for U.S. crude delivered at Cushing, Okla., and Dubai/Oman, for Middle Eastern crude.)

“WTI is going to assume less and less importance in the future and more oil buyers will index to Brent, or they will dramatically change the WTI delivery contract,” he said. WTI futures contracts have less flexibility, because they require buyers to take delivery at only Cushing, whereas Brent crude deliveries can be taken at a variety of locations, a Forbes column noted.

A New Normal

In any event, “a new normal” is being defined by the pandemic, said Mason. It appears that the pandemic will pass in China, followed by parts of Europe and then by parts of the U.S., which will lead to a reopening of economies and lifting of some restrictions such as stay-at-home orders, he said.

When they abate, people will get back out in the world,” he added. “The biggest problem for crude markets right now is that just with the sequestering [of people], there’s a lot less driving.”

That of course translates into lower demand for gasoline, and therefore for crude oil. “When it does pass, you’ll be back into something that looks a little bit more like the market not that long ago.”

Mason declined to predict what the price of crude would be once the markets gain equilibrium.

“But I would be surprised if it was not well above $25 [a barrel],” he said. But that possibility is subject to caveats, Mason noted. The first is the possibility of the energy markets actually having surplus storage capacity.

“The reason why I want to hedge my bets is that with so much storage in place – floating storage, oil in tankers, physical stores, oil in storage [facilities] and here and there and everywhere – oil is going to make its way out of the market,” Mason said.

“The last time we had a scenario like this was after the prices crashed in late 2014,” he recalled.

“Lots of oil in was storage and it depressed markets for a long time. It took several months for all that to work through.”

That situation could play out in the current setting as well, he noted.

Another caveat is the impact of “behavioral changes” in how work gets done, said Mason. That would include increased telecommuting, organizations requiring fewer employees to work out of offices, or have their employees come to work on fewer days of the week, staggering work hours and so forth.

Those practices would mean offices would need less heating and ventilation, for example, and also reduce rush-hour traffic congestion, he noted. Another wild card is how after the pandemic people take to international or long-haul travel, and the impact on demand from the aviation industry, he added.

Oil demand could revive and lift prices if the pandemic passes and economic activity returns to levels that prevailed three or six months ago, said Mason. If such a revival occurs, “then I would be very surprised if crude prices stay below $30. But that could easily be half a year,” he added.

Many in the oil industry worry that the pandemic will continue in the summer months that usually see peak demand. All over the world, people have cut back on business and holiday travel and economic activity has shrunk, dramatically reducing demand for oil.

Cheaper crude will not necessarily translate readily into bounties for consumers. “It is hard to store up oil … unless you have a nice in-ground swimming pool,” said Smetters. “And, just because crude oil is free or even better priced, it still costs money to refine it and distribute it. Gas prices at the pump won’t go to zero even at negative crude prices.”

“The annual summer dip seems small compared to the much bigger question: When will the economy start up again, and will society revert to its old habits, or has the crisis permanently changed the way in which we live and the products we demand?” said van Benthem.

“Will videoconferencing be an acceptable business practice even without COVID, or will the planes fill up with conference goers, business people and spring breakers again? Do we enjoy the current reduction in pollution enough to permanently push for more environmental protection?”

Impact on Oil Companies

Oil companies are responding to the uncertainty over demand with a wait-and-watch approach, and holding off on fresh investments. Mason expected most oil companies to “delay expenses or shut down production or push off exploration” to the extent they can. Some companies may not have such flexibility. Those that have overextended themselves with loans that have to be paid off would worry about going bankrupt, he added.

“Those who have a certain amount of flexibility, who have the cash balances, who have built in insurance policies for this sort of thing in terms of the possible financial structuring — there will probably be less activity from them in the next three or six months,” Mason continued.

They would “just wait and see, because prices are bound to rise at some point over the course of the next several months.” At that stage, they would come back and resume production, he added. He recalled the CEO of an oil company in Denver telling him a few weeks ago that her company was “basically hunkering down.”

Many oil producers will feel compelled to cap producing oil wells with the prevailing prices, said Siegel. “It’s expensive to cap the wells, so a lot of the wells were kept open and continued to produce,” he said.

“And now they have to be capped. When the front end is so low, then it does pay to cap it. They would incur that cost and then sell it in the forward market a year from now where the price is much higher.”

However, capping wells is not an easy option. “It’s a short-run versus long-run situation,” said Craig Pirrong, University of Houston professor of finance, whose expertise includes the economics of commodity markets. “Capping is a short run strategy, and it’s not practical for most producers. So the medium-to-long term response to continued low demand will be to keep wells open, and see output decline due to depletion, and not replace many of them with new drilling.”

“Capping a well is not like putting the cap back on the ketchup bottle,” said Smetters.

“Capping some wells can be cheap. But high-pressure, high-temperature wells are harder to cap and plugging them is more permanent and expensive.”

Several oil companies have already taken decisive steps. Last week, Royal Dutch Shell announced that it has postponed its Jackdaw natural-gas field development in the North Sea. It is expected to delay upstream projects in the North Sea as well, according to an S&P Global Platts report.

The company had also last month backed off from an equity investment in a liquefied natural gas project in Lake Charles, Louisiana, citing “current market conditions.” Other oil companies in the Permian Basin such as DiamondBack Energy and Parsley Energy have also announced cuts in production and activity, according to a Fortune report.

The current prices are also far from levels where producers could recoup their costs. The break-even price for crude production varies widely by country, with less than $50 a barrel for Russia and nearly $200 for Iran, which is hamstrung by U.S. sanctions, according to a Financial Times report.

The break-even rate of producing shale oil in the Permian Basin in Texas ranges between $40 and $55 a barrel, according to Fortune. “It varies across the U.S. and it varies even at the same place,” said Mason.

Drilling new wells in the current scenario is unlikely because of the high upfront costs they entail, said Mason. But drilled and uncompleted wells could be converted into producing wells at a “low incremental cost,” and those will be the first to come back online when the market recovers, he added.

Consolidation on the Horizon

It is inevitable that there will be some consolidation in the oil industry, with weaker companies getting acquired or closing down. “All the firms that are in trouble are going to go broke,” said Mason. “Somebody has to buy them out. And that somebody could be a medium-sized company, or it could be an oil major.

But they will be snapped up because they come with assets. Among other things, they have some other leases or they have direct access to resource deposits. They have human capital in terms of their employee pool. They have some typical capital machinery and other assets that are valuable.”

According to Pirrong, “There will certainly be consolidation in and exit from the E&P (oil exploration and production) sector in the U.S. If anything, it will lead to expansion in storage capacity, and [at] the firms that provide it.”

Consolidation is imminent also in the oilfield services industry, said Mason. The big companies in that space such as “the Halliburtons and the Baker Hughes and Schlumbergers of the world” would withstand the upheaval, but the relatively smaller firms for those “could go broke,” he noted. Pirrong added: “Service operators live and die with drilling activity.

Absent a rebound in that activity, the outlook for service firms is as bleak or bleaker than that of the E&Ps.”

The oil industry could also face constraints in the supply of talent. “While the low oil prices don’t translate one-for-one to lower gasoline prices, cheaper gas at the pump would also slow down demand for electric vehicles,” said van Benthem. “A prolonged crisis may have long-lasting effects with lay-offs of highly trained employees and a lack of new talent entering the industry,” he added.

What if Oil Falls to Less Than $10?

Meanwhile, U.S. oil prices have continued to decline because of fears over storage capacity. On April 28, the WTI contract for June fell to $10.07 a barrel before rising back up to $11.17. Many analysts worry that prices could fall below $10 a barrel. “If prices settle at $10 for an extended period, it will mean the industry is in deep trouble,” said Pirrong.

“A ‘new normal’ of sub-$10 oil prices would surely kill new investment and exploration activities, and would even force existing producers to shut down,” said van Benthem. “This is already happening.”

However, van Benthem did not foresee prices going below $10 a barrel. “While the negative oil futures prices grab the headlines’ attention, the Brent futures strip does not currently suggest that sub-$10 will be the new normal,” he said.

Brent futures for June onwards are above $21 and rising for subsequent months. “The 2022 futures trade around $40 per barrel, suggesting that the market expects oil demand to recover significantly post-COVID.”

The current prices “may just reflect an enormous temporary friction,” said van Benthem. “The market is desperately trying to find storage opportunities for the excess oil that’s still being pumped up, now that there’s no demand for oil with our empty freeways and grounded planes.”

The power of OPEC is also waning over how its members toe the prices to which they agree. “OPEC could in theory raise prices by a lot, but historically, the cartel has only rarely effectively managed to withhold substantial amounts of production,” van Benthem noted.

“The sub-$10 world [that some describe] may force them to act more decisively this time. The question is: When will the first OPEC members start defecting once the withholding strategy proves successful? More often than not, defectors cut production less when the oil price rises again, risking the stability of the cartel.”

Changing Geopolitical Equations

The power balance between oil producing countries is getting disrupted, and OPEC and Russia will see their influence diminishing. “It’s kind of the same question that came up in 2015. The answer is kind of the same as it was [then],” said Mason. Back then, WTI prices crashed from $107 in June 2014 to $36 by end-December 2015, under the combined impact of falling demand and rising supply, chiefly from Texan shale oil. “This is not a good time to be a member of an oil cooperative like OPEC. Their days as the big dog are gone.”

The stark reality facing yesteryear’s oil producers is that “there are just too many opportunities to find oil elsewhere,” said Mason, pointing in particular to the tight oil deposits in the Permian Basin. Production in the U.S. has been on a steady climb since 2008 when the first shale oil well was drilled into the Eagle Ford Shale in Cotulla, Texas, and from 2010, when output jumped from the more promising Permian Basin that spans Texas and New Mexico.

The growing U.S. influence in global oil markets ends up negating attempts by other oil producing countries to prop up prices. Mason explains: “If Russia and the Saudis do a deal to restrict output, then it puts upward pressure on prices. And the upward pressure is going to encourage more drilling in the Permian Basin. And lo and behold, there is going to be output that offsets the reduction that the Saudis and the Russians just spent so much time trying to put in place.”

The same pattern is likely to play out now as well, Mason said. “The Saudis and the Russians may persistently have a large-ish market share, but I’d be very surprised if they have much ability to influence price,” he added. “To the extent that power is important, it’s the power to influence the market and change prices. Those days are gone for the big producing countries.”

“[Unlike earlier], when demand was sufficiently tight to generate prices at which U.S. producers could operate profitably, the supply-demand balance has swung radically into imbalance,” Pirrong said. “Assuming that demand comes back, a similar situation will arise.

The transition during the rebound is much more difficult to forecast. Insofar as Russia’s predictability is concerned, it suffered a humiliating defeat and now knows that backing off on promises could bring swift retaliation from the Saudis. They will likely think twice before trying that again.”

Russia especially could be hit hard by the price crash, since it exports 70% of its oil production, said Smetters. The drop in oil prices in 2014 “wreaked havoc” on Russia’s economy, but last Monday’s price drop is much larger, he noted. Russia is putting on a brave face.

“The pandemonium with futures is absolutely speculative, [and] just a trading issue,” a Bloomberg report quoted Kremlin spokesman Dmitry Peskov as saying after last week’s negative prices on futures contracts. “There’s no need to give this an apocalyptic tinge.”

What Policy Makers Could Do

The options are limited for the Trump administration in responding to the supply glut. “I don’t see how the federal government could do much other than add some supply to the strategic oil reserve,” said Smetters. He noted that as of April 17, the strategic oil reserve held 635 million barrels out of a total capacity of 797 million barrels.

“Even ignoring shipping costs, that open reserve equals about two days of total world oil production. With shipping costs, it would take a while to fill. The government can’t force producers to reduce or cap,” he noted.

If some of the changes in terms of reduced travel and remote working do take hold longer term, policy makers may need to step in, according to van Benthem. “I strongly believe that such large structural changes require political leadership and economic incentives, and that places a big responsibility on the shoulders of politicians across the world to spend our COVID stimulus money wisely in a forward-looking way,” he said.

“There is a heated debate about whether the COVID stimulus package should be a political opportunity to pull employment and capital away from polluting industries towards renewable energy, energy efficiency, and other investments that clean up and modernize our economy at the same time,” van Benthem continued.

“To put it bluntly, given a limited amount of funds, would you rather keep and grow jobs in solar energy, or subsidize shale oil producers?

Do we want to bail out airlines or subsidize jobs in cleaner services industries to prevent mass unemployment?”

Coronavirus and the threat to US supremacy

Two questions serve as a reality check on excessive American declinism

Gideon Rachman

Coronavirus USA We can do it
© James Ferguson


At the height of the cold war, Ronald Reagan argued that rivalries between nations would vanish if the world was invaded by aliens. The former US president was too optimistic.

Today, the US and China are facing a common threat in the form of coronavirus. Far from uniting these two rivals, the pandemic seems to be intensifying their competition.

You can see why China might sniff an opportunity in this crisis. Coronavirus has targeted America’s weaknesses, while making many of its strengths temporarily irrelevant. The world’s most powerful military machine is not much use against a virus. But a lack of universal healthcare coverage is suddenly a threat not just to the poor but to the whole of US society.

The American economic and political systems are both reeling. One in 10 US workers has lost their job inside three weeks. Both Republicans and Democrats suspect the other side will use the pandemic to try and rig the upcoming presidential election. Paul Krugman, the economist and columnist, argued recently that American democracy itself is in danger.

Meanwhile, the Chinese government claims it has almost completely suppressed domestic transmission of the virus. Combine the relative stabilisation of China, with the threat of a new Great Depression and a deep political crisis in America, and it is clearly possible that Covid-19 will trigger a big shift in power from the US to China. It could even mark the end of American primacy.

This debate about US decline has, of course, been going on for decades. Broadly speaking, I have been in the “declinist” camp — arguing that the erosion of American hegemony is both real and inevitable. But at the same time, I’ve tried to remember two important questions that serve as a reality check on excessive declinism.

Question one is: what currency in the world do you most trust? Question two: where, outside your home country, would you most like your children to go to university or to work? For a majority of the global middle-class, the answers to those questions have been, respectively, the dollar and the US. If that continues to be the case after the pandemic, then American primacy will have survived Covid-19.

Those two measures of US power might seem idiosyncratic. But they have a broader significance.

The attractions of America’s universities and companies are a measure of the country’s ability to draw in talent from all over the world, while spreading American ideas and practices. It also represents a vote-of-confidence in US stability and openness.

The political views that people espouse are sometimes less significant than how they vote with their feet. One thing that Xi Jinping and Barack Obama have in common is that the two presidents both have daughters who studied at Harvard.

By contrast, Beijing still struggles to attract even the best Chinese scholars to work in China.

The country’s “Thousand Talents” programme has sought to attract leading academics by providing excellent salaries and research facilities.

But some academics, who returned to China from the US, have been dismayed by the political atmosphere at home. It is far more intrusive and threatening than anything they encountered in Donald Trump’s America.

Of course, it is possible that the US becomes a less attractive place to foreigners after the pandemic. A rise in xenophobia, a deep and lasting recession, a genuine threat to political freedoms — all, or any, of these would harm America’s soft power.

That would leave the mighty dollar. While US military dominance is increasingly contested, the dollar’s global role as a safe haven and the leading currency for trade is unchallenged. This translates into huge political power. The US can use sanctions to shut a country or a company out of the dollar system.

And, because it is the global currency, the sanctions reach around the world. Just ask Iran or the Russian oligarchs targeted by America. While many foreign powers resent the dollar’s power, no other country has a currency that commands the same respect.
 But the US response to coronavirus may test the world’s faith in the dollar. The $2tn dollar stimulus package just passed means that US national debt, which has already risen sharply in the Trump years, will surge still further.

Meanwhile, the Federal Reserve’s balance sheet is also expanding hugely as it buys up not just Treasury bonds but also corporate debt. If a “Third World” country was behaving like this, wise heads in Washington would be warning that a crisis lay just around the corner.

There must be a risk that even the US currency will eventually lose the world’s confidence.

Wild talk from prominent US politicians that America should default on US debt owned by China, as punishment for Covid-19, certainly does not help. But the US is aided by the fact that all the alternatives to the dollar still look worse.

The pandemic has raised fears of a new euro crisis. And China still uses currency controls, fearing the pent-up demand from Chinese savers to get money out of the country. Other touted alternatives to the dollar — gold, bitcoin — have major drawbacks.

The slogan on the greenback is “In God we Trust.” The world’s appetite for dollars sends back the implicit message — “In America we Trust.” If that trust survives coronavirus, so will American primacy.

Free Exchange

Should the IMF dole out more special drawing rights?

Some economists are calling for an increase, but there are hurdles in the way




Governments around the world are seeing their finances savaged by the pandemic. And poor ones, who are also suffering from capital flight, are crying out for cash.

The IMF, the world’s crisis lender, is already parcelling out loans. It may yet resort to a weirder weapon: the special drawing right (SDR), an arcane financial instrument designed in the 1960s.

At present, some 204bn SDR´S sit on the balance-sheets of finance ministries and central banks around the world.

Each can, in theory, be swapped for currency worth $1.36. Governments in poor countries desperately need cash to retain investors’ confidence, pay off creditors and buy medical supplies. Some economists think an infusion of SDR´S is part of the answer. Could this help tackle the corona-crisis?

When SDR´S were introduced in 1969 they were intended to reduce the world’s dependence on dollars. At the time many of the world’s countries pegged their currencies to the greenback, which was itself tied to gold, under the so-called “Bretton Woods” system of fixed exchange rates. But the two components were in tension with one another.

When too few dollars circulated in the world economy, perhaps as a result of America spending less on imports, countries would hoard greenbacks to defend their pegs, and global commerce ground to a halt.

But creating enough dollars to satisfy the global demand for reserves imperilled the credibility of the dollar’s peg to gold. Providing an alternative reserve asset, it was thought, might provide an escape from this dilemma.

The idea was reminiscent of “bancor”, a global currency proposed by John Maynard Keynes in 1941.

Like bancor, SDR´S aim to share the so-called “seigniorage” benefits that accrue to America as a result of providing the world’s currency.

To reinforce their balance-sheets with dollars, countries must, in aggregate, sell goods and services to America and hold on to the proceeds.

But when SDR´S are issued, everyone gets reserves without having to provide anything in return. Reserves fall like manna from heaven, rather than emerging from trade flows.

Yet SDR´S failed to take off. The need for them became less pressing after America untethered the dollar from gold in 1971. And too few were issued. Keynes had proposed that the stock of bancors would grow in line with world trade.

But political wrangling means that there have been only three allocations of SDR´S, the most recent of which was in 2009. They make up less than 3% of non-gold reserves; by contrast, the dollar makes up over half.

As a source of liquidity, though, sdrs have their advantages. They are not a true currency, as they can be exchanged only between imf members and not in private markets. Maurice Obstfeld of the University of California, Berkeley—and a former chief economist at the fund—sees them as a way to share risk.

Countries are given SDR´S in proportion to their IMF “quotas”, which determine their financial commitment to the fund and their voting rights. When they face a liquidity crunch, they can offer cash-rich countries SDR´S in exchange for hard currency.

They must pay interest, currently at a rate of 0.05%, on the amount of their SDR´S they choose to convert, making exchanging an sdr a bit like drawing on an emergency overdraft—one that does not need to be repaid.

Are SDR´S an appropriate crisis-fighting tool? The IMF reports that several poorer countries have called for it, and that members are discussing the idea.

Rich countries are offering their citizens wads of cash with very few strings attached, say supporters. Why shouldn’t the imf do the same for the world’s governments? Some economists want a huge allocation of SDR´S, worth $4trn.

There are several hurdles in the way and these could take months to overcome. Most important, America is reluctant to issue any SDR´S at all, let alone $4trn-worth. Its opposition stems from a belief that theimf should not be printing money (when converted, SDR´S increase the amount of cash in circulation).

And, like other countries, it also dislikes the idea of handouts that come with so few strings attached. What if the financial lifeline allowed countries to slacken the pace of reforms, or made life easier for Iran?

The IMF is supposed to support governments facing temporary liquidity problems, but also to insist on restructuring any debts that are unsustainable. An SDR allocation is described as liquidity support by its advocates, but it could help an otherwise insolvent country pay off its creditors.

America’s opposition matters. Issuing sdrs worth more than $648bn would require approval from its Congress. Even a smaller issuance would require 85% of votes at the IMF. Uncle Sam, with a 16.5% share, has a veto.

Others point out that securing an SDR allocation would mean spending too much political capital for too little gain.

Two-thirds would go to rich countries or those with plenty of reserves.

In 2009 183bn SDR´S were issued to help fight the global financial crisis.

But Ousmène Mandeng of Economics Advisory, a consultancy, finds that emerging markets (excluding China and members of the European Union) swapped just 1.9bn for cash in 2009-10.

Every little helps

However, SDR´S do not have to be used to be useful. Their very presence on balance-sheets frees up dollars.

And though the sums involved might be too small to matter to many countries, the share of a $500bn issuance flowing to the likes of Liberia or South Sudan would be worth 7-8% of GDP, says Sergi Lanau of the Institute of International Finance, an industry group.

With global demand collapsing and the world scrambling for dollars, now is not the time to dwell on the question of whether countries face solvency or liquidity crises.

Poor countries just need help, fast. It is worth taking some risks to make sure they get it.

It is perhaps no surprise that America has doubts about an instrument first designed to reduce the dollar’s dominance. Keynes proposed bancor just after sterling lost its sway.

It might take the emergence of a serious challenger to the dollar’s crown before America sees the appeal of the SDR.

Saving the Developing World from COVID-19

The COVID-19 pandemic could devastate parts of the developing world. But with a concerted, cooperative, and holistic approach, the international community can avoid a large-scale humanitarian tragedy in vulnerable regions – and protect the rest of the world from destabilizing blowback.

Mohamed A. El-Erian

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LAGUNA BEACH – Declining coronavirus infection rates and plans to begin easing lockdown measures in some parts of the developed world have provided a ray of hope after weeks of unrelenting gloom.

But, for many developing countries, the crisis may barely have begun, and the human toll of a major COVID-19 outbreak would be orders of magnitude larger than in any advanced economy.

With the United States having recently recorded more than 2,000 deaths in a single day, this is no trivial number. If the international community doesn’t act now, the results could be catastrophic.

Sub-Saharan Africa is a case in point. Several countries there would face significant challenges in enforcing social-distancing rules and other measures to flatten the contagion curve. The region’s already-weak health-care systems could thus quickly become overwhelmed by an outbreak, especially in a high-density area.

Africa has long suffered from a severe shortage of health-care workers, with only 2.2 workers per 1,000 people (compared to 14 per 1,000 in Europe) in 2013. And few African countries have a meaningful supply of ventilators, a crucial tool for treating serious cases of COVID-19.

Nigeria is reported to have fewer than 500 in total, while the Central African Republic may have no more than three.

Moreover, Sub-Saharan African governments have little fiscal and monetary space (or operational capacity) to follow the advanced countries in countering the massive impact of containment measures on employment and livelihoods.

Spillovers from Asia, Europe, and the US – including depressed commodity revenues (due to declining demand and prices), rising import costs, a collapse in tourism, reduced availability of basic goods, lack of foreign direct investment, and a sharp reversal in portfolio financial flows – have already exacerbated these constraints.

For those who had access to international capital markets, terms have become notably more onerous.

While Sub-Saharan Africa is not without some defenses – including strong family networks and cultural resilience, as well as lessons learned from the Ebola crisis – there is a real risk that this COVID-19 shock would lock it in a race between deadly hunger and deadly infections.

Some states, already rendered fragile by decades of weak political leadership or corrupt authoritarianism, may even fail, which could fuel violent unrest and create fertile ground for extremist groups.

The risks are not limited to the short term. Countries are also vulnerable to major future productivity losses, via both labor and capital. Prolonged school closures and joblessness could contribute to increases in domestic violence, teenage pregnancies, and child marriage, especially in countries that lack basic infrastructure for remote schooling.

Simply put, Sub-Saharan Africa may be about to confront a human tragedy so profound that it could leave a generation adrift in some countries, with consequences that extend far beyond the region’s borders. Two examples perfectly illustrate the multifaceted spillover risks.

First, by drastically reducing Africans’ current and future economic prospects, the COVID-19 crisis could eventually fuel even more migration than current forecasts anticipate. Second, by triggering a series of corporate- and sovereign-debt defaults, an uncontrolled COVID-19 outbreak could exacerbate the financial-market instability that the US Federal Reserve and the European Central Bank have taken such strong action to repress. This increases the chances of reverse-contamination from the financial sector to the real economy.

The scale of the threat is not lost on the International Monetary Fund, which, through an enormous ongoing effort, has moved quickly and boldly to increase emergency funding. More than 90 developing countries have already approached the IMF for financial assistance.

Together with the World Bank, the Fund has also called for official bilateral creditors, including China, which has become a major creditor in recent years, to suspend debt payments by the poorest developing countries.

Leading the way here too, the IMF is providing immediate debt relief for 25 of its low-income member countries, using grant resources to cover their multilateral debt-servicing obligations for six months.

Meanwhile, some countries, such as China, have offered large in-kind medical donations (what less charitable observers have described as “facemask diplomacy”).

But, to stave off disaster in vulnerable regions, the international community must do a lot more. Advanced economies, in particular, should supplement the home bias that has (understandably) characterized their responses so far with a broader assessment of the global effects, including spillovers to and spillbacks from Africa.

They should expand official funding assistance, facilitate broader debt relief, and urgently establish an international solidarity fund which other countries and the private sector could join.

Furthermore, developed countries should do more to share best practices for containment and mitigation of the pandemic. To facilitate this process, the World Health Organization needs to do a better job of centralizing and disseminating relevant information. Advanced economies’ leadership, one hopes, will soon extend to the universal deployment of more effective medical treatments, or even a vaccine.

Finally, the international community must do a lot more to crowd in private-sector resources.

Much as it did in the developed countries, the private sector can play an important role in the crisis response in vulnerable regions, both directly and through proliferating public-private partnerships.

While pharmaceutical and tech companies will do a lot of the heavy lifting, private creditors can help by working on orderly ways to reduce the immediate debt burden on more challenged developing countries.

But, again, this will require greater emphasis on enabling mechanisms. A bigger shift in mindset on the part of multilateral lenders and other international bodies (including the World Bank) will be needed.

The COVID-19 pandemic threatens to devastate large parts of the developing world. Only with a concerted, cooperative, and holistic approach can the international community avoid a large-scale humanitarian tragedy – and protect the rest of the world from destabilizing blowback.


Mohamed A. El-Erian, Chief Economic Adviser at Allianz, the corporate parent of PIMCO where he served as CEO and co-Chief Investment Officer, was Chairman of US President Barack Obama’s Global Development Council. He is President Elect of Queens’ College (Cambridge University), senior adviser at Gramercy, and Part-time Practice Professor at the Wharton School at the University of Pennsylvania. He previously served as CEO of the Harvard Management Company and Deputy Director at the International Monetary Fund. He was named one of Foreign Policy’s Top 100 Global Thinkers four years running. He is the author, most recently, of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.

Is the Zoom boom doomed?

By: Jamie Powell


During the market carnage wrought by coronavirus, a rather obvious trend has developed.

Investors, perhaps in shock at seeing many of their most beloved companies collapse, have turned to a clutch of stay-at-home stocks (or, erm, SAHs), which should benefit from us humans being locked up like caged animals for at least the next month.

Think indoor virtue-signalling device Peloton, prepared-meal-kit providers Marley Spoon, or MSN-messenger aper Slack.

However, one stock has leapt above them all: video conferencing platform Zoom, which has seen its share price rise 41 per cent since February 16:




Investor enthusiasm has taken Zoom’s market capitalisation to a touch under $39bn, over triple the valuation it listed with just over a year ago.

By anyone’s standards, the stock looks pricey: Zoom’s equity trades at 37 times forward revenues, according to S&P Global Market Intelligence. Gaze forward to 2024’s estimated figures and it doesn’t get much cheaper: 7.7 times that sales number. That suggests investors think Zoom’s growth will continue to accelerate post-Covid-19, no matter when (or if?) we return to our offices.

So has the market got it right?

On the face of it, the narrative adds up. Shackled to either our sofa or an uncomfortable dining chair, many of us are looking for ways to continue the flow of communication with our team mates and wider colleagues.

Enter Zoom which, thanks its easy-to-use interface, has become the app du jour for those wanting to spy on each other’s book cases. Alphaville can attest to its quality: a recent “pub quiz” (read: quiz) found us gazing at a dozen smoothly streamed windows into the lives of others. They were pretty impressive.

The hard data also speak to Zoom’s growing dominance in Stasi-simulacra. An April 1 memo by chief executive Eric Yuan revealed that its daily meeting participants — that’s tech speak for “people using the product” — had risen from 10m at the end of December, to 200m in March. At pixel time on Apple’s app store, it sits at number one in free apps, above Generation Z favourite TikTok and recent debutant House Party:




Whether this explosion in usage translates into positive cash flow is another matter. The company has yet to give an update on its pandemic-tinged finances but, to its credit, the past financial year was at least spent in the black. Net income was $25m and free cash flow $120m, although most of that gap can be explained by the $73m of stock compensation it paid to its employees.

However, quintuple both of those numbers to reflect its new user base, and $600m of free cash flow still not enough to justify a $39bn valuation, unless you think a highly uncertain projected cash flow yield of 1.5 per cent is good going in this market environment.

And that quintupling is assuming, of course, that those free users convert to paid-up ones. Zoom’s pricing plan for hangers-on includes unlimited one-to-one meetings, and group chats that can hold up to 100 participants for a maximum of 40 minutes. The incentives for a new team to upgrade don’t feel that strong.

Then of course one has to think about the notion that these new users will stick around.

Much has been made about how this pandemic has proven that working-from-home, erm, works and therefore companies will be more flexible after the lockdown when it comes to allowing employees to peruse daytime TV.

But equally, an argument could be made that the crisis has actually revealed the deficiencies with that arrangement, particularly when it comes to jobs that require shared expertise, tight feedback loops and, for a lack of a better phrase, incessant chatter. Think creative jobs, or software engineering, or even journalism. In these industries having colleagues around is a feature, not a bug.

Zoom also has a more pressing issue to deal with: security.

Just this Tuesday morning, Singapore suspended the use of the app by teachers after a “very serious incident” during a web-based lesson. And it’s not just schools either.

The Taiwanese government has banned its use over fears it uses Chinese servers.

Worries over security have also caused the German government, Nasa and the US Senate to curb its use, alongside commercial organisations such as Google and SpaceX.

The company has got the message.

Last week Yuan promised to shift “all our engineering resources to focus on our biggest trust, safety, and privacy issues” over the next 90 days, after he admitted that “we have fallen short of the community’s — and our own — privacy and security expectations.”

In a world where security is paramount — whether it be in government agencies or intellectual-property driven corporates — this may not be enough.

That spells potential trouble for Zoom’s bottom line as these organisations often provide the stickiest revenue to businesses, like Zoom, that aim to cement themselves as an immovable part of an organisation’s day-to-day workflow.

For Zoom it’s a particularly acute issue not just because there’s a huge new user base to convert into real, recurring revenues, but because the competition is fierce.

Microsoft’s Teams, for instance, which offers a lot of the same functionality, recently bigged up its privacy and security settings in a blog post.

Though it’s fair to say its existing user base on Office 365, as Slack investors have found out, are pretty easy to up-sell to.

Particularly if the competition is dropping the proverbial ball.

There is little doubt that in the first half of the year, and likely in 2020, Zoom is going to post blockbuster numbers.

Yet investors should be cautious extrapolating this explosive growth beyond 2021, when the economy, and earnings, should begin to normalise.

If Zoom returns to its admittedly quite impressive 2019 trajectory, it looks like the stock only has one way to go, and that’s down.