For the US and China, There’s No Going Back

Even under a Biden administration, the rivalry will only intensify from here. 

By: Phillip Orchard

For months leading up to the U.S. election, there was no shortage of speculation over who Beijing would prefer to have in the White House in January. In several (unsourced) interviews with Western media, Chinese officials insisted that President Xi Jinping and his inner circle didn’t have a particularly strong preference – that neither a Biden nor a second Trump administration would fundamentally reshape the trajectory of U.S.-China relations.

Yet nearly all of Beijing’s recent behavior has betrayed an expectation that there’d be worse to come with either outcome – and that any window of opportunity opened by electoral chaos would likely be far too brief to capitalize on. And for good reason. Beijing’s own immense internal pressures and unforgiving geopolitical imperatives are what’s locking it into its increasingly assertive course. And this, in turn, is forging an increasingly bipartisan consensus in Washington that Communist Party-led China is the country’s foremost strategic and economic challenge. As a result, there will be some tactical differences under a Biden presidency, as well as some changes in what particular challenges the administration prioritizes. But broadly speaking, the U.S.-China rivalry will only intensify from here.

The Bipartisan Consensus

It’s become fashionable to claim that U.S. strategy toward China under several of Trump’s predecessors was grounded in naivete and wishful thinking. The constant emphasis on engagement and bringing it into the global trading system was rooted in rose-colored assumptions that helping China get rich would eventually help bring democracy to China and incentivize Beijing to abide by the rules and norms of the established order – or so the argument goes.

But this argument misreads the historical record. U.S. national strategy documents from the mid-1990s, along with contemporaneous debates over China’s entry into the World Trade Organization, make clear that the Clinton administration was under no illusions about the character of the Communist Party of China and the long-term strategic and economic problems China’s rise was likely to pose. (The crackdown at Tiananmen Square was still recent history, after all.)

Rather, the Clinton administration’s relatively friendly China policies – and those of the George W. Bush and Obama administrations – were shaped by three main things. One was an understanding that the U.S. just didn’t have much leverage to make the CPC do things it didn’t want to do, particularly anything the CPC thought would weaken its control over China. 

The second was the realization that China’s cooperation would be needed on matters of critical shared interest: nuclear proliferation, terrorism, global financial stability, environmental and epidemiological threats, and so on. The third, of course, was the widespread tendency among U.S. business communities to view China overwhelmingly in terms of their bottom line.

This third factor made it increasingly difficult for the U.S. to change directions once it started to more tightly integrate with China. Beijing simply had too many friends and captured interests in the U.S., making the economic and political costs of an abrupt decoupling too high for any administration to stomach, especially when there were much more immediate problems (like the Global War on Terror and the global financial meltdown after 2008) to worry about. U.S. consumers, too, had developed a taste for low-cost imports and were none too keen to give them up.

2017 marked an inflection point, though. By the time Trump launched the trade war, U.S. political, economic and military interests had begun to align. The U.S. middle class had been gutted. Many neoliberals and U.S. business sectors had been alienated by China’s distortion of global markets, its flouting of WTO obligations, and Beijing’s support of things like intellectual property theft. 

China’s rapid emergence as a near-peer military competitor – one willing and capable of dictating terms to most of its neighbors – seemed to have snuck up on the U.S. defense establishment. This, combined with a perceived erosion of the U.S. Navy and Air Force’s technological advantages, sowed doubts among allies about U.S. commitments and generated widespread alarm in D.C. that the U.S. was not ready for great power competition. 

China’s crackdown in Hong Kong dashed any remaining optimism about Chinese democratization, while its concentration camps in Xinjiang outraged anyone with a pulse.

In other words, there’s something about the CPC for just about every powerful constituency in the U.S. to hate. So it’s getting harder and harder for Beijing to capture interests in the U.S., to exploit its internal divides, and to ensure that the path of least resistance for U.S. policymakers consistently favors the status quo with China. 

President Donald Trump’s trade and tech wars made meaningful progress on very few of their core goals. But the fact that he was able to sustain them despite the economic costs, even amid the coronavirus-induced economic implosion, underscored the reality that a paradigm shift is taking place.

Staying the Course

To Beijing, the Trump era was not a paradigm shift; it was a confirmation of long-held suspicions that the U.S. is singularly focused on kneecapping China’s rise. If the trade and tech wars changed anything in elite circles, it was by narrowing the space for dissent and quieting those who’ve grown concerned that China’s “wolf warrior diplomacy” and constant antagonization of its neighbors may backfire. 

This is why the CPC's rigidly top-down, censorial institutional culture matters. It creates echo chambers, suppresses informed, creative thinking, and incentivizes everyone who wants career success to toe the line. It also creates a dependence on stoking nationalism among its citizens and thus raises the political costs of compromising with the great Satan.

More important, though, the current leadership firmly believes the party’s survival, to say nothing of the country’s security and prosperity, hinges on a continuation of most of the policies that anger the U.S. most. This is why Xi is doubling down on state-managed mercantilism, as made explicit in a recent speech. It’s why Beijing seems content with hostile reactions to its moves in India, Australia, Taiwan and elsewhere. And it’s why it made an exceedingly risky bet in Hong Kong.

Critically, Beijing also happens to believe most of its policies are succeeding – in its mind, for example, it passed the ultimate systemic stress test posed by the pandemic – and that the U.S. is a wheezing superpower in denial about its decline. The CPC sees little reason to change course, even if it means locking itself into a self-reinforcing feedback with the U.S. and putting it on a risky path toward confrontation.

This is the challenge Joe Biden has inherited. The optimal strategy toward China would sustain the balance of power, persuade like-minded states to assume the risks of retaliation by joining an implicitly anti-China coalition, address domestic economic and technological vulnerabilities without doing excessive harm to the U.S.’ own economic well-being, and deter Beijing's most aggressive impulses without making cooperation on shared interests impossible – and without closing critical off ramps from a potential path toward war. 

In reality, many of these goals conflict. And any degree of meaningful progress will be expensive, both in financial terms and in political capital. Both will be in short supply given the intersecting domestic crises Biden will be juggling.

So while his administration will talk a big game about multilateralism, human rights and doing more to look out for the interests of friends and allies in the region, it will struggle to back it up. It will want to dramatically increase security assistance to partners along the South China Sea, for example, but everyone in Washington will have bigger budgetary priorities. 

It will want to do more to directly defend the material interests of U.S. partners in disputed waters – and dash Beijing’s belief that it’s on course to fundamentally overturn the balance of power in the Western Pacific – but the U.S. Navy and Coast Guard are already overstretched and in dire need of an overhaul. 

It may strike a quick deal with Beijing to scale back the bulk of the tariffs on Chinese imports that disproportionately hurt U.S. consumers, but Beijing won’t concede much. 

The leverage required to curb Chinese mercantilism and technology theft will remain elusive, especially since trade pacts like the Trans-Pacific Partnership will be a political nonstarter. It won’t force U.S. firms who don’t want to leave China to leave.

Thus, exactly what the Biden administration chooses to prioritize with China, and the tactics it employs in its pursuit, is up in the air. But there’s no going back to the status quo. 

The fundamental question now is where two countries can find equilibrium on the spectrum between strategic competition and war.

America’s Alliances After Trump

Donald Trump’s reckless contempt for America’s allies has weakened the country and created a far more dangerous world. President-elect Joe Biden will need a deft pair of hands to repair Trump’s wanton destruction.

Kent Harrington

ATLANTA – America’s allies should be forgiven if they are confused about where American foreign policy is headed. Who isn’t, given the go-it-alone recklessness of Donald Trump’s presidency? 

Over the past three years, Trump has sowed strategic chaos, and his foreign policy, if one can call it that, brought new meaning to incoherence. President-elect Joe Biden will be better almost by default. But has Trump changed America so much that the world cannot count on it ever being normal again?

Not only did Trump pursue a love affair with North Korea’s nuclear-armed dictator and remain smitten with Russian President Vladimir Putin – a man waging political war on the West. He also championed Brexit and badmouthed America’s European allies, when he was not undermining them outright. 

At the annual Munich Security Conference in 2020, French President Emmanuel Macron and German President Frank-Walter Steinmeier both acknowledged that Trump had fundamentally damaged the transatlantic alliance. 

Their message was clear: If Trump won a second term, the historic partnership that has long constituted the geopolitical “West” would never be the same. Prudent world leaders were doubtless preparing for even more instability and uncertainty had Trump been re-elected.

France and Germany, of course, have many reasons to disagree with the United States, be it on trade relations, Macron’s outreach to the Kremlin, or both countries’ relatively less confrontational approach to China. Macron, who last November called NATO “brain dead,” has made no secret of whom he holds responsible for the alliance’s decay and the broader sense of disarray among US partners and allies.

But in Paris and Berlin, as elsewhere in Europe, the reaction to Trump was not just about his bullying, trade tactics, or divisiveness. Europeans saw his administration charting a course that rejected the transatlantic security relationship and its central role in US global engagement more generally. 

Biden will ditch the unconstrained unilateralism. But even with a new approach, the damage Trump has done won’t be repaired easily, or alter views among European leaders that the continent increasingly will need to fend for itself.

Trump’s treatment of US allies in Asia has given Europeans ample warning to be prepared for more deterioration in the security relationship. Despite the North Korean nuclear threat and China’s growing power, Trump tried to turn America’s crucial alliances with South Korea and Japan into pay-as-you-go relationships. 

Fortunately, Biden understands what Trump doesn’t: that US defense pacts with those two countries have underpinned East Asia’s stability for 70 years and paid off handsomely for the US. Trump viewed both relationships as “bad deals,” and Biden will need to persuade Americans to turn away from his transactional diplomacy.

Moreover, Trump wasn’t the first US president to lean heavily on jingoistic rhetoric, and putting the MAGA genie back in the bottle may not be simple for Biden. Both South Korea and Japan can attest to the fact that “America First” was no mere slogan. 

With the Host Nation Support Agreements that determine the details of America’s presence in each country up for renegotiation this year, Trump repeatedly threatened to withdraw US forces from both countries unless they paid more for what he called American protection. Biden will have to work hard to restore Japanese and Korean trust as he seeks to renew these agreements.

In fact, South Korea and Japan already share mutual defense costs, and have underwritten the US military presence in Northeast Asia for decades. South Korea pays more than 40% of the operating costs of US forces stationed there; it also covered 92% of the US command’s $10.7 billion move to new facilities outside of Seoul, and it purchases billions of dollars’ worth of US military hardware. 

For its part, Japan provides $2 billion per year to support 54,000 US troops; it purchases 90% of its military hardware from US companies, and it has furnished $19.7 billion (77% of the total costs) for the construction of three major bases.

For nearly a year, Trump administration officials have demanded that their South Korean counterparts quadruple their country’s current $1 billion in financial support. Add to that leaks describing possible US troop withdrawals and the announcement in July that 12,000 US forces would leave Germany. Clearly, Biden’s administration will need not only to devise a new negotiating strategy, but also to reboot the US security guarantee.

Even with Biden in charge, the currently testy political relationship between South Korea and the US (which walked out on the earlier base talks) means negotiations won’t be easy. In Japan, formal talks began last month, and the government has until March 2021 to renew its agreement. 

Trump’s defense officials told their Japanese counterparts to expect the same treatment as South Korea. Biden will certainly change that script as well. But Japan’s new prime minister, Yoshihide Suga, likely still expects arduous negotiations, albeit without the take-it-or-leave-it attitude that raised questions about the durability of America’s security guarantees.

A simple return to treating allies like allies should go a long way for Biden. Trump demonstrated no concern for his policy’s political fallout in Seoul and Tokyo, or for its impact on the political fortunes of South Korean President Moon Jae-in and former Japanese Prime Minister Shinzo Abe. 

In the interest of security, both leaders tried to pander to Trump’s “stable genius” over the last three years, with little to show for it but domestic political embarrassment. Biden’s election undoubtedly brought sighs of relief in Seoul and Tokyo.

Sadly, Trump’s malignant legacy will survive his departure. With everything from health care to climate change begging for Biden’s attention, foreign policy is certain to take a backseat to domestic priorities. For US allies, patience will remain a virtue. Righting the wrongs of the Trump years will take time. 

As he has said at least since 1990, Trump wanted to reshape America’s defense arrangements and radically alter its role in the world. Trump may be a pathological liar, but he kept his word on this issue.

Kent Harrington, a former senior CIA analyst, served as national intelligence officer for East Asia, chief of station in Asia, and the CIA’s director of public affairs.

Scorched Earth 

Doug Nolan

November 18 – Reuters (Rodrigo Campos): 

“Global debt is expected to soar to a record $277 trillion by the end of the year as governments and companies continue to spend in response to the COVID-19 pandemic, the Institute of International Finance said in a report… The IIF… said debt ballooned already by $15 trillion this year to $272 trillion through September. Governments - mostly from developed markets - accounted for nearly half of the increase. Developed markets’ overall debt jumped to 432% of GDP in the third quarter, from a ratio of about 380% at the end of 2019. Emerging market debt-to-GDP hit nearly 250% in the third quarter, with China reaching 335%, and for the year the ratio is expected to reach about 365% of global GDP.”

Covid’s precision-like timing was supernatural – nothing short of sinister. A once in a century international pandemic surfacing in the waning days of an unrivaled global financial Bubble. 

A historic experiment in central bank monetary management already floundering (i.e. Fed employing aggressive “insurance” QE stimulus with stocks at record highs and unemployment at 50-year lows). 

A Republican administration running Trillion-dollar deficits in the midst of an economic boom. Yet, somehow, reckless U.S. fiscal and monetary stimulus appeared miserly when compared to the runaway excess percolating from China’s epic Credit Bubble. Monetary, fiscal, markets, at home and abroad: Covid bestowed end-of-cycle excess a hardy additional lease on life.

From the FT: 

“Global debt rose at an unprecedented pace in the first nine months of the year as governments and companies embarked on a ‘debt tsunami’ in the face of the coronavirus crisis… From 2016 to the end of September, global debt rose by $52tn; that compares with an increase of $6tn between 2012 and 2016.” 

According to the IIF, U.S. debt is on course to expand about 13% this year to $80 TN. 

As a percentage of GDP, U.S. debt jumped from 327% to 378%. U.S. government borrowings inflated a dismal 26 percentage points to 127% of GDP. Globally, developed (“Mature”) economy debt surged 49 percentage points to 432% of GDP. 

From the IIF: “… There is significant uncertainty about how the global economy can deleverage in the future without significant adverse implications for economic activity.”

Emerging market debt is expected to jump 26 percentage points this year to 250% of GDP, as indebtedness rises to $76 TN (Chinese borrowers accounting for $45 TN). 

China rapidly expanded already massive indebtedness, adding a staggering 30 percentage points to 335% of GDP (up from about 160% in ’08). China’s corporate sector added 15 percentage points to 165% of GDP. And more indications this week of mounting Credit stress (see China Bubble Watch below). 

Malaysia and Turkey added almost 25 percentage points of debt-to-GDP this year, with Colombia, Russia, Korea and Chile jumping around 20 percentage points. Thailand, South African and India each gained almost 15 percentage points, with Hungary, Mexico and Brazil near 10. 

From Bloomberg: 

“About $7 trillion of emerging-market bonds and syndicated loans are slated to come due through the end of 2021… Emerging markets, especially those in Latin America, have faced more pressure on credit ratings this year as debt loads rose…”

IIF projections have global debt increasing $70 TN, or a third, over what will soon be five years of synchronized “Terminal Phase Excess.” The past year, in particular, has seen rapid acceleration of non-productive debt growth. On a global basis, governments accounted for over half of new debt. 

In the IIF’s one-year sectoral breakdown, Global Government Indebtedness surged from 69.1% to 77.6% of GDP – led by a $3.7 TN increase in U.S. governmental borrowings. This was the largest of the sector gains (compared to 73.7% to 79.6% growth in Non-Financial Corporates). Canada, Japan, the UK, Spain and Italy were also notable for their massive expansions of government indebtedness.

Examining the current extraordinary market backdrop, the “pain trade” has been higher. Despite extreme bullish sentiment, many have remained less than fully invested. FOMO (fear of missing out) has been excruciating. The poor bears have been decimated. Short positions remain easy – big fat bear in a barrel - “squeeze” targets, with little concern these days for those pesky bears shorting overextended stocks. Devoid of selling pressure, the sky’s the limit.

But, mainly, there is today a pool of speculative finance without precedent. Positive vaccine news stoked a manic rotation, catching most in a highly Crowded marketplace tech heavy and underexposed to financials, small caps, myriad lagging sectors, EM and the broader market more generally. 

Quant strategies run amuck.  Throw in all the manic derivatives trading – beloved call options in particular – and one can easily explain the origins of market “melt-up” trading dynamics. And such a speculative, dislocated and devious marketplace welcomes negative news flow. 

This only entices some new short positions along with put buyers - to then be summarily torched by a carefree market gleefully climbing the proverbial “wall of worry.”

In reality, there’s plenty to worry about. As welcome as positive vaccine news is right now, the conclusion of the pandemic will not, unfortunately, usher in a return to normalcy. 

The massive amount of debt noted above will overhang the system for years, as will deep scars throughout the real economy. 

From the New York Times: 

“Maps tracking new coronavirus infections in the continental United States were bathed in a sea of red on Friday morning, with every state showing the virus spreading with worrying speed and health care workers bracing for more trying days ahead.”

U.S. daily infections surpassed 100,000 for the first time on November 4th. And just over two weeks later, we’re on the cusp of a 200,000 day (194,000 on Friday). 

Coronavirus taskforce coordinator Dr. Deborah Birx: “This is faster, it is broader and, what worries me, is it could be longer.” 

Hospitalizations nationally have surpassed 84,000, almost double the month ago level. 

Many states reported a doubling of hospitalizations over the past week. One in five hospitals now expects to face critical staff shortages within a week. Friday saw California report a record 13,005 new infections. 

U.S. equities traded to record highs on February 20th, seemingly oblivious to the unfolding pandemic. And then, within 10 trading sessions, markets were overwhelmed with panic. 

The Fed responded with rapid-fire rounds of increasingly panicked stimulus measures. These days, markets have once again been content to disregard a deteriorating pandemic environment. When the crisis erupted in March, markets confronted unknowns with regard to the pandemic as well as the scope and efficacy of the crisis response. 

Beyond the vaccines, markets’ current willingness to “look over the valley” rests firmly on confidence that fiscal and monetary policymaking will again rise to “whatever it takes.” 

A Friday evening Bloomberg headline: “Investors Look Past the Chaos and Throw $53 Billion at Stocks.” 

In “one of the biggest deluges of cash ever recorded,” U.S. equities ETFs have attracted $53 billion so far this month. What an odd backdrop for throwing caution to the wind and rushing into the market. Clearly, way too much “money” has been chasing highly speculative markets. 

November 20 – Bloomberg (Christopher Anstey and Saleha Mohsin): 

“The top two U.S. economic policymakers clashed over whether to preserve emergency lending programs designed to shore up the economy -- a rare moment of discord as the nation confronts the risk of a renewed downturn spurred by the resurgent coronavirus. 

The disagreement erupted late Thursday when outgoing Treasury Secretary Steven Mnuchin released a letter to Federal Reserve Chair Jerome Powell demanding the return of money the government provides the central bank so it can lend to certain markets in times of stress. Minutes later, the Fed issued a statement urging that ‘the full suite’ of measures be maintained into 2021. 

‘This is a significant and disturbing breach at a critical time for the economy,’ said Tony Fratto, who worked at the Treasury and the White House during the George W. Bush administration. ‘We need all the arms of government working together and instead we’re seeing a complete breakdown,’ he said, noting that Washington remains at an impasse on fiscal stimulus as well.”

As has become quite a habit, markets brushed off Mnuchin’s surprising termination of several of the Fed’s emergency programs. Remarkably, the entire contested election issue has been one big nonissue for an ebullient marketplace. 

With Biden ahead six million popular votes and holding a commanding electoral college lead, markets aren’t taking President Trump’s ranting, raving and suing seriously. 

The assumption is bluster peters out and a peaceful transfer of power emerges around January 20th. 

Does that leave two months for “Scorched Earth” shenanigans? 

Does Mnuchin’s move against the Fed foreshadow a bevy of measures meant to hamstring the new Biden administration and rattle the markets. 

From day one, President Trump suffered a peculiar obsession with all things stock market. 

Record equities prices were exalted as a reflection of his leadership prowess and adroit policymaking. So far, not even an inkling of the market crash a Biden presidency was to incite. 

If there is indeed some “Scorched Earth” scheme at work, why would the stock market not have a bullseye on its back?

Still ailing

USA Inc’s ponderous recovery

Beyond the frothy stockmarket and the tech boom, much of American business is still struggling

On the hustings, both Donald Trump and Joe Biden promised to revive America’s economy from its pandemic-induced funk. Doing so will require a turnaround for corporate America, which has suffered a savage downturn. When the occupant of the White House starts his four year term in January, in what state will American business be?

Some recent vital signs may look promising. America’s economy expanded at a record pace of 33%, on an annualised basis, in the third quarter. Total profits for the big firms of the s&p 500 index have surpassed analysts’ expectations by roughly a fifth, with 85% beating forecasts for the quarter. Michael Wilson of Morgan Stanley, a bank, calculates that revenues for the median s&p 500 firm rose by 1% year on year. Small wonder that the Conference Board, a research organisation, published a survey on October 20th finding that its measure of confidence of bosses at big companies has jumped to 64 from 45 in the previous quarter—a figure above 50 indicates more positive than negative responses.

Yet anyone tuning into big firms’ quarterly update calls with Wall Street investors could not help but pick up the tentative tone and frequent dour notes of executives. Visa, a payments company, for example, called the recovery “uneven”. Caterpillar, a maker of industrial machinery, admitted it is “holding more inventory than we normally would” because of the uncertainties resulting from the pandemic. And a close analysis of the figures suggests that the corporate recovery is very patchy, with some industries and smaller firms still in big trouble. Meanwhile, corporate balance-sheets are under strain, which could hold back investment and lead to an eventual rise in defaults.

America’s economic boom in the latest quarter would be impressive had it not come on the heels of a comparable decline in gdp in the previous three-month period. The economy remains 3.5% smaller than it was at the end of 2019, reckons the Conference Board, and it is not likely to return to its pre-pandemic level until the tail end of 2021 or possibly later (see chart). As for the large proportion of companies where profits exceeded expectations this quarter, Tobias Levkovich of Citi, a bank, is unimpressed: “Beating lowered earnings expectations is not that great a feat.” It is now clear that analysts were too pessimistic when they pencilled in their forecasts earlier in the year. He adds that many firms managed to improve profits not by boosting sales but by slashing their expenses. The business outlook remains “squishy”, he reckons, as “you can’t cost-cut your way to prosperity.”

The more you peer into the numbers, the more inconsistent the recovery looks. One source of differentiation is where a company’s customers are based. Jonathan Golub of Credit Suisse, another bank, estimates that the companies in the s&p 500 reported an aggregate revenue decline of 2.8% and a fall of 10.2% in profits in the third quarter compared with a year earlier. But he estimates that at American firms focused on exports profits plunged by over 14%, whereas those companies more reliant on the domestic market suffered a drop of less than 9%.

Size is another lens which reveals the uneven recovery. Binky Chadha of Deutsche Bank argues that it is “a tale of two stockmarkets”. The market capitalisation of the five biggest tech giants (Facebook, Amazon, Apple, Microsoft and Alphabet) has fallen in recent weeks from its peak of roughly a quarter of the entire value of the s&p 500 index. Even so, they have generated returns of 39% for shareholders this year and without them the 495 others have produced a return of -1%.

Small and medium-sized firms (smes) have been crushed. The proportion of them that are making losses—based on the Russell 2000, an index of smes—has declined a bit from its peak of above 40%, but it remains well above 30%. smes are nearly four times as likely to be losing money as big firms, a far worse situation than during the recession of 2001 or the global financial crisis a decade ago.

The mood in the board rooms of small companies is foul. The latest survey of executives at smes, published by the Wall Street Journal and Vistage, an executive-coaching organisation, found sentiment “stalled in October 2020 due to increased concerns about an economic slowdown amid a resurgence in covid-19 infections.” The gloomy outlook, the most pessimistic in six years, may be explained by the fact that 42% of small firms believe they will run out of cash in under six months.

If the inconsistency of the recovery is one worry, the other is the state of firms’ balance-sheets. Corporate debt was rising before the pandemic, and many firms have piled on more borrowings in order to cover the shortfall in revenue they have experienced this year. 

Edward Altman of nyu Stern School of Business is worried about what he calls “the enormous build-up of non-financial corporate debt.” By his estimation, firms have issued more than $360bn in high-yield debt (ie, junk bonds) so far this year, surpassing the previous record of $345bn in all of 2012. With debt-earnings ratios reaching critical levels, and a resurgence in corporate defaults, Mr Altman reckons that 6.5% to 7% of junk bonds, by dollar value, will default in 2020.

His fears are echoed by s&p Global, a credit-rating agency. It calculates that the “distress ratio” (distressed credits are junk bonds with spreads of more than ten percentage points relative to us Treasuries) for American companies had come down to 9.5% in September from its peak of 36% in March but that it remains above pre-pandemic levels. 

Corporate America already leads the world in the tally of corporate defaults this year, with 127 by the end of October. Nicole Serino of s&p Global notes that corporate credit quality is deteriorating, with the number of firms rated a lowly ccc+ or below now 50% higher than at the end of 2019. For such firms, she worries that “excess liquidity and low interest rates are only postponing the inevitable.”

With a large share of firms still making losses and given the weakening of balance-sheets it is far from clear that American business is in the clear. What happens next depends on three unknowns. One is the fallout from this week’s presidential vote. 

A prolonged period of post-election uncertainty would weigh on the mood, notes Mr Levkovich. He points to the 11% fall in the s&p 500 index after the election in 2000 while legal wrangling decided the outcome of the contest for the presidency between George W. Bush and Al Gore.

Another unknown is the timing and size of the next package of fiscal stimulus from Congress, which at the moment is frozen by partisan gridlock in Washington, dc, and which could be limited if the Republicans keep firm control of the Senate. This matters to companies because, as Mr Golub puts it, “the government has effectively said, ‘We do not want market forces to drive firms out of business right now and so we are going to backstop a large part of the economy.’” 

Mr Wilson believes that the number of companies going bankrupt so far this year has been much lower than otherwise feared because of generous stimulus measures.

The biggest unknown, though, is the pandemic. Moody’s, a credit-rating agency, predicts that corporate-debt defaults will continue to rise until March 2021. The reason it gives is “economic recovery remains fragile amid risks of another pandemic resurgence leading to another round of countrywide lockdowns”. 

That should serve as a sober reminder to the next president and corporate bosses alike that, despite a rebound, there may yet be difficult days ahead for usa Inc. 

Ten ways coronavirus crisis will shape world in long term

Much remains uncertain for business, the economy, domestic politics and international relations

Martin Wolf

    Shoppers in Manila maintain social distance while queuing © AFP via Getty Images

Covid-19 has had an immediate and massive impact. But how will it affect the longer term? 

That is far harder to tell.

What do we already know, after 10 months of Covid-19? We know that the world was ill-equipped to cope with a pandemic. It has caused about 1.1m deaths worldwide, mostly among the elderly. Moreover, some countries have suppressed the disease far more successfully than others.

We know that Covid-19 has inflicted a huge global recession, but one that has been far from equal across countries. This has inflicted particularly serious economic damage on the young, the relatively unskilled, working mothers and vulnerable minorities.

We know that “social distancing”, partly spontaneous and partly enforced, has damaged all activities dependent on human proximity, while benefiting ones that help people stay home. This has slashed travel. 

We know that vast numbers of businesses will emerge heavily burdened by debt and many will fail to emerge at all. Intervention by the fiscal and monetary authorities has been unprecedented in peacetime, especially in countries with internationally accepted currencies.

    Commuting may not go back to the pre-Covid status quo © Valery Hache/AFP via Getty Images

We know, not least, that the “blame-game” over the pandemic has destabilised relations between the US and China. Moreover, the pandemic has already called globalisation, especially of supply chains, into question.

What are the longer-term possibilities? Here are 10 aspects.

First, future of the pandemic. It is possible that a vaccine will be available quite soon and that it will be made available across the globe not much later. But this combination seems unlikely. If so, the disease will remain a threat for a long time.

Second, permanence of economic losses. These depend partly on how soon the disease is brought under control, but also on how deep the scars will be, particularly, the impact of unemployment, bad debt, increased poverty, disrupted education, and so forth. The world economy and most individual economies will probably be permanently smaller and their peoples also poorer than they would have otherwise been.

Third, structure of economies. Will these go back to the way they were before Covid-19 or will we stop travelling and commuting to offices for good? 

The likelihood is that it will be both. Travel will resume. 

So, too, will commuting. But they may not go all the way back to the pre-Covid status quo. We have leapt into a new world of virtual engagement we will not leave. 

This will change some patterns of living and working for good.

Fourth, enhanced role of technology. This is not going to reverse. At the same time, the centrality of the tech giants has increased the focus upon their enormous influence. Pressure to regulate monopolies and increase competition, especially in the tech sector, is likely to increase.

Fifth, the expanded role of government. Big crises tend to cause a step change in the role of government. 

Particularly significant is pressure to “build back better”. So governments are likely to be permanently more interventionist than before the pandemic?

Sixth, unwinding of interventions. Central banks are committed to “low for long”, in interest rates. Provided real and nominal interest rates do remain low, governments will be able to manage their own debts and help manage the restructuring of the debts owed by others. 

At some point, fiscal deficits will have to be reduced. Given the pressures for spending, that is likely to mean higher taxes, especially on the wealthy “winners”.

Seventh, effect on domestic politics. Some countries have shown effective responses to the crisis, while others have not. Whether a country is democratic or not has not determined this difference. 

Part of what does is whether the government cares about its effectiveness. Populist demagogues, such as Jair Bolsonaro, Boris Johnson and Donald Trump have performed poorly. This may force a shift against their performance politics.

Eighth, impact on international relations. This is a truly global crisis and one that can be effectively managed only with global co-operation. Yet trends in the direction of unilateralism and international conflict have been reinforced by the pandemic. The chances are good that this will get worse now, especially between the US and China.

Ninth, future of globalisation. The globalisation of goods had already slowed after the 2008 financial crisis. It is likely to slow further post-Covid-19. The multilateral system is likely to be further eroded, especially the World Trade Organization and the trade disputes between the west and China will not be resolved. At the same time, virtual globalisation is likely to accelerate.

Finally, management of the global commons. On this, Covid-19 is a double-edged sword. One side is the increased desire to do things better, not just domestically, but also globally, notably over climate. The other is the reduced legitimacy of international agreements, especially in the US, which has withdrawn from the Paris climate accord and the World Health Organisation.

Covid-19 is a profound shock. It follows the huge disruption of the global financial crisis just 12 years ago. It is sure to have large long-term consequences for business, the economy, domestic politics and international relations. 

Much will change. We can guess some of it. Much remains uncertain.