Why inflation might follow the pandemic

Governments should finance their debt at today’s ultra-cheap rates with the longest possible maturities

Martin Wolf

Inflation Hot Air Balloons
© James Ferguson


The pandemic has been likened to a war, though one against a disease, not other humans.

Like a war, it is reshaping economies and demanding huge increases in public spending and monetary support. It will certainly bequeath far bigger public debt and central bank balance sheets.

Does this mean the question of whether this long debt cycle must end in inflation has to be answered in the affirmative?

No, but this is possible. After the first world war, Germany inflated away its domestic war debt in the hyperinflation of 1923. After the second world war, the UK emerged with fiscal debt of 250 per cent of gross domestic product. Modest inflation helped erode a part of it.

So what might happen now?

We need to start from initial conditions. We entered this crisis with high levels of private debt, low interest rates and persistently low inflation.

In the group of seven leading high-income countries, none has debt close to that of the UK in 1945. But Japan’s net debt was 154 per cent of GDP and Italy’s 121 per cent pre-crisis.

The economic impact of Covid-19 is different from that of a big war. Wars restructure economies and destroy physical capital. Coronavirus has shrunk economies, by suppressing both supply and demand that depend on close human contact.

The immediate impact, as Olivier Blanchard of the Peterson Institute for International Economics argues, looks strongly deflationary: unemployment has soared, commodity prices have collapsed, much spending has vanished and precautionary savings have soared.

Consumption patterns have changed so much that inflation indices are meaningless.

Chart of UK public sector net debt as a % of GDP showing that it will remain lower than after the two world wars


For more than a decade, hysterics have argued that expanded central bank balance sheets are harbingers of hyperinflation.

Followers of Milton Friedman knew this was wrong: the expansion of central bank money offset the contraction of credit-backed money. Broad measures of money supply had grown slowly since the 2008 crisis.

But this time it really is different. In the past two months, US M2, a measure that includes demand, savings and deposits for fixed amounts of time, and Divisia M4, a broader index that weights components by their role in transactions, both show large jumps in growth.

If one is a monetarist, like Tim Congdon, the combination of constrained output with rapid monetary growth forecasts a jump in inflation. But it is possible that the pandemic has lowered the velocity of circulation: people may hold this money, not spend it. But one cannot be certain.

I will not forget the almost universally unexpected surge in inflation in the 1970s. This could happen again.

Chart of average UK inflation after three major conflicts that shows inflation does not have to follow huge increases in public debt, but it did after the second world war


What about the longer term?

Mr Blanchard suggests we are likely to see more of the same: structurally weak demand, low inflation and ultra-low interest rates — Japan’s situation for a generation. China’s shift to slower growth and weaker investment adds still more grey to this picture.

Mr Blanchard suggests three reasons why inflation might surprise on the upside: increases in public debt ratios much greater than the 20-30 percentage points now expected; a big jump in the interest rates needed to keep economies operating close to potential output; and “fiscal dominance”, or the subordination of the central bank to government demands for cheap finance.

Chart og government debt in G7 countries showing that indebtedness has mostly been rising but it also varies greatly


The rise in debt ratios cannot be ruled out.

But, as things stand, the countries that look most fiscally exposed are Japan and Italy. The former has been unable to get inflation up for years. The latter is, for now, contained in the eurozone. On interest rates, Charles Goodhart of the London School of Economics and Manoj Pradhan a business economist, argue that huge structural changes are coming.

The deflationary environment created by rising Chinese exports and globalisation is over.

Wage pressure will increase. When the surge in spending fuelled by fiscal and monetary largesse spills over into inflation, it will be viewed as temporary, or just welcome, as the real burden of debt is eroded.

Chart of broad money measure M2 and reserves of the US banking system showing that US money supply has suddenly jumped upwards since the Covid-19 crisis


Among the beneficiaries of this erosion of the real burden of debt will, the authors add, be governments. Politicians will be furious if central banks raise interest rates above the growth of nominal GDP, and force fiscal retrenchment beyond that needed to curb the huge fiscal deficits created (rightly) by the crisis programmes.

Popular resistance to a repetition of the public spending cuts that came after the financial crisis will be intense. Yet so, too, will be resistance to the higher taxes needed to shrink the fiscal deficits as full employment is restored.

Governments will then probably demand cheap central bank finance, probably reinforced by other forms of financial repression, including capital controls.

They will be justified as a desirable expression of national sovereignty.

Chart showing that long term bond yields in many countries are exceptionally low


Is any of this inevitable?  Certainly not.

Sensible governments should finance all their debt at today’s ultra-cheap rates with the longest possible maturities.

As and when the economy recovers, they should also raise taxes on those who can afford them.

The adverse structural shifts envisaged by messrs Goodhart and Pradhan are possible.

But further erosion of the position of labour, as automation accelerates, and a continued savings glut, as crisis-hit investment remains weak, seem even more probable. Central bank independence may well survive.

Many still back it.

Many countries that cannot borrow in their own currencies will certainly default, with members of the eurozone in a halfway house.

Beyond that, the future is uncertain.

Yes, the pandemic has created some features of a war economy. The chances of inflation may have risen. But they are still modest.

Hedge against it. Do not bet your shirts on it.

Chart of average maturity of debt stock by country  at end of December 2019 which shows the maturity of UK debt is notably longer than in the rest of the G7

Doug Casey on the Coming Bond and Real Estate Collapse and Where the Next Bubble Will Be

by Doug Casey




International Man: The bond super bubble continues to get bigger. Interest rates seem to be headed even lower from here. Is this the blow-off top in the bond market?

What do you think will cause central banks to lose control and for interest rates to head higher?

Doug Casey: Even with the Fed bailing out major institutions—which it will continue to do, just like back in 2008–2009—the fundamentals underlying many businesses are so bad that a lot of them are going to collapse. I’m not just talking about the obvious candidates—retail, restaurants, airlines—but across the board.

As that starts happening, people will realize that the cat’s really out of the bag, that this isn’t just another cyclical downturn—it’s genuine depression. And almost everything the government is doing is not only the wrong thing but the exact opposite of the right thing.

The worst possible place for money today may not even be the stock market, as dangerous as it is. It’s the bond market. Bonds aren’t just in a bubble. They’re in a hyper-bubble.

The bond hyper-bubble is serious because there’s so much debt in the world at such low interest rates. When reality reasserts itself, interest rates start heading up—not just to levels that show a real yield after inflation but levels from the early ’80s, which ranged from 10% to 20%. The bond market is heading toward its long-overdue collapse.

It will take down pension funds and insurance companies with it as well as the property market, which is built on a mountain of debt. It’s going to be really ugly. Most of their assets are in bonds. And many pension funds—particularly those for public employees—are already severely underfunded.

That’s really serious because we’re not at the bottom of a stock or bond bear market, where insolvency would be understandable. We’re at the top of bubbles in both, and things are as good as they could possibly get. As a consequence, a lot of cities and states are either going to have to increase contributions a lot or cut retirement benefits.

Regarding bonds themselves, as an investment class, they’re nothing like what they used to be.

Bonds are now a triple threat to your wealth—currency risk, interest rate risk, and solvency risk.

In the long run, currency risk is the most certain and perhaps the deadliest.

Despite the current demand for dollars—debtors are desperate for dollars to service and roll over their debts—the dollar will reach its intrinsic value.

The US Government, as the world’s biggest debtor, is most in need of dollars; but can get all it wants by selling its debt to its central bank, the Federal Reserve.

Why make a bet on the value of the dollar?

Second is interest rate risk. Interest rates are at all-time lows, substantially below the rate of inflation everywhere, and actually negative on about $17 trillion of European and Japanese government debt. I used to think interest rates below zero were metaphysically impossible but forgot that we’re now living in Bizarro World.

Artificially low rates are highly destructive. Low rates encourage people to do things that they ordinarily wouldn’t dream of because they think they can afford it.

That’s because of massive misallocations of capital and malinvestment. The government needs low rates since interest on $20-some trillion is a major cost.

Low rates also discourage people from saving. They make normally sensible folk act like foolish grasshoppers. Instead of setting aside wealth for the winter, like wise ants, it encourages them to consume today and even live out of capital by borrowing. When winter comes, grasshoppers starve. You know the old fable.

The third threat is solvency risk. With all the debt in the world, a lot of people just aren’t going to be able to pay their debts. This includes governments.

For example, the Argentine government can’t pay its debts. The US government is just a cycle or two behind the Argentine government. Of course, since the US dollar is a reserve currency, the US Government has a lot more runway before it crashes. But it’s going to lose reserve status. The dollar will be replaced not by another fiat currency, but by gold.

International Man: The global pandemic seems to have changed the value proposition for many to live in big cities. What do you think the effect of this hysteria will be on the real estate market?

Doug Casey: This is one of the second-order effects of the hysteria that I’ve previously discussed. The recent rent protests are going to roll over into a third-order effect. The government will say, "It’s okay. You don’t have to pay your rent or mortgage because we can’t have 20 million more families living under bridges. We’ll pay it for you." The same goes for utilities. This is something a lot of politicians are talking about right now.

That said, there’s an increasing tendency to get out of the big city and move to small towns, or maybe the countryside. Not the suburbs, though. The burbs of cities are the worst of both worlds in some ways.

Taxes are a huge consideration when it comes to real estate. With unemployment as high as it is right now—and it’s going to stay high—every kind of tax revenue is collapsing. Meanwhile, their expenses are exploding with unemployment and related benefits.

Unfortunately, government employees aren’t being fired or laid off at anywhere near the rate of the private sector. The government always takes care of its own, of course.

Pelosi is trying to get a near trillion-dollar bill through Congress to bail out state and local governments. We can only hope it doesn’t pass, so they’ll be forced to trim their bloated employee rolls. If that happens, however, they’ll cut back on desirable and essential services first, so the people will feel it, and scream for Federal funds.

It’s a bad idea to stay in the city or the suburbs. I’ve said that for years, but the current epidemic of riots underlines that. As does the trend of working at home and doing business electronically. It’s smarter to be in a small town, which has some cohesiveness, or in the countryside.

Amazon and Walmart, FedEx and UPS have made it quite possible and convenient to live anywhere now. You no longer have to live in the city to take advantage of most of the things that cities provide. Cities, at least in the US, are all in decline anyway. They’re crowded, noisy, dirty, expensive, and dangerous.

It’s unfortunate in many ways, though. The disappearance of cities was one major indicator of the decline of the Western Roman Empire in the 3rd through 6th centuries. But that gets us into a gloomy conversation about the collapse of Western Civilization itself. Right now, we’re just talking about nearby financial and economic problems.

The real estate bubble has primarily been in major cities like New York, LA, and San Francisco, and their equivalents around the world. In Vancouver—which was an ultra-hot market—transactions now are happening at 40–50% discounts from the peak. Property prices in fashionable big cities are a bubble that’s bursting as we speak.

International Man: Many retirees and savers hold large positions in risky stocks and junk bonds in a search for yield. What do you say to these people?


Doug Casey: First of all, the average guy generally gets killed in the markets. Even in a bull market, he only gets the table scraps, the poorest and worst of everything.

Right now, the public thinks everything will be just fine. It’s not. In a depression, yields that are both high and safe are like unicorns or hen’s teeth. Oh, and speaking of unicorns, the public is looking, en masse, for the next Facebook, Amazon, or Apple.

They’re spending ridiculous amounts of money on highly promoted newsletters and all kinds of scams. I don’t doubt infomercials pushing magic trading programs are going to show up on late-night TV next.

Tech stocks for people who know nothing about technology and trading services for people who know nothing about the markets. It’s perverse. But the public often thinks the party is still on—they’ve heard about 8,357% and 10,523% returns—and pile in like lemmings.

John Q Public doesn’t realize that he’s going to get eaten up by bid-ask spreads. He doesn’t realize that he’s going to get killed by the commissions on both sides. Even if the person he’s taking advice from is right, the average guy gets and acts on the information too late.

Lastly, he doesn’t have the psychology that it takes to be a trader, a speculator, or even an investor. These are all different things, incidentally. What the latecomers are is gamblers—but they don’t know it.

That is what people are doing in a desperate attempt to outrun the collapse—and they’re making their situation worse.

Trying to trade is one thing. The other is buying all kinds of tech stocks, which always happens late in the game. People often pile into tech stocks after the bubble has broken, but they don't know that it has burst.

The old expression "high-tech, big wreck" is going to become very obvious in the future. Most tech companies have to constantly raise lots and lots of money. They’re science projects. Most of them are burning matches—very much like mining exploration stocks. How many are going to be the next Amazon or Facebook? Most of them are going to wind up trading for about zero.

What do I say to these people?

"Please don’t do it. You’re just going to lose the rest of your money."

International Man: What speculative opportunities do you see in this environment?

Doug Casey: Unfortunately, the main opportunities are speculative. All the phony money being created will create other bubbles.

The question is, where will those bubbles be? They’re not easy to identify.

My guess is that the next bubble is going to be driven by both fear and greed as well as prudence into gold and, to a lesser degree, into silver. And, for different reasons, into commodities as a group.

That’s where I would look.

Gold is no longer at giveaway prices like it was in 2001, at $250. It’s been an excellent place to be for a long time. But it’s going a lot higher.

There are about 2,000 gold mining stocks. Or, at least, companies that claim to be gold mining, gold development, or gold exploration stocks. These are three different things. That distinction should be made.

Some of them are still very depressed right now.

Gold mining—which is generally a risky, crappy business—is one of the few profitable businesses out there.

Of mining companies in production today, most have "all-in sustaining costs" of about $1,000 an ounce, but gold is trading at $1,700.

Fund managers—most of whom, like Buffet and Munger, neither like nor understand gold—are going to start piling into these things. So will the public, but much later.

I think this is a rare opportunity. This is going to be the next bubble.

Forget about common stocks, bonds, and real estate. There’s plenty of time for conventional investments after the economy bottoms.


There’s a way to make sense of this rally, as long as there’s a swifter economic recovery than anyone thinks posible.


Flying toward our perfect future?

Bad News? Buy Stocks
 
What’s going on? Stock markets were up almost everywhere to start the month. This was despite a list of bad-news items that might be expected to push down share prices in normal circumstances:
 
  • China has paused imports of U.S. agricultural goods, which it undertook as part of last year’s “phase one” agreement to avert a trade war. This issue dominated international investing throughout 2019, when news as bad as this would inevitably have caused a major “risk-off” spasm.
  • Gilead Sciences Inc.’s share price took a sharp tumble after results showed that its Remdesivir drug might not be as useful in treating Covid-19 as had been hoped. Earlier in the pandemic, more positive results had not only sent Gilead’s share price soaring, but also lifted the entire market;

 Gilead's stock fell after a disappointing test result
 
 
  • Global Covid-19 infections, outside the U.S., hit a new record. Brazil in particular appears to be in a very dangerous position. The following chart is from Bianco Research.


relates to Stocks' Extreme Disconnect Demands a Perfect V
  • The rally in West Texas Intermediate crude paused as investors pondered whether meetings to thrash out a continuation of supply caps beyond the end of this month would happen on schedule. The breakdown of talks in early March triggered the worst week for the markets this year.

  • The U.S. is currently undergoing a spasm of civil unrest on a scale not seen since at least 1968, the year of the assassinations of Martin Luther King and Robert Kennedy. New York City is under curfew as I write. 

Add to all this that equities are rallying while most other asset classes are failing to confirm an expansion ahead. Bond yields and industrial commodities remain low; gold continues to sit at levels it hasn't seen since 2012.

We can mention all the usual caveats: Economic growth doesn’t correlate with stock market returns in the short run, and generations of equity investors have been conditioned to “buy when there’s blood in the streets.”

Still, a disconnect this extreme between nightmarish scenes on the streets of the U.S. and a global pandemic, on the one hand, and a continuing rally in the stock market, is something truly special.

This tweet, from a user who hides behind a pseudonym, sums up my own feelings almost exactly: “After watching markets for 25 years, I have to say, this is the most extreme disconnect I have ever witnessed with regards to price against P/E, massive unemployment and drop in GDP, riots, failing trade wars, frauds, income inequality, etc.”
So, what can explain this? I don’t think ultimately that this rally makes sense, and I definitely didn't expect anything so strong and sustained. If there is a justification, it goes as follows.

Equity prices are dependent on future earnings, and on the interest rate we use to discount them. The rally in share prices is the product of well-founded expectations of higher corporate profits and low interest rates into the future.

Let’s look at how well this stacks up:
 
The Discount Rate

The Federal Reserve has made it known that it is actively discussing yield curve control — intervening to ensure that yields at particular points on the curve remain at a given low level. And, to quote my Bloomberg Opinion colleague James Bianco, “the market is behaving as though yield curve control is already taking place. 10-year yields have been stuck in a tight range for two months.”


Ten- and two-year yields have  been spectacularly stable for two months now, while all is chaos around them. The 10-year yield, in particular, is behaving exactly as we would expect if someone very rich was intervening to keep it between 0.6% and 0.7%. This is very different from the bond market’s behavior in preceding years:

Bond volatility, as most popularly measured by the BofA MOVE index, is lower than when it started the year. Equity volatility, as measured by the CBOE VIX index, is still double the level at which it started the year. In such alarming and uncertain circumstances, low yields aren’t surprising; such steady and unmoving yields are remarkable:

Equity volatility remains elevated; bond volatility is back to normal


So investors are making a clear bet that the next few years will see financial repression — deliberate intervention to force the public and the corporate sector to lend money to the government at uneconomically low interest rates. This has happened before, notably in the years after World War II. In such conditions, equities can be relied on to beat bonds.
That doesn’t mean we should all feel comfortable about Uncle Sam forcing us to lend to him at rock-bottom rates. This isn’t a great basis on which to invest. As Bianco puts it: “Yield curve control is nothing more than price fixing. The Fed sets the price of interest rates and then uses its balance sheet in an unlimited fashion to keep interest rates at that level.”

There is also the problem that, to quote Ian Harnett of London’s Absolute Strategy Research Ltd., “financial repression means repression of financials.” A forcibly flat yield curve makes it very hard for banks to make money. And if banks aren’t making money, it grows harder for them to extend credit and fuel economic growth. Repression may be a relatively painless way to pay for the money the government had to throw at the coronavirus problem; it doesn’t augur well for growth or a vibrant stock market:

relates to Stocks' Extreme Disconnect Demands a Perfect V


Future Earnings

As I have pointed out before, prospective earnings, as in the multiple of expected earnings for this calendar year, are close to the all-time high set at the height of the dotcom bubble. This is somewhat misleading, though. Everyone knows this year’s earnings will be terrible. A very high multiple of this year’s earnings can be justified if there is valid confidence in a rebound next year.

If we look at past nosedives, a V-shaped recovery doesn't seem so unlikely. These numbers come from David Kostin, chief U.S. equity strategist at Goldman Sachs Group Inc. This is what happened to U.S earnings during previous postwar U.S. recessions, along with Goldman’s base and worst-case scenarios for the current one:

relates to Stocks' Extreme Disconnect Demands a Perfect V


And this shows us the subsequent recoveries. After falling an average of 13%, earnings bounced back by 15% over the next four quarters, essentially forming a perfect V:

relates to Stocks' Extreme Disconnect Demands a Perfect V


If next year’s earnings turn out to be in line with Goldman’s baseline forecasts, then the market is trading at a high but reasonable 18 times 2021 earnings. It is higher than that if the more bearish estimates from buy-side firms are right; and at an all-time high of 26, significantly above even the worst excesses of 2000, if the worst-case scenario is correct.


So the market is plainly working on the assumption that things will turn out about as well as can reasonably be expected:


relates to Stocks' Extreme Disconnect Demands a Perfect V

Markets are indeed braced for an almost perfect V-shape, based on how expectations for standard consensus earnings have moved this year, as this chart from Andrew Lapthorne, chief quantitative strategist at Societe Generale SA, shows. By the end of next year, earnings will be higher than they were in 2019, and barely any lower than was expected at the end of March:

relates to Stocks' Extreme Disconnect Demands a Perfect V

Breaking this down further, however, Lapthorne also looks at “flash” estimates — those most recently changed, and which presumably most fully take into account all the information now available. This is a relatively quiet time for revisions, as the first-quarter earnings reporting season is over, but the picture is clear.

Markets are braced for horrendous growth this year, particularly in Europe, and a strong rebound in 2021, again particularly in Europe. Overall, it looks as though earnings are expected to be a bit more than 5% lower next year than in 2019. This makes the fact that the S&P 500 is now higher than it was at any point in the first 10 months of last year a little difficult to explain, low interest rates or no low interest rates:

relates to Stocks' Extreme Disconnect Demands a Perfect V


For a more dramatic presentation of how estimates have moved, this chart shows both the overall consensus change and the flash revision. Technology and a few defensive sectors are relatively unscathed, but expectations for many more economically sensitive sectors are still savagely reduced.

This means there is room for a recovery, though estimates for some sectors are continuing to fall. If the market is also banking on yield curve control to keep rates low, it is hard to see how dreadful falls in earnings like this can be avoided for financial sectors.

relates to Stocks' Extreme Disconnect Demands a Perfect V

All of this is against the backdrop of a market that entered the crisis looking expensive, and of very high policy uncertainty, coupled with very low consumer confidence. It does look as though reopening in the U.S. is happening relatively smoothly thus far, in terms of the number of coronavirus cases if not in terms of the situation in the streets.

If it turns out that we can put the virus behind us much sooner and more completely than many experts have led us to believe, then there is a decent chance of doing better than these earnings numbers, in which case the current pricing won’t look mad. But it is a narrow route:

relates to Stocks' Extreme Disconnect Demands a Perfect V


Kostin has a diplomatic way of putting this which I think makes sense:
From a fundamental perspective, we believe the current index level implies expectations of an achievable but optimistic path of normalization, and that meeting that expectation would validate the existing market level rather than push it substantially higher. At the same time, numerous medical, economic, and political risks dot the investment landscape.
In other words, this market isn’t quite as utterly crazy as it might look at first. But it is priced for perfection amid conditions of extreme uncertainty, and risks are almost all to the downside.

The most likely way for this disconnect to be resolved is by share prices falling again. Let us all hope that it is resolved by a swifter recovery from the lockdown conditions and in the economy, than anyone now thinks possible, ideally coupled with a historic resolution of America’s deep problem of racial injustice.

The latter alternative looks less likely. 
For my fellow New Yorkers, the only sensible advice at the time of writing is not to go outside. Curfew has started. For everyone else, I recommend a brilliant documentary on Netflix called Crip Camp, about a 1960s summer camp in the Catskills that was specially for the disabled. Many alumni went on to be leaders in the struggle for disabled rights.

It’s a charming but also an inspiring and surprising story. If they could overcome some of the horrible disabilities that nature had forced on them, then the rest of us can put up with being cooped up inside.

Why This Time Was Different

In 2003, the world contained the SARS epidemic to Southeast Asia and ended the crisis by that July. Based on the limited information currently available, four factors help to explain the difference between then and now.

Carl Bildt

bildt76_ANTHONY WALLACEAFP via Getty Images_chinacoronavirus


STOCKHOLM – How will the COVID-19 mega-crisis end? I don’t know, and nor does anyone else. So, perhaps it would be more productive to reflect on how it started. By addressing that issue, we might be able to improve our chances of averting another pandemic in the future.

The current crisis is hardly the first of its kind. In early 2003, another coronavirus – SARS-CoV-1 – suddenly spread from southern China across Southeast Asia, but it ultimately remained regionally contained.

Later, we learned that SARS (severe acute respiratory syndrome) had been spreading in southern China for some time, and that Chinese officials had been reluctant even to admit its existence and issue a warning, let alone take appropriate measures to contain it. Only after the epidemic had reached Hong Kong, a key global financial hub, did alarm bells go off.

Nonetheless, coordinated international action soon followed. There was a sharp drop in air traffic in the region, and many areas were cordoned off. The World Health Organization’s leaders at the time criticized China for its slow response, and the Chinese health minister was duly fired. By early July, the WHO was able to declare the crisis over, lifting its remaining recommendations for restrictive measures. The world returned to normal.

Why have we failed so spectacularly in 2020 after succeeding in 2003? Any answer to that question will be tentative, because there is much that we still don’t know about COVID-19 or the early months of the outbreak. Still, I see four factors that might help to explain the difference between now and then.

First, it took time for Chinese authorities to wake up to what was happening, sound the alarm, and start taking resolute action. From what we know, COVID-19 first emerged in China in mid-November 2019, and had been detected spreading through Wuhan by mid-December, when reports started circulating in Taiwan. Finally, on December 31, 2019, China alerted the WHO of a potential outbreak.

During those early weeks, local authorities in Wuhan sought to cover up the outbreak, including by concealing information from the central government in Beijing. We may never know just how much time was lost to Wuhan officials’ obfuscation. But we do know that after China’s first report to the WHO, it took another three weeks for Chinese authorities to lock down Hubei province. By that point, many residents had left for the Chinese New Year holiday, spreading the novel coronavirus, SARS-CoV-2, to other parts of the country (meanwhile, Wuhan allowed street celebrations to proceed).

A second factor that makes this crisis different from the one in 2003 is that SARS-CoV-2 seems to be much more contagious than its predecessor. This has magnified the consequences of Chinese foot-dragging. During those initial 5-7 weeks, and in the weeks after the WHO sounded the alarm, when the rest of the world did very little, COVID-19 was able to spread much farther and wider than SARS ever did, and the result has been far deadlier.

The third, related, factor is that the world of 2019-2020 is much more interconnected than the world of 2002-2003 was. Wuhan, an inland city with 11 million people, has sometimes been called the Chicago of China, owing to its wide-ranging integration into global supply chains. Over the past few decades, the city has developed into a major hub. Before the lockdown pandemic, there were six flights per week from Wuhan to Paris (as well as five to Rome and three to London), and frequent non-stop flights to San Francisco and New York. What happened in Wuhan did not stay in Wuhan.

The last factor that cannot be ignored is the geopolitical dimension. The world was already falling into a persistent state of confrontation and disarray long before the COVID-19 crisis erupted. Back in 2003, it was only natural that the international community would come together quickly to coordinate a joint response. But in 2020, that scenario wasn’t even on the table. Even after the virus had gone global, US President Donald Trump’s administration remained in denial. And to this day, it has not made even the slightest gesture toward providing global leadership.

America’s historic abdication of its traditional role has trickled down, infecting most of the established instruments of global cooperation. When the WHO declared COVID-19 a pandemic on March 11, it might already have been too late. But the confused and flailing reaction from the United States and other major countries has clearly made matters far worse.

My tentative conclusion is that these four factors together explain why this episode is so much more severe than the SARS epidemic. A novel coronavirus has plunged the world into a mega-crisis the likes of which we have not seen in modern times. We should consider what that says about the state of global governance.

Again, nobody knows how this crisis will end. But by understanding how it started, we might be able to prevent, or at least mitigate, the next one.


Carl Bildt was Sweden’s foreign minister from 2006 to 2014 and Prime Minister from 1991 to 1994, when he negotiated Sweden’s EU accession. A renowned international diplomat, he served as EU Special Envoy to the Former Yugoslavia, High Representative for Bosnia and Herzegovina, UN Special Envoy to the Balkans, and Co-Chairman of the Dayton Peace Conference. He is Co-Chair of the European Council on Foreign Relations.

The Post-COVID-19 World Will Be Less Global and Less Urban

world bank ease of doing business


The COVID-19 pandemic will reverse the trends of globalization and urbanization, increasing the distance between countries and among people. These changes will make for a safer and more resilient world, but one that is also less prosperous, stable and fulfilling, writes Wharton Dean Geoffrey Garrett in this opinion piece. (This article originally appeared as part of Penn on the World after COVID-19, a joint project of Penn Global and Perry World House.)

For the past four decades, globalization and urbanization have been two of the world’s most powerful drivers. Global trade increased from under 40% of the world’s GDP in 1980 to over 60% today. Over the same period, the number of people living in cities more than doubled to over 4 billion people today — more than half the world’s population.

COVID-19 will reverse both of these trends, increasing the distance both between countries and among people. Some will laud these changes for increasing safety and resilience. But a world that is less global and less urban would also be less prosperous, less stable and less fulfilling.

Here are two core predictions about the world after COVID-19:

Less global, more isolated. Even before COVID-19, the decades-long trend toward ever-more globalization of trade, investment, supply chains and people flows was beginning to grind to a halt. We began to look closer to home in terms of the products we produce and consume, the people with whom we interact, and where we get our energy and our money.

In retrospect, we will come to view the years right before the 2008 financial crisis as “peak globalization.” Since then, the combination of recession, inequality and populism has created a growing anti-globalization and anti-immigration consensus in western countries, exemplified by the U.S. trade war with China.

The reaction of developed economies to the coronavirus will only strengthen this consensus, as all things international will be viewed as incurring unnecessary and dangerous risks. What was a growing “anti-globalization” consensus is poised to crystalize into a “de-globalization” reality.

We are being told this de-globalization will make us all more resilient. But it will also make us less prosperous — with less choice and higher prices. It may also make us less secure, as international cooperation will decrease and the potential for international conflict will increase.

Less density, more distance. Urbanization is likely to be the other major casualty of the coronavirus. Unlike globalization, the trend of ever greater-urbanization was unaffected by the global financial crisis. Even America — the land of all things suburban — joined the global march into cities. People were attracted to cities not only for economic opportunity but also for the urban lifestyle.

After coronavirus, people will be more fearful of crowded trains and buses, cafes and restaurants, theaters and stadiums, supermarkets and offices. Crowded spaces are the lifeblood of cities. But now crowds are seen as major health risks. People who have the ability to exit the city will increasingly be tempted to do so.

People who cannot leave will feel at increased risk, hunker down, and reduce their movements and contacts. It is hard to think about Manhattan without the subway and 10-deep pedestrians on Fifth Avenue. But that may be the increasing post-COVID reality.

De-urbanization would harm economic growth because cities generate enormous scale economies and have proved to be remarkably effective incubators of creativity and innovation.

This could be particularly true in developing economies where the movement of people from rural areas to rapidly expanding cities has been perhaps the key driver of poverty reduction.

But the shrinking of cities will have other adverse effects too, from reducing cultural vibrancy and cosmopolitanism to exacerbating climate change. In addition to being more productive, cities also tend to be more environmentally sustainable.

A world that is less global and less urban would be far less appealing to me, personally. But it is also a world that would hurt economic prosperity, reduce shared understanding among disparate people, and increase the prospect of conflict among them.

Our immediate reactions to COVID-19 will lead us to want both to de-globalize and to de-urbanize. But we must take fully into account the profound longer-term costs of doing so.

Globalization and urbanization generate challenges we must confront, all the more so in a post-coronavirus world. The solution is to manage them, not to reverse them.