Federal Reserve has encouraged moral hazard on a grand scale

Chair Powell has gone from preaching about credit risks to buying junk bond funds

Jonathan Tepper


We have never seen countrywide lockdowns to prevent the spread of a virus. It is right that governments compensate citizens for quarantines that prevent them from working and central banks prevent a short-term liquidity crisis from becoming a crisis of solvency.

But the response must not be a cover to bail out bust borrowers and out-of-pocket speculators.

Yet last week we witnessed unprecedented moves by the US Federal Reserve to buy low-rated bonds and even exchange traded funds of junk debt.

Markets reacted with glee at being rescued yet again. One strategist on Wall Street even called it a “gift from the Easter bunny”.

Former Treasury secretary Timothy Geithner once described Walter Bagehot’s Lombard Street as “the bible of central banking.”

According to that 1873 book, central bankers are supposed to avert panic by lending early and without limit to solvent companies, against good collateral, and at a penalty rate.

However, when it came to the crunch in 2008 Mr Geithner consciously disregarded that sacred text. He and then Fed chairman Ben Bernanke lent freely to possibly insolvent groups at zero rates. Those actions encouraged moral hazard on a grand scale. Instead of promoting prudence, central bankers since then have continuously spiked the punchbowl.
In a recent report, the IMF warned that central banks have increased financial fragility by encouraging companies to pursue “financial risk-taking” and gorging on debt. Rather than target lower debt levels, companies learned that they would be bailed out if they borrowed.
But with or without coronavirus, we would have seen a wave of bankruptcies. Corporate debt in the US has never been higher, at 47 per cent of gross domestic product. Globally, non-financial corporate debt has doubled since the last financial crisis.
Vast swaths of the economy are now inhabited by “zombie” companies, which have not generated enough cash over the past few years to cover their interest costs. Researchers at the Bank for International Settlements suggested that the proportion of zombie companies in more than a dozen advanced economies had risen from 4 per cent in the mid-1990s to more than 12 per cent by late 2018. Debt is used to finance more debt, and zombies lead to overcapacity and lower productivity.
After a decade of economic growth and generous tax relief, US companies should have held cash piles to sustain them for short periods without revenue. But most borrowed all they could and never saved for a rainy day.
Today credit spreads are increasing, indicating a higher probability of default. However, the anomaly is not the current levels of stress but the unnatural calm that came before. Research by Variant Perception shows that, historically, companies with high levels of net debt compared with their cash flows have had higher costs of funding.

But this relationship broke down after the last crisis. It is only now, during the coronavirus crisis, that fundamentals are reasserting themselves and terrible companies are seeing their spreads widen.Coronavirus business update

The stance of Fed chair Jay Powell, a governor of the central bank since 2012, should not be a surprise. Four years ago he noted in a speech that “a long period of very low interest rates could lead to excessive risk-taking and, over time, to unsustainably high asset prices and credit growth.”

Many times he warned against suppressing volatility. Yet as soon as markets swooned in December 2018, he immediately reversed course. He has gone from preaching about the risks of credit growth to providing liquidity to junk bond ETFs.

Lending to potentially insolvent companies is bad enough, but buying corporate bonds and ETFs in the secondary market is of questionable legality under Section 13 of the Federal Reserve Act, which allows for lending against collateral in “exigent” circumstances. It also does nothing to help fund the economy, and merely helps the returns of investors who have already bought corporate bonds. It is a paradise for speculators.

The obvious beneficiaries of the junk bond-buying programme are overleveraged private equity groups and unhealthy borrowers. This is not surprising. Mr Powell spent years at Carlyle, the private equity giant.

After the last financial crisis, Mr Geithner, too, moved through the revolving door to the position of president at Warburg Pincus, another private equity firm.

Investors and chief executives are learning that no matter how imprudent their borrowing in the good times, when the bad times inevitably arrive, they will be thrown a lifeline.

The writer is chief investment officer at Prevatt Capital and founder of Variant Perception, a research firm

What Happens When The Pandemic Ends?

by John Rubino

US government debt pandemic

Let’s assume that by the end of this year a combination of social distancing and some new and effective treatments convert covid-19 from existential threat to chronic nuisance and the economy starts to assume an air of normalcy.

Which is to say that people go back to traveling and eating out and buying Chinese-made things they don’t need with money they don’t have.

Are we really home free? Or will some other, even bigger black swan come in for a landing?

To put this question into context, it helps to look at how the world got here. In extremely brief form:

We engineered a tech stock bubble in the 1990s that burst in 2000, requiring drastically lower interest rates and truly insane speculation in housing to rescue the big banks.

When that bubble burst in 2008, interest rates had to fall even further and even more debt – ranging from government to student to subprime auto (and, yes, mortgage) — had to be taken on to save Wall Street. Hence the term “everything bubble.”

Then came the pandemic, which burst the everything bubble and has convinced the world’s governments that truly astounding amounts of new debt are required to bail out all the parts of the private sector that have more-or-less ceased to exist.

Here, for instance, is the Fed’s balance sheet, which is a proxy for the amount of new currency the central bank has created out of thin air and dumped into the economy.

The blue line is GDP growth and the red line is Fed currency creation.

Note that more and more currency has to be created to maintain the same anemic growth trend:

Fed balance sheet pandemic
And here’s the federal government’s debt. Note the same situation as with the Fed: ever-greater borrowing is necessary to maintain a diminishing rate of growth.

Now back to the original question: What happens when the pandemic is over and we try to resurrect something like normal life?

The answer is that we run head-on into the one crisis that was completely foreseeable, which is demographics.

Unlike housing busts and pandemics, the number of retirees who will need ever-higher government benefits is right there in pretty much every study of US population trends.

The number of people over 65 (and therefore eligible for generous Medicare and Social Security benefits) will surge from about 35 million today to over 80 million by 2050.

The possibility of us ever being able to scale back our borrowing is thus zero.

US retirement age population pandemic

Looked at this way, the financial side of today’s crisis is actually the new normal.

No matter if or when movie theaters, restaurants, and cruise ships fill up again, debt will continue to soar because reining it in is politically impossible.

With the government having lost fiscal tightening as a financial management tool, all the pressure will be shifted to currencies, which historically speaking are a very weak reed. Google “list of hyperinflations” … actually, don’t bother, here’s the list that pops up:

list of hyperinflations pandemic

These countries did pretty much what we’re doing, which is to say they responded to crises of one kind or another by running the monetary printing presses.

In each case their currencies collapsed due to oversupply and/or loss of faith in government.

The difference between this and those previous hyperinflations is that the latter were isolated crises in a sound-money world.

Today everyone is doing it, which means the coming crisis will be global, and therefore just as devastating as any pandemic.

The Myth of the Middle East Regional Powers

By: Hilal Khashan

In an April 10 teleconference meeting among Turkey, Azerbaijan, Kazakhstan and Kyrgyzstan, Turkish President Recep Tayyip Erdogan predicted the emergence of a new world order in the aftermath of the coronavirus pandemic.

However, the events that have left the world mostly unprepared to deal with the virus do not support Erdogan’s prediction.

Some indicators suggest that a post-coronavirus world order will reflect post-World War I Europe, in which nation-states rose out of the ruins of empires.

Indeed, in the United States and Europe, nationalism appears to be growing.

But no matter how the world changes, the grouping of countries that Alfred Thayer Mahan first referred to as the Middle East in 1902 will likely continue to be defined by the power vacuum that has dominated the region since World War I.

After a history of several millennia of imperial rule, today’s Middle East state system was created by Western powers and Russia, and they continue to oversee it.

The coronavirus pandemic is in many ways revealing why this is the case.

Historical Rivalry in the Middle East

For more than three millennia, competing empires ruled the region now known as the Middle East.

The Battle of Kadesh in 1274 B.C., which took place in modern-day Syria between Pharaonic Egypt and the Hittites of the Anatolian highlands, brought stability and affluence to the Nile River Valley.

In 605 B.C., Egypt lost its influence in the Near East after being defeated in the Battle of Carchemish, again in Syria (known as Babylonia in ancient Mesopotamia). The Byzantine-Sasanian War of 602-628 weakened both Byzantium and Persia, and not long after, Muslim armies from the Arabian Peninsula seized Greater Syria from the Byzantines between 634 and 638 and defeated the Persian army in Iraq in 636. They also brought Egypt under their full control by 646 after defeating the Byzantine army there. By 651 B.C., the Sasanian Empire had fallen to Arab-Muslim troops.

Fast forward to A.D. 1514, and the Ottoman Empire had gained dominance in much of the region.

The Ottomans defeated the Safavids in the Battle of Chaldiran in west Azerbaijan and kept them out of the Middle East, which the Ottomans conquered shortly afterward.

The Ottomans also clashed with the Qajars, who inherited the Safavids, before settling their territorial divisions in the treaties of Erzurum of 1823 and 1847.
The Ottoman Empire, 1683
(click to enlarge)

However, the 19th century brought the terminal decline of the Ottoman Empire, which Russian Tsar Nicholas I in 1853 named the “sick man of Europe.”

In Egypt, Muhammad Ali created a modern state with French assistance, and in 1831, his son Ibrahim Pasha invaded Syria and defeated the Ottoman army in the 1832 Battle of Konya. In 1839, the Ottomans attempted to retake Syria, but Ibrahim Pasha defeated them in the Battle of Nezib.

However, at this point, the British and Austrians intervened to prevent the collapse of the Ottoman Empire — at least until they could decide how to partition it. They forced Egypt to abandon its claim to Syria in the 1840 Convention of Alexandria.

The convention also coerced Egypt to slash its army, terminate its military industry and relinquish its territorial expansionism.

The Qajar Empire did not fare better than its Ottoman rival in the 19th century, and it lost sizable territory to Tsarist Russia in the 1826-28 Russo-Persian War.

By the mid-1800s, the United Kingdom and Russia had begun to truly dominate the politics of the Middle East.

Western Intrusion and New Regional Arrangement

The time for Europe to fully dismantle the remnants of the Ottoman Empire arrived in 1915 when the Ottomans aligned with Germany and the Austro-Hungarian Empire in World War I.

In 1916, the French and British reached the Sykes-Picot Agreement to seize Iraq and Syria.

A year later, the British government issued the Balfour Declaration, which promised to create a Jewish homeland in Palestine.

The United Kingdom granted Egypt, which it had occupied in 1882, its independence in 1922 and gave Iraq its independence in 1932, but it maintained military and political dominance over them.

In 1943, the United Kingdom also pressured the government of Free France to grant independence to Syria and Lebanon.

After the state of Israel was established in 1948, it reached armistice treaties with its Arab neighbors in 1949. And in 1950, U.S., British and French foreign ministers reached a Tripartite Agreement for the Middle East in which they committed to maintaining the region’s existing state order and military balance.

Notably, they understood military balance as meaning Israel’s ability to defeat the combined Arab armies. In 1955, Egypt signed a deal with Czechoslovakia to obtain modern military hardware, and from then until June 1967, Egypt worked to build itself up as a major regional power, despite a military defeat in the 1956 Suez War.

Meanwhile, in the Six-Day War of 1967, Israel demonstrated powerfully that it had no Arab military competitor. However, Israel’s title as a regional power is fairly erroneous; it is less a regional power than a Spartan state that aggressively and mercilessly defends its national interests. Its peace with Egypt and Jordan is cold and hardly goes beyond security arrangements and intelligence cooperation.

And its clandestine diplomatic ties, especially with the countries of the Gulf Cooperation Council, do not qualify it to claim a leadership position or political superiority.

The Syrian Uprising Debunks the Myth of National Regional Powers

The Iranian Revolution of 1979 introduced Iran as a new Middle East regional power — especially after it involved itself in the Arab-Israeli conflict by establishing Hezbollah and sponsoring Hamas and the Palestinian Islamic Jihad.

The U.S. invasion of Iraq in 2003 gave strength to Tehran’s claim as regional power.

But Iranian leaders neglected to understand the implications of eliminating Iraq, which had defeated them in the 1980-88 war, as a regional competitor. (Iraqi President Saddam Hussein had miscalculated when he thought his victory against Iran entitled him to make Iraq a dominant military power in the Middle East. He developed ambitious nuclear and missile programs during the war years with Iran and expected to get away with them. The Iranians are now doing the same.)
In 2012, Iran prodded the Syrian regime to militarize the country’s uprising and transform it into a war against radical Islam, which threatened to derail Iran’s Shiite Crescent project through Iraq, Syria and Lebanon — an essential part of Iran’s strategy to secure prominent regional power status.

But by 2015, despite massive Iranian military support, the Syrian government and its many Iranian-funded Shiite allies had failed to defeat the rebels.

Russia’s active military intervention in the Syrian armed conflict beginning in September 2015 tipped the balance of power in favor of President Bashar Assad’s regime. Moscow had emerged as the decisive military and political player in the Syrian conflict, dwarfing the influence of regional players Iran and Turkey.

A few years later, Iran’s weak military response to the January 2020 U.S. killing of Qassem Soleimani, the chief of the al-Quds Brigade of the Islamic Revolutionary Guard Corps, further demonstrated the fragility of Iran’s claim to the title of regional power.

It is not an exaggeration to assert that, as a result of its direct military intervention in Syria, Russia — more than Iran, Turkey or Egypt — has become the dominant regional power in the Middle East. In February 2020, Erdogan failed to drive the Syrian army out of Idlib in northwest Syria after warning that no heads “will remain on their shoulders” if the Syrian troops did not comply with his ultimatum.

The Turkish president bit the bullet after making the statement and ended up alienating himself from the United States. Erdogan is aware that there are limitations to Turkey’s regional power ambitions in the Middle East, and he does not trust Russian President Vladimir Putin, especially since Turkey has no institutional relationship with Russia.

Erdogan chose to pursue a more pragmatic policy line in the Western Balkans. In October 2017, he visited Serbia and received a warm welcome from President Aleksander Vucic, who seemed quite willing to open up to Turkey and forget the bitter memory of the 1389 Battle of Kosovo, which resulted in an Ottoman victory and later served as the spark that ignited Serbian nationalism.

Erdogan’s venture into the European Union’s backyard has already drawn sharp criticism from French President Emmanuel Macron, who warned Turkey that the Western Balkans is off-limits.

The Coronavirus Pandemic and What’s Next

At various times in modern history, Turkey, Iran and Egypt have presented themselves as regional powers in the Middle East, but they are not strong enough nations to avoid the political and military influence of more powerful countries.

Even though the Egyptian economy is improving, the majority of Egyptians are getting poorer because economic expansion occurs mostly in the oil and gas sectors, which employ only a small percentage of Egypt’s labor force.

The coronavirus threatens to destroy Turkey’s emerging economy, which has only recently started to recover from the financial crisis of 2018. Meanwhile, the Iranian economy is shattered. The virus is wreaking havoc on the Middle East’s already flagging economies, and wild protests are likely to spread to the area’s core countries after the pandemic abates.

Coronavirus Cases in the Middle East, as of April 14
(click to enlarge)

The upheaval resulting from the virus has brutally exposed the structural weaknesses of the Middle East’s inherently rigid political systems, which have failed to address their unprecedented national emergencies, instead approaching the virus with denial, blame and misinformation.

Lack of transparency and suppression of medical reports about the extent of the spread characterized the initial response of the Turkish government. A reluctant Turkey waited until March 11 to report its first confirmed case of COVID-19 and even then declined to inform the public about its location.

Neither Turkey nor Iran has yet managed to flatten the curve of the virus’s exponential growth. (The fact that Turkey is having difficulty containing the virus did not seem to prevent Erdogan from airlifting medical aid to Italy, Spain and the Western Balkan countries.)

The Egyptian government, meanwhile, has taken an official stance of belittling the virus’s impact.

This approach has contributed to a nonchalant public attitude and has resulted in a country with no clue about the real extent of the virus’s (seemingly rapid) spread within it.

In Iran, President Hassan Rouhani has warned his people that they have to live with the virus for an extended period, and Supreme Leader Ali Khamenei did not hesitate to accuse the United States of launching biological warfare in his country.

Rouhani is reluctant to declare a national lockdown partially because, in addition to the devastating economic implications, it would commit the armed forces to the streets and give additional leverage to the conservative clerics who control them.

Authoritarianism, which is rampant in the Middle East, increases in times of societal crises such as natural disasters, economic collapse and wars. These crises further aggravate existing imbalances in civil-military relations and increase executive power at the expense of the legislature and civil society.

The coronavirus pandemic has redefined the meaning of power and introduced the quality of the public health sector as a key independent variable in assessing the strength of a country. (Military might, after all, has proved useless in fighting the virus.)

Rule by fear and excessive coercion are exacerbating authoritarian tendencies in the Middle East, and further alienating the people from the state. Public apathy and antipathy toward the ruling elite do not bode well for the future of the region.

The leading countries of the Middle East may hope that in the wake of the coronavirus pandemic, a new world order will allow one of them to become a true regional power.

But right now, their weaknesses, combined with the historical strengths of Western and Russian powers, suggest that much will remain the same. 

Banks Can Only Guess at Ultimate Virus Fallout

JPMorgan Chase and Wells Fargo have set aside billions of dollars to cope with the coronavirus fallout, but that may be far from enough

By Telis Demos

JPMorgan Chase Chief Financial Officer Jennifer Piepszak on Tuesday said more provisions are highly possible in the coming quarters. / Photo: JPMorgan 

Two of the largest U.S. banks have set aside billions of dollars to cover loan losses related to the new coronavirus crisis. Unfortunately, that may only be enough under a rosy scenario.

For the first quarter, JPMorgan Chase JPM -2.30%▲ added nearly $7 billion to its loss reserves, while Wells Fargo WFC -3.99%▲ put aside almost $3 billion. These are extraordinary amounts, especially against the placid credit markets of the past several years. But as the banks acknowledge, it may not be reflective of what is coming down the road in more dire scenarios. That could be particularly the case for risks to corporate borrowers.

At JPMorgan, the bulk of the new provisions were for credit-card loans, $3.8 billion out of the total $6.8 billion. That makes sense, given the fact that cards are unsecured by collateral, and with the unemployment rate—a primary driver of card losses—feared to jump to 10%, if not double that, in the coming months, according to JPMorgan’s economists. Including other adjustments related to new accounting rules, overall allowances for loan losses now represent 9.7% of retained credit-card loans, up from 3.4% at the end of last year.

JPMorgan also put aside an additional $2.4 billion for wholesale loans gone bad for the first quarter. But as a proportion of total loans, the allowance ratio moved in the opposite direction. Allowances for loan losses as a percentage of retained wholesale loans are now 0.87%, down from 1.02% at the end of last year. That is partly a result of the new loan-accounting standards, as well as the fact that corporate lending had an extraordinary growth surge in the first quarter.

But it also is a reminder that the risks to companies are more complex and may take longer to play out. In the first quarter, corporations made a historic grab for liquidity, which has for now put many on sounder footing.

Companies drew down on some $50 billion on credit lines at JPMorgan, and some at-risk companies were approved for $25 billion in new credit. JPMorgan also led a quarterly record amount of investment-grade corporate-debt issuance.

Overall commercial and industrial lending grew 23% from year-end. By contrast, consumers actually borrowed nearly 10% less on their cards at JPMorgan over that time.

Both banks called out the oil-and-gas industry in particular as driving higher provisioning in the quarter. This sector is in trouble almost regardless of what happens with the pandemic and social distancing, given where the price of oil is expected to be.

But the ultimate potential effects on airlines, hotels, retailers, commercial real estate and so forth are much more in flux. Ratings downgrades on wide swaths of borrowers picked up pace only late in the quarter, pushing much of the possible pain into the next quarter.

On Tuesday, JPMorgan Chief Financial Officer Jennifer Piepszak repeatedly emphasized that the outlook is uncertain and that more provisions are highly possible in the coming quarters. Much will depend on the success of various government programs intended to keep consumers and small and large businesses afloat, she said.

“Everything is incredibly fluid,” she said. “We really need to learn a lot about the ultimate impact of these programs because they are extraordinary and should have an extraordinary impact.”

Similarly, Wells Fargo said the extent of losses would depend largely on the effectiveness of the government’s stimulus measures for both consumers and businesses.

JPMorgan said in its most extremely adverse scenario for how coronavirus plays out, credit costs could hit $45 billion in total this year, just shy of the $47 billion increase following the 2008 financial crisis. A sharper recovery could mean things stop well short of that point.

But an extended major downturn would mean the provisions taken by banks so far are only the beginning.

The Dawn of a New Era

A Paradigm Shift Accelerated by the Coronavirus

Even before the arrival of COVID-19, humanity found itself stuck in several crises at once. The current shock delivered by the coronavirus could accelerate a paradigm shift that was already underway. It may result in a better and more sustainable world.

By Ullrich Fichtner

Paris, in times of the coronavirus
Paris, in times of the coronavirus / Robin Utrecht/ Echoes Wire/ Barcroft Media/ Getty Images

I. The Crash

The world that we still considered to be "normal" back in February has collapsed in an historically unprecedented crash. Half of humanity is currently adhering to some form of lockdown protocols and every single continent has been affected - poor regions and wealthy regions, urban areas and rural ones.

Huge portions of the global economy have come to a grinding halt and 180 countries around the world that just a few weeks ago were experiencing economic growth and rising prosperity have now plunged into a deep recession.

The collapse of tourism, the massive disruptions to the global transportation sector and the suppression of urban life has, in many places, affected the entire spectrum of human activity, crippling the retail, production and service industries in addition to bringing sports, the arts and cultural life to a standstill. The entire leisure industry has been paralyzed.

The World Trade Organization (WTO) estimates that global trade will shrink this year by between 13 and 32 percent – numbers that are so unbelievable that they leave one gasping for breath. Companies and entire nations will go bankrupt as a result, and the disruptions could trigger revolts and even revolutions.

In the United States, the labor market went from historically positive numbers to historically negative numbers almost overnight, an event with nothing even close to an historical precedent. Almost 22 million Americans have lost their jobs in the course of the last four weeks and economists believe that unemployment could reach as high as 32 percent this summer.

Adam Tooze, the economic historian at Columbia University, believes that if things continue on the current path, the U.S. economy could shrink by up to a quarter, similar to the crash in 1929 - with the difference that the plunge back then took place over the course of four years while the current implosion may by compressed into just a few months. "There has never been a crash landing like this before," Tooze wrote in the magazine Foreign Policy. And it is an analysis that applies to the entire world.

Wealthy countries are currently slinging around trillions of dollars to cushion the initial consequences of the disaster and help keep companies alive. It is certainly the correct course of action, but the structural fractures that are currently opening up will ultimately be unavoidable.

Many – a huge number, in fact – of the stores and restaurants that are now closed will never open their doors again. Many factories around the world that were producing at maximum capacity just a few weeks ago have shut down for good.

It will soon become clear that the question as to when restrictions should be loosened and production resumed is not the primary issue. It is very clearly one thing to enact a decree paralyzing entire industries, but a completely different one to restart them after weeks or perhaps months of stoppage.

There is no switch that can be flipped. There is no proven plan that can be turned to. In the puzzle of modern-day manufacturing practices, the near future will see myriad instances where one small piece will be missing to complete the final product.

It will take time to fill the gaps and it will become necessary to rethink entire production processes. In the globalized economy with its famously long supply chains, no country can restart economic activity on its own – not even if that country is called Germany.

Uncertainty has crept into the erstwhile so tightly planned business processes of global capitalism. The "black swan," which became known during the 2008 financial crisis as a metaphor for an extremely unlikely event, has been transformed by the coronavirus into the new totem animal of the global economy. "Radical uncertainty," which until recently was merely an abstract concern, has now become our constant companion, says Tooze.

One might even begin to believe that it would be better to start all over again from the beginning instead of trying to fix the old system one more time.

COVID-19 crashed into a world that was already in crisis.

II. The Power of Inertia

Nothing is as it was any longer, as everyone is currently saying and writing. In the German daily the Frankfurter Allgemeine Zeitung, former German Foreign Minister Joschka Fischer recently called it "the first crisis for humanity in the 21st century."

European Commissioner Thierry Breton, who holds the common market portfolio, believes that the closely networked continents will once again grow more independent of each other.

The head of the International Monetary Fund, Kristalina Georgiewa, has spoken of "humanity's darkest hour." Pope Francis believes it is now time to turn away from what he termed "functional hypocrisy." Blackrock CEO Larry Fink also wrote in a letter to investors that they must prepare for a new world of uncertainty.

Everyone with power, money and reputation is currently saying that we are facing radical change, the beginning of a new world. But what do they actually mean? Do they really mean it seriously? Is it possible that death, the great equalizer, might somehow improve humanity?

Is it possible that the virus may trigger a global moment of reflection characterized not just by fear and danger but also by new visions for the way forward in which we are able to distinguish the important from the inconsequential? Could this be the moment when we finally actually try to tackle the important tasks we are faced with?

Should that be the case, then the virus could emerge as a kind of salubrious shock leading to a new design for the 21st century. But are we ready for the realization that our lives must change and that the way our economy functioned until how was beset by too many shortcomings? Are we prepared for the recognition that the insanity of mass consumption and resource exploitation cannot continue?

Initial signs are far from encouraging. The head-butting between European finance ministers, who were only able to agree on a confusing array of aid measures after hours of contentious video conferencing, has not made it seem as though we are at the dawn of a new era.

The decision forced through by the Netherlands - and not prevented by the Germans – to force conditions on struggling countries in exchange for financial assistance was a perfect example of long-festering deficiencies.

Even beyond that, initial impressions from the approach to this allegedly world-changing crisis are sobering. The ugly international competition for masks and equipment, the unilateral border closures, the lack of international coordination on aid packages - none of that has signaled the beginning of a new epoch, at least not a good one.

More than that, the fact that some hedge funds in London earned billions in profits from the corona-induced stock market crash is reminiscent of the worst excesses of casino capitalism.

The nation-state has returned – in Europe, of all places – in all of its dark glory, and it has already served up nationalistic missteps. In her historic televised address on the eve of Germany's coronavirus lockdown, German Chancellor Angela Merkel didn't make a single mention of the European Union. There was no mention of Germany's neighbors or international cooperation, and the word "Europe" didn't make an appearance either.

The chancellor's focus was entirely on the Germans, and the same phenomenon could be observed across the continent. The French are taking care of their crisis, the Spanish are focused on theirs, as are the Austrians, the Swedes, the British, the Hungarians, and so on.

There is no sign of joint action -- and nor have many unified goals been identified. The view from the local church steeple in Europe is once again the extent of the global horizon.

Advice from international health experts and the plea from the World Health Organization (WHO) to refrain from closing national borders have been completely ignored. And now, the borders are closed, as though customs officials and border guards could stop pathogens the same way they can stop migrants.

But the most important questions have gone unanswered: How much suffering might have been avoided if, for example, eastern France and western Germany had not seen themselves as peripheral regions of the nation-states to which they belong, but instead as part of the same region in crisis? What if they had understood the cross-border region as a single zone confronting the same problems and suffering from the same shortages?

The fact that in the Alsace region, critically ill patients were transported to distant – French – hospitals despite the fact that beds in nearby – German – intensive care units were available is a function of the bad habits developed in an old world whose disappearance would be anything but detrimental.

It is shameful that Germany, the most powerful country in Europe, has again neglected to take any steps towards strengthening the union. It has once again become apparent that EU headquarters in Brussels has no power and that, in the opinion of EU member states, shouldn't get any. Old, nation-state attitudes have deep roots.

These attitudes are reflected in small things, such as the fact, for example, that political maps are consistently used to depict the expansion of this virus – as though it were a national problem. The colorings used on the maps are meant to show how each country is doing in the fight against the illness, while diagrams are used to identify model pupils (South Korea) and problem children (the United States).

Each country's supply of face masks is carefully enumerated while national stockpiles of medical equipment are compared. It may sound cynical, but the daily tables showing the number of infections and deaths look almost like the medal counts from some macabre Olympics. None of it is particularly encouraging.

A climate protest in San Francisco in September 2019: Radical insecurity
A climate protest in San Francisco in September 2019: Radical insecurity KATE MUNSCH / Reuters

If coronavirus marks a turning point in human history, then it apparently hasn't yet been reached. We apparently have to wait for the post-corona era. The general impression at the moment is not that plans for a better future are being laid. Instead, it looks more as though everyone's energy is currently being focused on returning to what was considered normal back in January or February.

The aid programs slapped together by national governments - the German one on its own has been funded with 750 billion euros – are aimed at a rapid return to the pre-corona age and its ultimate continuation. As though nothing had happened. Hopes are being nurtured that the damage done by COVID-19 can be repaired and that everything can then continue on as before. It isn't likely that such efforts will be successful. But if they are, then the world will have learned nothing from this disaster.

Finance ministers and central bankers are currently shifting around unprecedented amounts of money: millions, billions, trillions. To try to get an idea of what is at stake, a comparison with the famous Marshall Plan, with which the U.S. financed the post-World War II reconstruction of numerous European countries, is helpful. It had a volume of around 13 billion dollars, the equivalent today of around 130 billion euros.

Berlin has now made six times that sum available – for Germany alone. Given that amount of quantitative assistance, are qualitative expectations allowed? Are they, perhaps, imperative? Should the state merely be a silent partner in many companies or should it not, perhaps, speak up here and there?

Helen Mountford of the renowned U.S. think tank World Resources Institute has described what is at stake. Governments and countries that are now looking at their options for surviving the crisis, she wrote in her blog, have only two options: "They can lock in decades of polluting, inefficient, high-carbon and unsustainable development," or they can take advantage of the opportunity for a rapid reorientation.

Such hopes are being harbored by environmental activists. But there also a number of other rather large challenges at our door. After all, things were far from "normal" in the world into which coronavirus was born, the situation was far from optimal, despite our current hindsight skewed by a few weeks of crisis. COVID-19 crashed into a world that was already in crisis. Indeed, it was suffering from several crises at the same time. Or have we forgotten?

Democracies rooted in the rule of law were under attack both internally and externally – from international populists and domestic extremists.

The multilateral postwar order, with its many global organizations, was merely a shadow of its previous self, in part intentionally destroyed by the occupant of the White House, in part allowed to disintegrate by the disinterest of larger countries.

Back toward restraint, to a more clearly defined state, to security, moderation, docility and the desire for order.

The international community of nations was unable to find solutions to crises and conflicts that continue to smolder in Syria, Afghanistan, Yemen, Mali, Venezuela and elsewhere.

Vast numbers of displaced people triggered ongoing human tragedy on all continents and, in particular, between Europe and Africa.

The capitalist cycle of production and consumption seemed to have entered a late phase of decadence.

The internet, and the social media platforms it supports, had unleashed a destructive force that was corroding politics, societies and even families.

There are, in other words, plenty of reasons for resisting the urge to return to the era before the times of COVID-19 struck. The virus arrived in a world where there was already significant unease about the way things were going. It would be helpful to not lose sight of that now. Indeed, it would be advantageous if the changes we are now facing were so radical that simply continuing as before were no longer possible, if new perspectives were to open up and if a new opportunity for a different future were grasped. It is time for change.

III. A Glimpse of the Future

Throughout history, there have been numerous catastrophes that contemporaries saw as a turning point or, at the very least, as a wakeup call. The Lisbon earthquake of 1755 marked the end of an era and can be considered as one of the triggers of the Enlightenment.

The eruption of Krakatoa in Indonesia in 1883 was, thanks to the advent of the telegram, one of the first apocalyptic global news events. Rather than wondering about the degree of humankind's responsibility for large disasters, people tended to question how an omnipotent God could allow so much suffering.

The coronavirus could ultimately have similarly far-reaching consequences. Just as belief in an all-powerful God began to crumble in the 18th century, questions about the effects of human activity can no longer be ignored. It's as if the shock of coronavirus is making more palpable the multiple crises that we, more or less unwittingly, have maneuvered ourselves into.

In light of the current situation, the WWF has issued a reminder about issues that are related to the virus and the illness it causes. Those issues include advancing deforestation, humanity's encroachment on the habitats of wild animals and the sale and consumption of exotic animal species.

All of them are practices that must finally be ended, says the WWF. It is, the organization says, the only way to prevent future pandemics caused by the dangerous transfer of viruses from animals to humans, so-called zoonoses.

Hygiene at farmer's markets and street markets, particularly in Asia, needs to be prioritized by public officials - and it is in their own interest to do so. It must be permitted to ask – without being lectured about cultural insensitivity – whether the highly risky consumption of certain wild animals necessarily has to be part of a nation's culture. A critical gaze must also be cast on traditional Chinese medicine, which processes animals into pastes, powders and tinctures.

But this is no blame game and assigning such is a waste of time. Only the question of one's own individual responsibility will actually get us anywhere. Should studies produce reliable data that heavy air pollution has contributed to significantly higher COVID-19 fatality rates, then cities and industrial regions around the world suddenly have quite a few more urgent items on their to-do lists.

There are a lot of enormous questions currently in need of attention. But they no longer have to do with God. They include: Why are humans so destructive? Why are we, eyes wide open, destroying the very foundation of human life? Why have we – at a global level – been so unable to stop doing the wrong thing and start doing the right thing?

Refugees off the Libyan coast in 2017: Questions about the effects of human activity can no longer be ignored.
Refugees off the Libyan coast in 2017: Questions about the effects of human activity can no longer be ignored. / Taha Jawashi / AFP

In a shock like the one we are currently experiencing, such questions are lent a great deal more urgency. Changes already underway accelerate and previously complicated knowledge suddenly becomes so obvious that even a child can understand.

That is currently the case with the charts and graphs showing the significant reduction in air pollution as a result of the coronavirus lockdown.

They won't simply be forgotten again after the crisis is over. They will become part of our broader awareness. The colorful charts and images tell us a lot. First and foremost, that its not all in vain, that action can in fact lead to results.

It also shines a new light on the excuses employed by politicians when they claim - at least on environmental questions – that they are unable to take the steps that are required.

The images from this global lockdown – the empty cities, the quiet boulevards – will have a lasting effect on politics. How will world leaders, after placing entire nations under house arrest, explain to their citizens that a rapid ban on plastic bags is unfortunately out of the realm of possibility?

That it is impossible to push through stricter regulations for this or that chemical? Who will believe in the future that there isn't a simple way to stop industrialized animal cruelty, pesticides, noise pollution, dirty air and substandard food products? Who will re-elect politicians who do nothing to protect our climate?

IV. Paradigm Shift

COVID-19 will change the world because even before the pandemic, it was already in the grips of a far-reaching transformation. The best evidence for that transformation is the book, published in October of last year, two months before the appearance of the novel coronavirus, called "The End of Illusions."

The author, German sociologist Andreas Reckwitz, describes how societal upheavals take place, how collective thought shifts and how useful, decades-old paradigms suddenly disintegrate and are replaced by a new one.

According to Reckwitz, our Western capitalist societies had arrived at just such a moment in history last fall. His book shows that at least since 2010, following the financial crisis, globalization had entered a "crisis of extreme dynamism" that was producing an increasing number of unpleasant consequences. And now, in 2019-2020, this "late modern" period was reaching its end – something that would have happened even without COVID-19, it just would have taken longer. The virus is merely speeding up a vast cultural shift.

We contemporaries have frequently sensed that shift, that something was ending, in recent years. Radical globalization, the "neo-liberal competitive state," to use Reckwitz's term, lost the attraction that they exuded back in the 1990s. Growing social inequality, the scandalous gulf between the poor working class and the fabulously wealthy ownership class became a source of gnawing dissatisfaction in an unsustainable environment.

The arguments and the rage of social movements such as Occupy Wall Street, the World Social Forum and Fridays for Future managed to trickle into the mainstream, despite widespread skepticism directed at the activists.

The point, though, is not to cast aspersions within the right-left political schema solely on the evils of neo-liberal globalization as conceived on the right – as Reckwitz masterfully demonstrates. The era now coming to an end was defined by much more than economic radicalism.

It also produced significant advances in individual freedoms. It raised awareness for the sufferings of minorities and achieved recognition for marginalized cultures.

The paradigm that is currently struggling for survival didn't just liberate the economy, but also society at large. It wasn't just labor laws and job protections that were deregulated, but also links to cultural traditions and the straitjacket of gender determinism. A new middle class developed that transformed the shaping of one's own biography – from career to leisure time to family – into a fulfilling challenge.

The fact that protecting resources was not a priority can be seen in the globally expanding fleet of SUVs or in the comically low prices charged by budget airlines. Airbnb and Uber became symbolic brands in a world were socioeconomic and socio-cultural winners went hand in hand.

The political right celebrated its – economic – liberation while the political left profited from new – cultural – freedoms.

Together, though, the capitalists and the hedonists ultimately produced too many losers, which is why the dominant paradigm finally slid into crisis. If it is true that we are at the end of an epoch, and everything indicates that we are, then our lives in the pre-corona era were long in a phase of decadence.

Neo-liberalism was not able to cushion the social inequality that it had created and was very clearly in the process of digging its own grave: A society in which inept bankers are allowed to shower themselves with multimillion-dollar bonuses while hundreds of thousands of retirees are threatened with old-age poverty cannot avoid eventual instability.

How will world leaders, after placing entire nations under house arrest, explain to their citizens that a rapid ban on plastic bags is unfortunately out of the realm of possibility?

But the leftist, progressive current produced losers, writes Reckwitz. As an insulated class of urban, generally well-educated elites, they produced a kind of cultural exclusion, subtly devaluing those who felt threatened rather than enriched by the multicultural, environmentally focused society.

Right in the heart of the general cosmopolitanism, an old middle class was lost, one that "fluctuated between maintaining and losing status all while facing cultural degradation." The fact that members of this group have proved particularly susceptible to the polemic offerings of right-wing populist rabble-rousers isn’t difficult to comprehend.

The fact that their fears were undervalued by the ruling culture of comprehensive globalization was a significant factor in the crisis that had ripened just before the appearance of the novel coronavirus.

A new political paradigm is necessary, a new "foundation for political thought and action" that better matches the challenges we face than the old one. Societal values and the "utopia of the desirable" changed, unnoticed at first, but then hard to ignore. And now, we are trending away from opening and liberalization and self-realization - and back toward restraint, to a more clearly defined state, to security, moderation, docility and the desire for order.

"Embedded" liberalism is the future, Reckwitz wrote six months ago – a time that seems from today's perspective like a completely different time. But even then, it was the same world in which we now live – and even then, it was deep in the grips of change. The virus has merely made the transformation more visible, thus speeding it up. It won't, however, make things easier.

For as long as the crisis lasts and nobody is able to predict when it will end, there will be a competition between a variety of apocalyptic scenarios that we are already familiar with. On the right of the political spectrum, the collapse of the Western world is invoked, while leftist critics of capitalism are collecting arguments for the collapse of capitalism. Greta Thunberg, in her environmental niche, will not suddenly stop talking about the climate collapse.

But mainstream society has also always had its own apocalyptical fantasies and is yearning for deliverance. The undiscerning internet-euphoria had already come to an end before the arrival of COVID-19, with the worldwide web long seeming to have been corroded by fears of cybercrime and constant surveillance by large companies and national governments.

The political campaigns, filter bubbles and constant online bullying that infused the social networks belied the erstwhile digital promise that the internet would produce liberty, equality and fraternity.

The flood of fake news in the corona crisis has further intensified doubts about the benefits of the World Wide Web. Here, too, stricter, not fewer, rules will be the consequence.

Again, our modern, Western, capitalist societies were already in deep crisis when corona arrived on the scene. And they knew it. "What began as a welcome, emancipatory empowerment of responsible citizens," Reckwitz writes, "ultimately threatened in the culture of late-modernity to transform into individual self-interest against the institutions."

He wrote that back in October. In April 2020, this sentence already seems like a product of a past era. With just a few strokes of the pen, the state eliminated individual self-interest. And hardly anybody seemed to mind. Because the world is undergoing fundamental change.

V. On the Other Side

Epochal theories are always subject to chance. Claims of a fundamental shift are, despite all the arguments presented, little more than a game. In his tome "Cultural History of the Modern Age," the both brilliant and enjoyable Austrian Egon Friedell made the observation that humans have always been unable to understand the times in which they live.

Contemporaries, Friedell wrote in the early 20th century, are never able to see the entirety of an historical event, but only seemingly arbitrary pieces.

It's a point of view that is difficult to argue with. The events of this dramatic pandemic are inconceivable, with our focus fluctuating wildly between the global crisis and the urge to panic buy toilet paper, between images of suffering and Italians singing from their balconies.

How will the narrative of this era ultimately be written? When did the story begin? How many chapters have already been completed? What are the pieces that will ultimately become part of the completed work?

French economist Jacques Attali wrote a dictionary for the 21st century already in 1998 called "Dictionnaire du XXIe siècle." From A for activity to Z for zen, Attali – known as a kind of intellectual adviser to a number of French presidents – let his imagination run wild, thus securing his reputation as a futurist.

Lehman Borthers CEO Richard Fulud in October 2008: It will beneficial to put a stop to harmful developments that have been with us for too long.
Lehman Borthers CEO Richard Fulud in October 2008: It will beneficial to put a stop to harmful developments that have been with us for too long. / JONATHAN ERNST / REUTERS

Attali was right about a lot of things. He recognized "nomadism" - the free movement of people, goods, information, institutions and factories – as a significant characteristic of the future world, an idea that wasn't completely a given at the time. He felt that a new, precarious civilization was on the way, one that would find itself confronted by new dangers. He even included an entry for "epidemic."

Globalization could boost the return of huge epidemics, he wrote. Viral illnesses, he added, could prove just as dangerous as the Spanish Flu epidemic in the winter of 1918-1919. In the new millennium, he predicted, pandemics would be triggered by the destruction of the habitats of certain animal species. "A mass-extinction event is to be expected in the south," Attali wrote, and it will be necessary for global measures to be implemented to combat new diseases – measures that could call into question the entire culture of "nomadism" and even democracy itself.

That is where we currently find ourselves. Our primary concerns are still reserved for those who are sick and dying, with fear and mourning the dominant emotions in regions that have been hardest hit. Thousands of people are dead, tens of thousands are still getting sick each day, and nobody can say with any degree of certainty how the pandemic will evolve and when a vaccine might be found. It is possible that we will see a second, or even a third wave. A new round of lockdown measures. Reports from South Korea that recovered patients may be vulnerable to coming down with COVID-19 again are cause for deep concern.

It is quite likely that this pandemic marks the moment when constant health concerns become a dominant element of our daily lives. The desire for a return to the insouciance of the pre-corona era will likely remain nothing more than a dream. From now on, the risk of a pandemic will constantly be hanging over our heads. Just as humanity used to live under the constant threat of nuclear war, as Bill Gates said in a speech five years ago, we will have to live in fear of a deadly virus from now on.

We will, in any case, take the danger more seriously than we did until recently. That alone will have clear consequences: Goods will no longer flow around the globe as they have because supply chains and industrial production will be set up differently. New food safety norms will be introduced, with agricultural production, animal husbandry and the handling of fresh produce being subjected to new regulations. The preference for local over international, the familiar over the exotic, will become stronger.

The EU, and what remains of it, will become more protective. United Nations agencies will search out new roles and will remind us that the blueprint for a better, fairer, healthier and safer world has already been produced, in the form of the Millennium Goals. International corporations will have to reorganize. The traveling circus of conferences and meetings will have to become smaller, with video conferencing taking their place.

Internet companies will grow into new areas of business and play an even larger role in our working lives than they do now. Company executives will have to carefully consider whether they want to relocate factories abroad, and if they do, they will perhaps prefer five smaller production sites in three different countries over a single vast factory in China.

That will drive up costs and sacrifice efficiency, but it will minimize risk and make production more sustainable. And sustainability is good. Sustainability will be a keyword in the new era that is dawning with the coronavirus.

The word will be broadly understood and will be applied to all human activity, even at the private level. If the U.S. doesn't rein in its exorbitantly wasteful lifestyle, it will soon be treated by the international community as a rogue nation. Europe and China will grow closer as partners on environmental protections.

It will be exciting to be part of this new world. It will beneficial to put a stop to harmful developments that have been with us for too long. It will be fascinating to watch the development of a new paradigm, to see old ideas die and new ideas take their place. It will feel good to finally surmount the pre-corona era.

It had reached its end. In his Easter speech, German President Frank-Walter Steinmeier put it like this: "Perhaps we believed for too long that we were invincible, that we could continue to go faster, higher, farther. That was a mistake." The time has now come to fix it.

What would Keynes do?

The pandemic will leave the rich world deep in debt, and force some hard choices

Who takes the pain, and can there be gain

IN “HOW TO PAY FOR THE WAR”, a pamphlet published in 1940, John Maynard Keynes looked back on the way that the British government had, in the late 1910s, tried to pay off enormous quantities of debt with a combination of higher taxes and inflation. Wages had not kept up with inflation, meaning “that consumers’ incomes pass[ed] into the hands of the capitalist class”.

Meanwhile the rich, as bondholders, had benefited from interest on the loans.

This time, Keynes argued, it would be better to take money from the workers directly by forcing them to lend to the government while the war was on and there was little to spend money on anyway. Later the government could pay the workers back the money they had lent it with interest, using the proceeds of a substantial wealth tax. “

I have endeavoured”, Keynes wrote, “to snatch from the exigency of war positive social improvements.”

Like a war, the fight against covid-19 has seen governments, particularly those in the rich world, rack up debts so large that the way in which they are paid off could have a long-lasting effect on their economies, and significantly affect the distribution of wealth.

There are deep differences between today’s circumstances and those which Keynes surveyed, perhaps foremost among which is that advanced economies now routinely shoulder a level of debt that Keynes would have seen as an unmanageable burden (see chart 1).

But those dealing with the aftermath of this year’s remarkable borrowing should still heed his example in looking for the right way to distribute the pain as they do so.

Debt before dishonour

The numbers involved are enormous. Advanced economies will run an average deficit this year of 11% of GDP, according to the IMF, even if the second half of the year sees no more lockdowns and a gradual recovery. Rich-world public debt could run to $66trn, which might be 122% of GDP by year’s end.

Governments wishing to see such debt burdens diminish must tread one of three broadly defined paths.

First, they can pay back the borrowing using taxation.

Second, they can decide not to pay, or agree with creditors to pay less than they owe.

Third, they can wait it out, rolling over their debts while hoping that they shrink relative to the economy over time.

The likely constraint on paying off debt with future tax revenues is politics. Such a strategy requires some mix of raising taxes—which upsets quite a few people—and cutting spending on other things—which also upsets quite a few people, including some who will not have liked the tax increases either.

Nevertheless, after the global financial crisis of 2007-09, which increased debt levels by about a third in advanced economies, many countries chose to reduce public spending as a share of the economy. Between 2010 and 2019 America and the euro zone cut their public-spending-to-GDP ratios by about 3.5 percentage points. Britain’s fell by 6 percentage points. Taxation, meanwhile, rose by between 1 and 2 percentage points of GDP.

Public appetite for paying off pandemic debts through a return to such austerity seems likely to be scant. The emotional, as opposed to economic, logic of austerity—people had spent too much, and must rein themselves in—does not apply.

What is more, post-covid publics are likely to want more spent on their health, not less. More than half of Britons supported tax increases that would pay for more spending on the National Health Service even before the pandemic struck.

Ageing populations are also increasing the demand for public spending, as are investments needed to tackle climate change.

The second option—defaulting or restructuring debts—may be forced on to emerging economies which lack any other way out. If it is, that will cause significant suffering. In advanced economies, though, such things have been increasingly rare since Keynes’s day, and look unlikely to make a comeback. A modern economy integrated into global financial markets has a huge problem if capital markets lock it out as a bad risk.

That said, there may be more than one way to default. Kenneth Rogoff of Harvard University argues that promises to increase health-care and pension spending in coming decades should also be viewed as government debt of a sort, and that this sort of debt is easier to back out of than obligations to bondholders.

It is hard to ascertain whether the “default” risk in these debts—ie, the risk that politicians cut health-care and pension spending, reneging on their promises to ageing populations—is rising.

Unlike bonds they are not traded on financial markets that provide signals of such things. But it almost surely is, especially in countries, like Italy, where pension spending is already enormous.

Rich-country politicians unwilling to shift away from spending and towards taxing, or to risk finding out how terrible a default would be, are likely to choose to grow their way out of hock.

The secret to this is ensuring that the economy’s combined level of real economic growth and inflation stays handily above the interest rate the government pays on its debt. That allows the debt-to-GDP ratio to shrink over time.

In a much-noted speech in 2019 which called for a “richer discussion” about the costs of debt, Olivier Blanchard of the Peterson Institute for International Economics, a think-tank, argued that such a strategy was more plausible than many might think. In the United States, he pointed out, nominal growth rates higher than interest rates are the historical norm.

Many rich-world governments pursued this sort of strategy after the second world war with some success. At its wartime height, America’s public debt was 112% of GDP, Britain’s 259%. By 1980 America’s debt-to-GDP ratio had fallen to 26% and Britain’s to 43%.

Achieving those results involved both a high tolerance for inflation and an ability to stop interest rates from following it upwards. The second of these feats was achieved by means of a regulatory system which, by depriving citizens of better investment options, forced them in effect to lend to governments at low interest rates. By the 1970s economists were calling this “financial repression”.

In a paper published in 2015, Carmen Reinhart of Harvard University and Belen Sbrancia of the IMF calculated that France, Italy, Japan, Britain and America spent at least half of that period in so-called “liquidation” years in which interest rates adjusted for inflation were negative.

They estimated that the average annual “liquidation tax” to governments resulting from real interest kept low by inflation and financial repression ranged from 1.9% of GDP in America to 7.2% in Japan.

The violence inherent in the system

To attempt such repression today, though, would require redeploying tools used by post-war governments—tools such as capital controls, fixed exchange rates, rationed bank lending and caps on interest rates. This would be offensive to lovers of economic freedom. It would also be sufficiently contrary to the interests of investors and savers to be politically very demanding.

That said, the coming years could prove to be politically demanding times. But if governments did enact such changes, they would spur responses unavailable to investors of the 1950s and 1960s, such as investment in cryptocurrencies and other immaterial products.

Even without a mechanism for keeping interest rates low, inflation can go some way to lessening the debt burden. “My gut instinct is that we will need higher inflation to wash away some of the debt,” says Maurice Obstfeld of the University of California, Berkeley (who, like Mr Blanchard and Mr Rogoff, was once chief economist at the IMF).

Yet though inflation may be necessary if debt burdens are to shrink, it may not be readily forthcoming. A few economists think inflation will surge of its own accord when the enormous economic stimulus they expect butts up against the supply disruptions imposed by lockdowns. But Mr Obstfeld and many others worry instead about deflation, or at least less inflation than they would like.

For some, the cause of this is “debt overhang”—the idea that debts sap the economy of demand. Wealthy bondholders, by definition, prefer saving to spending. Many others make a simpler judgment. The circumstances of the pandemic which made massive borrowing necessary in the first place—such as surging unemployment—are also likely to cause a deflationary slump.

Since the pandemic started, the cost of insuring against inflation through financial markets has fallen, reflecting a belief that there is unlikely to be much of it about. Investors seem to be predicting that five to ten years from now the Bank of Japan, the European Central Bank (ECB) and the Federal Reserve will all be undershooting their inflation targets.

Low inflation is bad for nominal growth. But it does at least reduce borrowing costs. Central banks can cut interest rates, if they have any room left to do so, and create money with impunity. In the five weeks leading up to April 16th, the Fed bought $1.3trn of American government debt: 5.9% of 2019 GDP and more than the entire budget deficit.

Thanks in part to the Fed’s actions, the American government can borrow for ten years at an interest rate of just 0.6%. In low-growth, lower-inflation Japan ten-year bonds are pegged at around 0%. Only in indebted countries in the euro zone, such as Italy, do bond yields threaten to exceed recent nominal growth rates.

These low interest rates make the fiscal picture seem less bleak. Vitor Gaspar, a senior official at the IMF, says the fund expects a combination of low rates and rebounding growth to see debt burdens stabilise or decline in the “vast majority” of countries in 2021. And bond-buying by central banks takes much of the worry out of some of the debt.

Take Japan. Its gross-debt-to-GDP ratio in 2019 was around 240% of GDP, which sounds truly astonishing. But years of quantitative easing (QE) have left the Bank of Japan with government bonds worth nearly 85% of GDP.

And the government could, in theory, sell financial assets of a similar magnitude if it had to. Adjust the debt to take these things into account and what remains is a little over 70% of GDP—less than a third of the gross figure and roughly comparable to what the figure is for America if you make the same adjustments (see chart 2).

Well before the pandemic such analysis had led many influential economists to start treating higher public debt as sustainable in a low-inflation, low-interest-rate world. Because the pandemic has pushed both inflation and interest rates the same way—down—their logic still holds.

However, there are reasons for scepticism.

Start with central-bank debt holdings. QE does not really neutralise public debt. Central banks buy government bonds by creating new money which sits in the banking system in the form of reserves. And central banks pay interest on those reserves.

Because the central bank is ultimately owned by the government, QE replaces one government debt-interest bill, interest payments on bonds, with another, interest payment on bank reserves.

And although the latter are very low today—negative, in fact, in several places—they will stay so only so long as central banks do not need to raise rates to fight inflation.

Since the global financial crisis, betting on low rates has paid off; some have gone so far as to see them as a new normal, part of a low-growth economy in which demand needs constant stimulation.

But that brings out another flaw in the sanguine view of public debt: it assumes that the future will be like the past. Although markets expect rates to remain low, it is not a sure thing. There is, for example, the possibility that lockdowns and stimulus in close succession do indeed bring on price rises.

There is also the possibility that a great deal of the deflationary pressure has been due to oil prices, which as of today really do seem to have no further to fall.

An alternative critique is that the past may not offer the reassurance some might seek there. A preliminary working paper by Paolo Mauro and Jing Zhou of the IMF, riffing on Mr Blanchard’s theme, examines borrowing costs and economic growth for 55 advanced and emerging economies over, in some cases, as much as 200 years.

The 24 advanced economies they study have on average benefited from interest rates which are below the nominal growth rate 61% of the time. Yet they find that such differentials are “essentially useless” for predicting sovereign defaults. “Can we sleep more soundly” with interest rates below growth rates? they ask. “Not really,” they answer.

The first sign of any debt trouble in the rich world would probably be rising inflation. At first, that might be a relief, given the present deflationary risk and the recent history of persistently insufficient inflation. It would be a sign that the economy was recovering. By reducing real interest rates it would further boost growth.

And central banks that have long fallen a percentage point or so short of their inflation targets might feel comfortable seeing inflation ride a percentage point or so proud of it. But a somewhat relaxed attitude to 3% does not mean a willingness to accept 6%.

Inflation rising further above targets than it has been below them would bring on a stark choice for heavily indebted governments. Should they leave the central bank alone, let it raise rates to keep inflation at target, and look to taxpayers—or pensioners—to pay for the resulting rise in debt-interest costs? Or should they lean on their central banks to keep interest rates low, permitting inflation to rise and thereby easing their debt burdens?

Some context for that question comes from the blurring between fiscal and monetary policy the pandemic has already seen. Steve Mnuchin, America’s treasury secretary, has said that on some days he has spoken to Jerome Powell, chairman of the Federal Reserve, more than 30 times.

The Bank of England has co-ordinated interest-rate cuts with Britain’s treasury and recently agreed to increase the government’s overdraft. The Bank of Japan has long been an enthusiastic partner in the economic agenda of Abe Shinzo, the prime minister. The outlier is the euro zone where, because of the horror of inflation found in countries such as Germany and the Netherlands, political pressure on the ECB is just as likely to result in hawkish policy.

Facing the exigencies

Conveniently for politicians, some of the pain of high inflation would be borne by foreign investors, whose share of public debt exceeds 30% in many rich countries. “In a crunch, will Chinese debt-holders be treated as senior to US pensioners?” asks Mr Rogoff.

But less foreign investment in years to come would need to be set against that advantage. A perception that a nominally independent central bank was in fact a creature of politicians would create a risk premium on investment that would slow growth throughout the economy.

Inflation would bring arbitrary redistributions of wealth to the disadvantage of the poor, just as Keynes observed it to have done in the late 1910s. Richer people are more likely to hold the houses and shares that rise in value with inflation, not to mention mortgages that would be inflated away alongside government debt. Higher inflation would also provide a bail-out that favoured more indebted companies over the less indebted.

Higher taxes, tried a little in the wake of the financial crisis, could be targeted more precisely to reduce inequality—much as they were in some countries after the second world war. Wealth taxes, as favoured by Keynes back then and increasingly discussed by academics and left-wing politicians today, could find that their time had come.

Post-pandemic populations may welcome the sort of cost-free-to-most all-in-it-togetherness they might provide. Less radically, a value-added tax in America (which lacks one), higher taxes on land or inheritance, or new taxes on carbon emissions could be on the cards. Like inflation, however, tax rises inhibit and distort the economy while producing a backlash among those who must pay.

While the world’s chief problem is battling an economic slump in which inflation is falling, such choices are tomorrow’s business. They will not weigh heavily on policymakers’ minds. Even economists with reputations as fiscal hawks tend to support today’s emergency spending, and some want it enlarged.

Yet one way or another, the bills will eventually come due.

When they do, there may not be a painless way of settling them.