Crazy, Dangerous Things

Doug Noland

The nineties were a fascinating time for top-down macro analysis. The decade began with a severe banking crisis, the inevitable consequence of the late-eighties Bubble. The economy was in deep recession. The Greenspan Fed slashed rates and manipulated the yield curve, surreptitiously recapitalizing the banking system while nurturing non-bank Credit creation (securitizations, derivatives, hedge funds, the repo market and “Wall Street finance”).

This wave of financial innovation came at a critical juncture, helping to finance massive Current Account Deficits, speculative excess and U.S. deindustrialization.

Throughout the decade, I was a devoted reader of the great German economist Kurt Richebacher’s monthly “The Richebacher Letter.” I became enamored with facets of the Austrian School of Economics – certainly its focus on Credit and economic structure.

Dr. Richebacher was critical of the Fed’s interest-rate manipulation, U.S. over-consumption, persistent Current Account Deficits, and the dearth of productive capital investment (i.e. deindustrialization). Richebacher’s analysis resonates more today than ever.

Crazy, Dangerous Things have taken root in policy circles. Traditional norms are being tossed on the compost heap. Deficits don’t matter; the size of central bank balance sheets doesn’t matter; what central banks purchase doesn’t matter; money doesn’t matter.

When I contemplate how we could have sunk to such a place, my thoughts return to Dallas Fed president Robert McTeer’s post-“tech” Bubble comment back in 2001… “If we all go join hands and buy an SUV, everything will be all right.” The following year Dr. Bernanke, with his government printing press and “helicopter money,” joined the Federal Open Market Committee.

Was the “Roaring Twenties” the “golden age of capitalism” or a historic Bubble? Was the Great Depression chiefly an inevitable consequence of boom-time financial and economic excess and deep structural impairment – as “Austrian” analysis holds? Or, instead, was the catastrophic downturn the consequence of policy negligence (tight monetary policy and then failure to aggressively expand the money supply after the 1929 crash) – as Bernanke and Milton Freidman analysis profess?

This should have been the crucial debate almost two decades ago. I would say it is the monumental debate of our times – except for the fact that there’s no debate. We’ve reached the point where even the craziest monetary ideas have been readily adopted. I would much prefer not to sound like some wacko extremist. But as a student of financial history, I group Dr. Bernanke in with the infamous monetary charlatans. He is, however, a monetary saint comparatively to today’s MMT crowd.

There are many frightening aspects to the pandemic. From a health perspective, there is terrible death and illness – yet clear justification for intermediate-term optimism. We’ll eventually have effective testing, vaccines and treatments for this dreadful virus. Meanwhile, social, political and geopolitical ramifications evoke anything but optimism.

The pandemic arrived at a critical juncture in history. A multi-decade global experiment in unfettered Credit, monetary management, economic structure, and “globalization” was showing heightened late-phase instability. Relations between nations were turning more antagonistic, as growth in the global “pie” stagnated.

Nationalism and strongman leadership were on a steep rise – in a backdrop of heightened insecurity, uncertainty and instability. In particular, hostilities were unfolding between the world’s superpower and the aspiring superpower – both led by strikingly forceful presidents.

China’s historic financial and economic Bubbles were faltering, raising the odds that Beijing would target foreigners (the U.S. in particular) as the source of national woe. In the U.S., a deeply divided nation was turning even more so, with widening wealth inequalities feeding frustration and distrust.

Even before COVID-19, central banks and their “money” creating operations were considered fundamental to the solution for myriad problems at home and abroad. With stocks at inflated record highs and boom-time unemployment near 60-year lows, the Fed nonetheless slashed rates and restarted QE.

Despite ongoing double-digit Credit growth, the People’s Bank of China (PBOC) cut rates and pursued aggressive monetary injections. Not many weeks after the ECB ended a historic ($2.6 TN) QE operation, it abruptly restarted the printing press. Money supply in the U.S., China and elsewhere surged parabolically. I’ve referred to 2019 as a “Monetary Fiasco,” though it proved merely a warmup.

Federal Reserve Assets were up $288 billion last week to a record $6.638 TN, with a six-week gain of $2.126 TN. M2 money supply expanded $78 billion, with a six-week gain of $1.236 TN. Fed Assets were up $2.436 TN (62%) over the past year, with M2 up $2.221 TN (15.3%).

April 17 – Bloomberg (Christopher Condon and Matthew Boesler): “Federal Reserve Bank of Cleveland President Loretta Mester said the U.S. central bank is too focused on limiting damage to financial markets and the U.S. economy to be concerned that its actions will encourage excessive risk-taking by investors. ‘Yes, we are moving into unprecedented territory, but remember we’re trying to lend to firms that through no fault of their own were impacted by the virus,’ Mester said… Before the crisis, the Fed had warned about the high level of indebtedness at U.S. companies. Critics have said that in buying so-called junk debt the Fed will only encourage future risky lending. ‘I don’t think we can be that concerned about those kinds of moral hazards,’ Mester said. ‘This is a hugely and negatively impactful shock, and we have to do all we can to make sure we’re not doing permanent damage to the underlying fundamentals of the economy.”

It's terrible. The U.S. has lost 22 million jobs in three weeks, in one of the steepest downturns on record. No one wants to see such hardship, and we all would prefer to limit “permanent damage to the underlying fundamentals of the economy.”

But how can we completely turn our backs to permanent damage to “money,” along with trust in our central bank, markets and finance more generally? If we need crazy fiscal deficits to temporarily support the unemployed, small business, and state and local governments, so be it.

But today’s unending tarmac of “C 130 Hercules money” droppers is fraught with extreme risk.

U.S. Continuing Claims for Unemployment almost doubled from the initial subprime eruption in June 2007 to the heart of the crisis in late-2008. The unemployment rate jumped from 4.5% to 6.5% prior to the Fed unleashing an (at the time) unprecedented Trillion plus QE stimulus program. It was an appalling hardship for millions of workers through no fault of their own.

Thousands of uneconomic businesses that proliferated during the “easy money” mortgage finance Bubble period needed to be shuttered. It’s tempting to invoke “the downside of Capitalism” or the unfortunate reality of the business cycle. But it’s not that simple, and it certainly wouldn’t be fair to Capitalism.

The Fed orchestrated a false boom, and Bubble collapse was unavoidable. From an “Austrian” perspective, a massive Monetary Inflation saw “money,” Credit and real resources poorly allocated, asset Bubbles proliferate, and deep financial and economic structural impairment propagate.

April 12 – Financial Times (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.”

The harsh reality is that over the past decade the Fed and central bankers have inflated a historic global Bubble.

The world now faces an unavoidable precarious adjustment, where policy responses to collapsing Bubbles carry the high risk of destroying trust in money, finance and policymaking.

The Fed and Treasury have opened Pandora’s Box. There are no rules – or a tested framework for how to proceed.

April 16 – Reuters (Howard Schneider): “U.S. small businesses may need as much as $500 billion a month to fully ensure their survival through the widespread closures and disruptions slamming their revenue during the coronavirus crisis, Atlanta Federal Reserve bank President Raphael Bostic said… That ‘baseline’ figure derived from staff analysis, he said, would be a starting point for discussions about how to expand a $350 billion small business lending program that was exhausted in about two weeks. ‘Using that as a benchmark might give us some guidance. ... It would not be good to lose them,’ Bostic said…”

April 11 – Bloomberg (Naomi Nix): “U.S. governors are urging Congress to give states $500 billion in ‘stabilization funding’ to meet budget shortfalls resulting from their efforts to stem the spread of coronavirus. Maryland’s Larry Hogan and New York’s Andrew Cuomo said… the stay-at-home orders most states have implemented were necessary to protect the public but hurt states’ economies. Hogan, a Republican, and Cuomo, a Democrat, are chairman and vice-chair, respectively, of the National Governors Association. ‘To stabilize state budgets and to make sure states have the resources to battle the virus and provide the services the American people rely on, Congress must provide immediate fiscal assistance directly to all states,’ the pair said.”

In a rally for the history books, the S&P500 gained 15.5% in two weeks. The Nasdaq Composite rose 17.7% over this period, and the small cap Russell 2000 16.9%. The Nasdaq100’s 17.3% rise pushed this index positive for the year.

How could it be possible for stocks to mount such a rally in the face of a looming global economic depression? No Conundrum. Early in the mortgage finance Bubble period, I would write “liquidity loves inflation!” Throw “money” into an unsound system and it will instinctively gravitate to areas demonstrating robust inflationary biases.

These days stocks fit the bill. Equities markets are bolstered by the deeply entrenched view that the Fed will do whatever it takes to sustain inflated prices, along with a market structure (i.e. ETFs, derivatives, 401k plans and pension contributions, hedge funds, algorithmic trading, stock buybacks, etc.) that promotes trend-following flows.

This dangerous dynamic has turned perilous.

The acute stress associated with the bursting Bubble ensures the Fed will be injecting additional Trillions over the coming months, with markets confident the liquidity spigot will be wide open for as far as eyes can see. Witnessing U.S. equities divorced from underlying economic fundamentals in not that unusual - yet never to the degree of largely dismissing an unfolding global depression.

COVID-19 is the catalyst for the bursting of history’s greatest global Bubble.

And no amount of fiscal and monetary stimulus will immunize the U.S. economy from the unfolding economic downturn.

After a decade of historic excess, global economies face unprecedented fragility.

Importantly, international officials lack the flexibility enjoyed by policymakers from the world’s reserve currency government.

Here in the U.S., a unique dynamic sees massive monetary inflation chiefly funneled into U.S. securities markets, bypassing most of the population and much of the economy. This powerful dynamic attracts international flows, including trade deficit-associated international dollar balances, underpinning the dollar in the face of incredible monetary inflation and Current Account Deficits.

The South African rand dropped 4.5% this week, followed by a 3.3% decline for the Turkish lira, 2.4% for the Brazilian real, 1.7% for the Chilean peso, 1.6% for the Mexican peso, 1.6% for the Czech koruna and 1.4% for the Malaysian ringgit.

When emerging market central banks move to orchestrate monetary stimulus, disparate Inflationary Dynamics ensure the flow of this newly created “money” contrast markedly to the U.S. Wealthy individuals and financial institutions sell local currencies to purchase dollars, yen and euros, while weakened currencies trigger inflationary pressures in the real economy.

“Roach Motels” was the EM moniker back in the nineties. International finance would flow freely into EM booms, only to be eventually trapped by collapsing currencies, illiquidity and capital controls come the arrival of the bust.

A historic EM bust is now unfolding. The IMF, World Bank and other international institutions will be lending like crazy, yet the sources for the Trillions required to reflate EM Bubbles are anything but obvious.

April 17 – Wall Street Journal (Jonathan Cheng): “Since the Cultural Revolution ended in the mid-1970s, China’s economy, fueled by market reforms, has notched up more than four decades of unbroken gains, enlarging the domestic economy by roughly a hundredfold and transforming the world. That winning streak is over. China on Friday reported a 6.8% year-over-year contraction in its economy for the first three months of the year—the first quarterly decline in gross domestic product since official record-keeping began in 1992 and likely the first since Mao Zedong’s death in 1976… The fall was even steeper compared with the previous quarter: a 9.8% pullback as the coronavirus that first emerged in the central Chinese city of Wuhan spread across the country and around the world, delivering an economic blow unprecedented in modern times. ‘The scale and breadth of China’s economic contraction are staggering,’ said Eswar Prasad, an economics professor at Cornell University and the former head of the International Monetary Fund’s China division. ‘There is little prospect of China driving a revival of global growth.’”

The Chinese economy contracted 9.8% during Q1. Auto sales were down 48% in March, with Q1 air passenger traffic slumping 54%. Home sales are said to have recovered only to about 40% of pre-virus levels. A Friday morning Bloomberg headline: “China Suffers Historic Economic Slump with Hard Recovery Ahead.” And from the Associated Press: “China Opening Up But Consumers Stay Home.”

China has changed profoundly since their last economic downturn. I question how quickly Chinese consumers recover sufficient optimism to borrow and spend at pre-COVID levels.

There will be some pent-up demand and inventories to replenish. Yet a very bearish case can be made for the maladjusted Chinese economy.

Faltering confidence and a bursting housing Bubble would ravage domestic demand. Meanwhile, already struggling with overcapacity, China’s massive export sector faces the grim prospect of a global depression and collapsing EM demand. Such prospects should have the global community fearing Chinese financial system and currency fragilities. The renminbi was under modest pressure again this week.

Europe has its own acute fragilities. Italian yields jumped 20 bps this week to 1.79%, with spreads to German bunds widening 33 bps. Yield spreads widened 47 bps in Greece, 19 bps in Portugal and 16 bps in Spain. Stocks were down 3.2% in Italy and 2.8% in Spain this week.

April 16 – UK Telegraph (Ambrose Evans-Pritchard): “The eurozone’s emergency plan to fight Covid-19 has unravelled within days. Italy’s prime minister has rejected the central element of the €540bn package as a ‘trap’. No Italian leader in the current febrile mood could accept it and survive for long… ‘The deal is an admission of European inadequacy,’ said professor Adam Tooze, of Columbia University. The plan eschews joint debt issuance and amounts to extra debt foisted on states already at the outer boundaries of debt sustainability, pushing them further into a ‘bad equilibrium’. Jean-Paul Fitoussi, of Science Po in Paris, says the package amounts to ‘collective suicide’… ‘If there is no real mutualisation of debt, we will either slide further underwater, or take the inevitable politically incorrect step and say, ‘Enough is enough, let’s get out’,’ he said. Above all, it misjudges the simmering anger in Italy… If each state remains responsible for its own pandemic debt issuance, the effect is to turn a symmetric health shock into an asymmetric economic shock for different EMU states, further widening the gap and pushing Club Med to the brink. UniCredit says Italy’s public debt will jump by 33 percentage points to 167% of GDP this year with Portugal rising to 146%, and Greece 219%. The ball is now back in Germany’s court.”

At the end of the day, I don’t expect the Germans and Italians to share a common currency. I have expected the hardship that would accompany the piercing of the global Bubble to again place European monetary integration at risk. At the current trajectory, Italy is moving quickly to an unmanageable debt situation. It is difficult for me to see the Germans and Dutch agreeing to mutual European debt issuance.

The euro traded at an almost three-year low 1.08 vs. the dollar in February, spiked to a high of 1.15 on March 9th, then reversed sharply to 1.06 on March 23rd, back to 1.12 by the end of March, and closed down 0.6% this week at 1.0875. A euro breaking lower on heightened concerns for Italian/periphery debt and euro zone integration would add fuel to the dollar’s upside dislocation. With king dollar already benefiting from the U.S.’s competitive advantage in fiscal and monetary stimulus, an additional push from euro weakness would place additional pressure on faltering EM currencies – including the renminbi.

WTI crude this week sank 20% ($4.49) to an 18-year low $18.27 – despite much vaunted OPEC+ supply cuts. But it’s not only sinking crude prices confirming unfolding global economic depression. Having rallied only marginally off March panic lows, this week’s 2.2% drop pushed the Bloomberg Commodities Index to a 23.3% y-t-d decline.

And while the U.S. equities rally continued, other indicators were less than bullish. Investment-grade and high-yield CDS prices moved higher this week (partially reversing the previous week’s major decline). Latin-American sovereign CDS moved markedly higher. Mexico CDS surged 45 to 270 bps, up from 72 bps in late-February and not far below the 293 bps March 23rd closing high. Brazil CDS jumped 35 to 291 bps, and Colombia CDS rose 30 to 247 bps. Turkey CDS surged 89 to 649 bps, South Africa 31 to 408 bps, and Russia 15 to 178 bps.

Markets this week provided confirmation of ongoing global instabilities – with crude and commodities, in the euro zone’s periphery and EM, as well as with dismal Chinese data. Global COVID-19 data similarly don’t inspire confidence.

From my vantage point – eyeing key vulnerabilities globally – it is as if the U.S. stock market has become a sideshow oddity.

I hope all the optimism surrounding opening the economy is justified. I just look at the daily new infections and death data – and the national infection maps – and am skeptical we’ll attain a semblance of normalcy anytime soon. And with a deeply divided country becoming only more so – and COVID-19 turning increasingly political – it’s destined to be a disturbingly strange election year.

COVID-19 is, as well, becoming a major geopolitical issue – in alarming fashion.

April 17 – Fox News (Bret Baier, Gillian Turner, and Adam Shaw): “The U.S. is conducting a full-scale investigation into whether the novel coronavirus, which went on to morph into a global pandemic that has brought the global economy to its knees, escaped from a lab in Wuhan, China, Fox News has learned. Intelligence operatives are said to be gathering information about the laboratory and the initial outbreak of the virus. Intelligence analysts are piecing together a timeline of what the government knew and ‘creating an accurate picture of what happened,’ the sources said. Once that investigation is complete -- something that is expected to happen in the near-term -- the findings will be presented to the Trump administration. At that point White House policymakers and President Trump will use the findings to determine how to hold the country accountable for the pandemic.”

A Different Normalcy

Frustration Mounts Over Tepid Loosening of German Lockdown

Many Germans are growing impatient with the hesitant pace of efforts by the government to loosen the lockdown imposed to bring the number of coronavirus infections under control. But there's little agreement on whether the measures are appropriate: Scientists fear they go too far and business leaders say they do little to change anything.

By Manfred Dworschak, Silke Fokken, Jan Friedmann, Florian Gathmann, Kristina Gnirke, Annette Großbongardt, Hubert Gude, Simon Hage, Christoph Hickmann, Armin Himmelrath, Valerie Höhne, Martin Knobbe, Armin Mahler, Cornelia Schmergal und Gerald Traufetter

Pedestrians rest at a square in Munich, Germany
Pedestrians rest at a square in Munich, Germany THE NEWYORKTIMES / REDUX / LAIF

German Chancellor Angela Merkel isn't generally one to get overexcited, so when she does reach for hyperbole, it tends to reflect genuine elation. "We have achieved a high degree of unity in our approach, which is almost a miracle for a federal republic," she said on Wednesday, after a videoconference with the governors of Germany's 16 states. Bavarian Governor Markus Söder of the Christian Social Union (the sister party to Merkel's conservative Christian Democratic Union), Hamburg Mayor Peter Tschentscher of the Social Democrats (SPD) and Finance Minister Olaf Scholz, likewise of the SPD, were sitting next to her as she spoke, at a safe distance.

A miracle, indeed.

The governors spent around four hours speaking with the chancellor and key cabinet ministers about the path forward in the fight against the coronavirus. They managed to produce a declaration with concrete resolutions.

The strict social distancing measures will remain in place until May 3, though car dealerships, bicycle shops and bookstores can open, presuming certain regulations are observed. Shops with a floor space of up to 800 square meters (8,600 feet) are also allowed to reopen. Schoolchildren in grades approaching graduation or on the cusp of transferring to the next level of schooling will return to the classroom. Large events will remain prohibited until Aug. 31 and the wearing of masks in buses and stores is recommended, but not mandated.

The roadmap isn't quite as strict as in France, where strict curfews were recently extended, but it also isn't nearly as liberal as in Denmark, where even the daycare centers have reopened.

Unresolved Questions

Although Germany's states were able to reach an agreement, a number of questions remain unresolved. Where, for example, did the figure of 800 square meters come from? Why is there an exception for car dealerships and not, for example, for furniture stores? Why have bookstores been given priority over electronics stores? The decisions offer plenty of ammunition for lawsuits.

Even the much-praised unity looked more fragile the day after the agreement was reached.

Many states plan to open their schools before May 4, while others want to include more exceptions when it comes to store openings. Some states envision opening up the zoos, while others do not. There isn't likely to be much consistency.

The federal government will continue taking things slowly and treating the process as an experiment with unpredictable outcomes. Merkel says she plans to consult with the governors every two weeks to discuss how the measures are working.

She will be focusing her attentions on one development in particular: the reproduction number, which refers to the number of additional people a coronavirus patient infects. If it is below one, the virus can be controlled. If it rises above that number, then Germany's health-care system could soon be overwhelmed. 

As Merkel explained, a rate of 1.1 would mean hospitals reach capacity in October, a rate of 1.2 would mean July and 1.3 would mean June. During the video conference, the Chancellery posted the chart on the screen, essentially as a warning to those insisting on greater freedoms. Merkel has never been one for taking risks.

Despite their efforts at convincing Germans of the benefits of caution, the four politicians on Wednesday were rather half-hearted in their appeals for solidarity. They failed to explain one fundamental thing to the country: that it will likely have to live with the virus for quite some time. 

Nobody can say when a vaccine might be available, though it certainly won't come soon. A Harvard University study has forecast that we may have to live with social distancing measures, at least intermittently, until 2022.

There will be a return to normalcy, but it will be a different normalcy. Politicians have thus far been unable to find the words, ideas and scenarios to describe and shape this new normalcy. What, for example, will school lessons look like given the necessarily strict anti-infection measures? 

Above all else, where will the resources come from? For how long can the economy continue to endure limitations and what do long-lasting distancing measures mean for business? 

What can be done to support the parents of young children, now that they may be forced to juggle childcare with working from home for the next several months? Even if there is an emergency daycare program for the children of essential workers, what about those who don't qualify?

And when will residents of Germany once again be able to exercise their constitutional rights, like going to church or attending a demonstration?

Such questions were discussed in the Wednesday videoconference. And despite Merkel's warm words, participants weren't always in complete agreement. Indeed, there were moments of intense disagreement.

North Rhine-Westphalia Governor Armin Laschet, one of the candidates to take over the leadership of the Christian Democrats (CDU), has for weeks been calling for the debate about reopening Germany to be held in public and not behind closed doors. The Wednesday meeting was thus vital for his political future: If the steps toward loosening the lockdown measures didn't go far enough, it could leave the impression that hardliners, like Marcus Söder, had got the better of him. 

Given that the next chair of the CDU is likely to end up replacing Merkel as chancellor, these intra-political questions must always be considered when looking at the course being charted by Germany's leaders.

Split Over Churches

Laschet clashed with other meeting participants primarily on the issue of religion. A Catholic by confession, Laschet joined Thuringia Governor Bodo Ramelow, a member of the far-left Left Party, in arguing that religious services should be permitted as long as certain measures were observed.

Others noted that it is primarily the elderly - those who are most at risk in the coronavirus epidemic – who attend church services and that the kind of singing that takes place during church services increases the risk of transmission via exhaled particles. Laschet quickly found himself on the defensive.

The decisive argument was delivered by, of all people, Söder – who, as head of the CSU, is perfectly placed to either boost Laschet's Chancellery aspirations or torpedo them. A Protestant himself, he is nonetheless head of a largely Catholic state. He pointed out that even the pope celebrated Easter mass completely on his own. Why should Germany do any different?

Laschet and Söder have found themselves squaring off several times in recent weeks. The Bavarian governor has generally been pushing for stricter measures, with Laschet usually insisting greater attention be paid to those measures’ economic and social toll. On Wednesday, though, Laschet found himself in conflict with Economics Minister Peter Altmaier, also a member of the CDU.

Caution Wins Out

Their disagreement centered on which stores could be allowed to open. In the morning, an agreement had been reached that shops up to a size of 800 square meters could be opened as soon as possible. Merkel would have preferred limiting the size to 400 square meters, but Finance Minister Scholz, the senior SPD member in Merkel's coalition government and thus her vice chancellor, wanted to allow shopping malls to open. The 800 square-meter rule was something of a compromise.

According to meeting participants, several governors were critical of the rule. They claim Altmaier said that even though he had voted in favor of the rule in the preceding cabinet meeting, he was no longer so sure. He floated the idea of only opening shops on May 15. Participants say that this is when Laschet lost it. By then, he said, many of the stores they were talking about wouldn't be around anymore. Laschet said he expected that the economics minister would be more sensitive to such concerns.

Others sided with Laschet when he defended the 800-square-meter solution, with even Söder joining in: "Armin and I may not have agreed on much in the last several days, but we need a compromise on this point," he said. Merkel took the floor, but Laschet continued to make his disagreement clear with angry gesturing, leading Merkel to comment: "Armin, we can all see how upset you are. Peter supports the compromise.” Ultimately, they all agreed on the resolution made by the cabinet.

They did not, however, go along with Laschet's desire to extend the exception to furniture stores. There is no need to do so, said Baden-Württemberg Governor Winfried Kretschmann, a member of the Green Party.

"Everyone has a chair. Nobody is sitting on the floor," he said. Laschet, however, did manage to push through the exception, if only for his state, the next day.

  Closed stores in Cologne's city center
Closed stores in Cologne's city center imago images/Manngold

Proposals from other state governors to reopen playgrounds, for instance, did not get majority support from the governors. Mecklenburg-Western Pomerania Governor Manuela Schwesig, of the SPD, suggested restaurants be allowed to open up their outdoor tables given the nice spring weather, but Söder, in particular, was against it. 

Nevertheless, Schwesig said that the compromise reached was broadly acceptable, adding that the most important aspect for her – perhaps informed by the fact that she, as a cancer patient, is a member of a high-risk group – was the recommendation that masks be worn. "It's not something we in Germany are used to," she said, "but we have to do it. It is a simple means to protect ourselves."

Those who wanted to open the country even further ended up on the losing side on Wednesday. Caution won out, with politicians largely following the advice of scientists, aside from some risky exceptions. Experts have recently been calling for even greater precautions and warned against reversing the gains that have been made by prematurely loosening the lockdown measures.

Still, the virus is halfway under control for the time being. Recent numbers have indicated that infections have been largely stable of late. There are still around 3,000 new infections per day, but a similar number of people are recovering each day as well. A working group at the Helmholtz Association of German Research Centers, however, has argued that Germany should now take advantage of that situation and push for complete victory. In a statement, the researchers calculated how the epidemic could be conquered in just a few weeks. Assuming that strict social distancing rules stay in force.

"From a purely epidemiological perspective, we should be tightening the measures rather than reducing them," says Michael Meyer-Hermann of the Helmholtz Center for Infection Research in Braunschweig. He argued that it is easier to stick to the current regime for at least another few weeks to continue reducing the number of infections.

If just a few people are getting sick – say, perhaps, around 100 per day – then each individual infection could be monitored and tracked, according to the concept. The patients would be isolated and those they had contact with could be tested. The spread could thus be stopped and the rules for the rest of society could be significantly loosened.

But if the rules are loosened too early, in this view, the best outcome is that the current situation remains constant. There would be thousands of new infections each day and the fight would potentially continue for years – as would the significant limitations on social life.

No Agreement on Best Way Forward

But even among scientists, there is no clear agreement on the best way forward. Meyer-Hermann's colleague, the epidemiologist Gérard Krause, for example, is more optimistic. He believes that it will be possible to achieve lower infection numbers even with the less strict regulations that have now been agreed to. "But we have to keep a close eye on the effect they are having," he says. "It is also important that we massively strengthen other areas of the fight."

Krause's point of view is reflected in the agreement reached on Wednesday, in which federal and state governments agree to increase funding for health authorities. "Significant investments are necessary, both in terms of staffing and technology," he says. 

"The health agencies are the key to a successful strategy against the virus. They must be able to immediately track down new infections and to assiduously implement the at-home quarantining of contact persons."

On the one side, the scientists are issuing warnings; on the other, businesspeople are pushing forward. The politicians are trapped between these two extremes as they consider the steps needed to lead the country out of the crisis.

According to the Munich-based ifo Institute for Economic Research, each further week of the shutdown will cost 42 billion euros. How many billions less will it be after the announced measures for loosening the lockdown have been implemented? 

"What happens now won’t change much,” says Clemens Fuest, the head of ifo. "People shouldn’t have any illusions about that.”

Before the videoconference with the governors, Peter Altmaier, especially, was facing pressure from business associations, particularly that of German Association of the Automotive Industry (VDA) and its president, Hildegard Müller. 

She had once again made it clear that the government absolutely needs to allow car dealerships to reopen. The high-end German manufacturers largely build their cars to order. She argued that if nobody can buy them, there’s no point in opening the factories either. Müller spent years previously as a staffer at the Chancellery who worked very closely with Merkel.

Economists are also putting pressure on Altmaier to loosen the shutdown. "If the economy doesn’t start up again by early May, then there won’t be a quick recovery,” says Michael Hüther, the director of the German Economic Institute in Cologne, which has close ties to industry. In a position statement, the Cologne-based economist vividly described how the collapse in demand, broken supply chains and lack of working employees are paralyzing industry and trade.

Will Demand Still Be There?

The car industry plays a key role, not only because 800,000 jobs directly depend on it, but also because the lack of demand is preventing many suppliers from reactivating their manufacturing processes. Now, the German government has given in to the pressure and allowed car dealerships to reopen.

Daimler and Volkswagen have announced that they will slowly restart work in some plants starting next week. Ford and BMW plan to do the same in May. But the automobile industry remains far from what could be described as normal times.

As long as school operations remain limited and daycare centers are still closed, car factory workers with children will have to stay home, meaning plants won’t be fully staffed. The car companies are also dependent on partner firms in countries like Italy, and nobody knows at this point when they will be able to deliver their goods again.

Together with the federal government, car companies now want to try to coordinate the industrial sector’s ramping-up process across Germany and internationally - while ensuring that deliveries don’t get stuck at Europe’s national borders.

But the biggest problem for the car companies is that nobody knows if they will still be able to sell their cars after the restrictions are loosened. The carmakers are calling for a state program to be implemented to spur demand – as fast as possible.

Other business sectors would be happy to be able just to sell their products and services at all. 

The tourism, hotel and restaurant industries remain completely paralyzed and have been left hoping that the chancellor and governors decide to ease the restrictions on them during their next videoconference on April 30. The German Hotel and Restaurant Association (DEHOGA) is pushing for a rescue package to be implemented that would enable businesses to survive that long. 

Small retailers, however, can hope to reopen their stores under strict rules soon. But how many customers will actually show up if the restaurants and cafes around them remain closed, and the big retailers and department stores aren’t open?

That’s apparently exactly what the government was considering when it controversially decided to allow stores under 800 square meters (8,600 square feet) to reopen. This measure aims to prevent masses of consumers from streaming into German city centers and congregating in pedestrian zones.

One alternate proposal was considered during the meeting between Merkel and the governors: to open all stores and limit the number of customers to one per 20 square meters. It was ultimately rejected because the lines in front of the doors would be too long.

"Absolutely Incomprehensible”

Many retailers view this regulation with incomprehension. Marcus Diekmann, the director of Rose Bikes, a bicycle retailer, sees the decision as "pure marketing for the federal government.” Diekmann is also on the advisory board for a baby-products company called Babyone, whose stores need to be large enough to accommodate displays of children’s beds and baby carriages and are now unable to open their doors.

"Now you are allowed to sell flowers, but not the products needed by expecting parents. That is pure arbitrariness and absolutely incomprehensible,” says Diekmann.

On a fundamental level, Fuest, the economist, understands the government’s cautious approach. He says that Germany needs to meet certain conditions that it hasn’t yet met before it can further loosen the rules. It needs sufficient masks and protective equipment, for example, but also enough tests to determine how many people have been infected, how many are immune and how many have actually died from COVID-19.

According to Fuest, as long as this data is unavailable, re-opening the economy is akin to flying blind. But he also believes is it essential that the "tentative changes continue and further measures follow.”

The authorities will need to come up with smart approaches for the resuscitation of individual sectors despite the ongoing dangers of contagion. This includes the education system, where classes will start up again in the coming weeks. As participants in the videoconference said on Wednesday, the authorities in charge of the education system still need more time, even though the schools have been closed for weeks and they have had time to prepare. Now the fact that the education system has been under-financed and is in need of reform is coming back to haunt it.

In the recommendations it issued last week, Germany’s Leopoldina academy of science, made it clear what schools now need to do for teaching in the classroom to resume: staggered school hours, a focus on core subjects, lessons with a maximum of 15 pupils. Students and teachers will also need to social distance from one another, wear facial coverings and comply with hygiene regulations, like regularly washing their hands.

But if a primary school usually has three fourth-grade classes with 25 students each, how many classrooms will it need if no more than eight or nine children are allowed to sit in a room at a time? It sounds like a math lesson, but Martina Reiske, the director of the Sudbrack primary school in the western German city of Bielefeld, has had to make these calculations. They might soon become a reality.

The answer? Nine classrooms. "When I take into account that I need two additional rooms for children in emergency child care because their parents are key workers, I arrive at 11,” Reiske explains by phone. The school has 15 classrooms in total, including a music room and a playroom. The director says that the numbers would work if only one grade of students is being taught, but the school has three additional grades.

    A classroom at an elementary school in the state of Rhineland-Palatinate
A classroom at an elementary school in the state of Rhineland-Palatinate /wolfstone-photo/ imago images/Werner Schmitt

The staffing situation is also critical. Reiske has 33 teaching staff at her school, including many in part-time positions, as well as a social-education worker and two social workers. But one teacher is pregnant, and two other members of the teaching staff have disabilities and can’t teach on-site at the school during the corona crisis. The same applies to three other staff members above the age of 60, who qualify as members of a risk group and should therefore not be exposed to any danger of infection. That makes 33 minus six.

That’s a lot compared to some other schools. According to the Education and Science Workers’ Union (GEW), approximately one-third of German teaching staff are considered members of a risk group, if only because of their age.

An Acute Staffing Shortage

Because the number of students in Germany has been sinking overall in recent decades, politicians in many German states have hired too few new teachers and invested little money in education. Politicians were hoping that low birthrates would result in a "demographic benefits.”

But then the birthrate unexpectedly went up again and more immigrants came to Germany, and there’s now an acute shortage of staff. Schools in some regions can’t even offer classes on a full range of subjects. That demand is growing as a result of the crisis, but you can’t just pull new teachers out of a magician’s hat.

As Sudbrack elementary director Reiske explains, all positions at her school in Bielefeld are currently occupied. She can split up the fourth grade among the remaining teachers and some educators, and have each of them be taught in shifts for four hours daily, between 8 a.m. and noon, and 9 a.m. and 1 p.m. And she says she could still provide emergency care, "but it won’t suffice for many more children than that.”

Reiske points out that teaching a class of 10 to 15 kids, as is now being called for, is "a dream” from a teaching perspective. The children’s family backgrounds are very varied, she points out. Some children, she says, are being well cared for while they are being home-schooled, but other parents struggle with their German and in some cases both parents have to work. "One mother only picked up the package of assignments, which we had assembled for everyone, for her child three weeks into the closure.”

But Reiske says there is an upside. "If things remain as well-cleaned as they have been during the corona crisis, that, at least, would be progress.” She argues that the cleaning staff has received more exacting instructions from the school authorities since the shutdown, and maybe also more money. The school is much cleaner than it has otherwise been, she says, though at the moment, there are only five kids in the building, instead of the normal 360.

Politicians now need to be thinking about the big picture in ways that can creatively and quickly solve problems like the ones encountered by the schools, improving people’s everyday lives despite the coronavirus. But the federal government is still in acute crisis mode.

"At the moment, we are not thinking any further ahead than the next month,” says one member of Merkel’s cabinet. They aim to find a solution with the churches that would allow religious services to resume again soon and to reopen some sports facilities, like ones for tennis or horseback riding, the minister said.

Key Factors in Decisions

But Health Minister Jens Spahn is currently being plagued by other questions, like the actual number of infections. Thus far, the actual number of COVID-19 cases has remained a question of guesswork. The Health Ministry estimates that only about 1.5 percent of the total population has been infected so far. That means the country is still at the very beginning of the epidemic.

For Spahn, therefore, there are two key factors that are crucial -- the number of intensive care beds that are still available and the number of protective masks. On Wednesday morning, Spahn reported in Merkel’s special corona cabinet meeting that there were still around 10,000 free ventilation places and 10,000 additional intensive care beds available. In order to be able to determine the current number, he ordered the hospitals last week by decree to enter free capacities into an online register.

When it comes to the masks, Spahn has been able to score small victories: As of this weekend, his ministry has managed to obtain 80 million masks. They remain reserved for doctors and nursing staff – and won’t even be enough for that. Billions of masks would be required to provide supplies to the general population.

This has prevented German state governments from issuing orders for wearing masks in public spaces – they could only recommend it this week. Although a strict requirement is impossible to implement, they did recommend that anyone traveling by bus or train should, when in doubt, cover their mouth and nose with a self-sewn mask.

The chancellor herself even shared some caretaking tips for masks after the meeting. Before the cameras, she explained that masks need to "be washed regularly” or "ironed, or placed in the oven or microwave.”

If only there were such simple solutions for everything.

Pension transfers under lockdown

Market volatility has temporarily halted the £80bn final salary transfer market, yet there is increased desire to cash in

Josephine Cumbo

© Dan Mitchell

The unprecedented economic disruption caused by the Coronavirus has led many individuals to consider taking the irrevocable step of trading their future retirement security to ease a cash crunch today.

Since “pension freedoms” were unleashed in 2015, more than £80bn has flowed out of traditional final salary-style pension schemes. More than 500,000 people have opted to trade a secure income stream from a defined benefit pension in the future for a lump sum.

In recent years, this has been driven by movements in the bond markets used to calculate the transfer value of a pension. Individuals have been able to access eye-watering lump sums of as much as 30 or 40 times the value of their expected annual pension. Market volatility has not dulled the desire to cash in — although regulators are currently making it much harder to do so by allowing schemes to suspend transfer activity in an effort to stabilise the pension system.

Regardless, advisers say the key drivers for those looking to unlock their pensions during the current pandemic are the wish to pass on sizeable pension pots to family members, plus growing fears of corporate collapse as companies with large pension deficits struggle to navigate the crisis.

In volatile market conditions, why do people still want to transfer final salary-style pensions?

The difficulty of generating a secure income in retirement has been compounded by the current crisis, with equity markets plunging and companies taking the axe to dividend payments.

However, some retirement savers would still prefer to take a cash lump sum over the regular income for life that a final salary-style pension could generate.

“Just as there has been evidence of an increase in people wishing to update their wills, those who have experienced poorer health may already have been considering a transfer with the aim of securing greater benefits for their family,” says Christine Ross, client director with Handelsbanken Wealth Management.

She says that while defined benefit schemes will provide a pension for a surviving spouse this will be at a reduced level — generally half or, in more generous schemes, two-thirds of the member’s pension.

“A transfer will provide a ‘pot’ of money which can be drawn upon by the member in their lifetime but also remains fully available for the surviving spouse to draw from,” she adds.

There could also be tax benefits for those who transfer to a defined contributions (DC) pension.

Under the current rules, if you die before your 75th birthday, money in your pension below your lifetime allowance can be passed free of tax to your beneficiaries. After 75, they will pay income tax at their highest marginal rate on money subsequently drawn down.

“The tax treatment of pensions has definitely been a factor in the rising number of transfers over the years, although there can be no guarantee this quirk in the system will continue. As a result, people should go into this process with their eyes wide open,” says Michael Martin, private client manager at Seven Investment Management.

Asset values as Covid-19 took hold

What happens to my pension if my employer goes bust?

Just as the current crisis is causing people to focus on their own mortality, plenty are fearful about the longevity of company pension schemes where they have built up the bulk of their retirement benefits. Advisers recognise this as a key driver of current transfer inquiries.

“There will be members of DB schemes who are worried about their employer failing and consequently the impact this will have on their pension benefits,” Ms Ross adds.

Members of DB schemes whose employers become insolvent are covered by the Pension Protection Fund, the industry “lifeboat” scheme.

Those already drawing on their pensions will continue to receive their full pensions, albeit with lower annual increases.

However, those yet to reach normal pension age for their scheme will receive 90 per cent of the pension they were expecting — and the PPF caps annual payouts at £41,461 at age 65.

As the cap is applied before compensation is reduced to 90 per cent, the actual amount a “capped member” who retired at 65 would receive is £37,315, the PPF says.

Experts say those expecting pensions income above this threshold may want to consider a transfer if they are concerned about their employer failing.

“An individual having spent many years at a firm and expecting a pension, for example in excess of £50,000, will take a sharp reduction in what they were expecting to receive,” says Ms Ross.

“It is these members who will be carefully considering their options. Whilst transfer values must reflect the benefits being given up, it may be that the offer made would still not realistically allow a member to achieve the same benefits that would be guaranteed by the PPF.”

However, members looking to pursue a transfer will find that the regulator’s emergency measures present a significant stumbling block.

What emergency measures have been introduced by the regulator?

Due to the extraordinary economic circumstances at the end of March, the Pensions Regulator gave trustees of about 5,500 pension schemes — covering more than 6m active and deferred members — the right to suspend transfers and requests for transfer quotes for up to three months.

The regulator has made clear that trustees can suspend all transfer activity, so this will affect those who have a transfer in progress and are waiting for it to be paid, as well as requests from members to take their pension early.

Funding levels for UK defined benefits schemes

Ordinarily, members considering their retirement options could request a quote known as a cash equivalent transfer value (CETV) up to 12 months before they reach the scheme’s retirement age.

In normal circumstances, pension schemes should issue transfer quotes within three months and then honour any payment request within six months.

However, the regulator has given schemes breathing space to review their CETV terms and to assess the administrative impact of any increase in demand for CETV quotes, with resources under strain from lockdown.

The cash value offered for a pension depends on market conditions at time and the funding position of the scheme.

The regulator’s chief concern is that volatility in financial markets and weakened funding levels that many schemes have experienced means transfer quotes issued on current terms may be too generous.

“Trustees need to ensure the scheme’s funding position isn’t prejudiced by overpaying transfer values, which could weaken the funding position for remaining members,” says Charles Cowling, chief actuary with Mercer, the professional services firm.

“This is something that trustees are looking at very closely at the moment.”

There are also serious concerns about fraud, which has rocketed since the onset of the pandemic.

“Savers might increasingly look to transfer their pension, prompted by the instability of their employer or the financial markets,” the Pensions Regulator warns in guidance for trustees on its website.

“This means they could be increasingly targeted by scammers attempting to lure them to ‘safe havens’. If a saver asks about transferring their pension, urge them to exercise extreme caution.”

Will all schemes halt transfers?

It is early days, but experts do not believe there will be a wholesale block by schemes on transfer activity for the next three months. It seems more likely that transfers will be halted for the worst-funded schemes, which have not fared well in the market downturn.

“Schemes with the highest exposure to equities will have seen the greatest hit on their funding levels,” says Alistair Russell-Smith, partner with Hymans Robertson, the professional services firm.

“Schemes that have held up tend to be the ones with high levels of hedging against interest rates falls and inflation and have a lower exposure to equities and credit. These are less likely to review their transfer terms,” he says.

Members denied a transfer request can challenge the reasons for the suspension by complaining to the scheme’s trustees. If you are not happy with their explanation, you can take your issue to the Pension Ombudsman, a free and independent service which settles disputes between schemes and members

However, the ombudsman has confirmed it will take the Regulator’s Covid-19 guidance into account if it receives complaints about delays caused by these specific circumstances.

How have market movements affected transfer valuations?

Market volatility may have widened pension deficits, but transfer values are still at near-record highs — mainly because of ultra-low interest rates, which influence how CETVs are calculated.

Mark Barlow, partner at XPS Pensions Group, a consultancy, says it is very difficult to say whether transfer values would rise or fall over the next six to 12 months, as this would depend heavily on how financial markets, particularly government bond yields, reacted to the progression of the Coronavirus crisis. 

“March saw the highest volatility that we have seen in transfer values as government bond yields fluctuated significantly as the outbreak took hold in the UK,” says Mr Barlow.

“Whilst the future remains uncertain, it is likely that we will continue to see high levels of volatility in transfer values over the coming months.”

Damian Bailey, an actuarial consultant at Lane Clark & Peacock, says that if the economic downturn caused interest rates to be low for even longer, and if monetary loosening raised inflationary expectations, transfer values could be expected to remain high. 

“But there is a risk that huge government borrowing could put upward pressure on interest rates, and this could lead transfer values to be scaled back,” he adds.

Pension transfers slow

Could transfer values offered by pension schemes be reduced?

Currently, transfers deals offered by scheme must be at “full value”. However, it is possible for trustees to offer less if the scheme is not fully funded and paying full value could put the security of remaining members at risk.

For example, if the scheme actuary says a company pension scheme is only 80 per cent funded, transfer values may be cut by 20 per cent to reflect this.

Schemes that are fully funded on a “best estimate” basis cannot reduce transfer values without this action being signed off by the scheme actuary.

With all the uncertainty, does it still make sense to seek a transfer?

The regulatory starting position is that most people are better off keeping a DB pension and not transferring it to a personal pension arrangement, which is more flexible and attractive for passing on the fund to heirs, but loads full investment risk on to the individual.

Certainly, many of the half a million people who transferred out in the past five years will have seen large hits to their investment portfolios.

However, advisers say that over 55s who fear being made redundant or coming under severe financial pressures in the months and years ahead may well be more motivated to pursue a transfer.

“Whilst it may be tempting to consider a transfer because of concerns about an employer, it is potentially just adding risk on top of risk,” says David Hearne, director and chartered financial planner with Satis Financial Management.

“You could be trading a short-term risk with your employer for a lifetime of risk managing a new defined contribution pension instead. It would be sensible to look for other sources of funding before you had to call on your pension plan.”

Ms Ross of Handelsbanken Wealth Management agrees.

“The idea of a transfer may seem attractive as this would create a ‘pot’ of capital, some of which could be withdrawn as a tax-free sum and allowing income to be drawn for as long as needed and turned off if a new job is found,” she says.

“However, future income — and how long that can be sustained — will be wholly dependent on how the fund is invested and how it performs, which will be the responsibility of the individual.”

Mr Hearne adds: “For a small group of people, who are over 55, and may be at risk of losing a home or business without being able to take some benefits from a pension, it may still be worth seeking advice on a transfer.”

What alternative options are there to a transfer?

Taking early retirement from a defined benefit scheme is an alternative option that could be considered by those aged 55 or over experiencing hardship as a result of Covid-19, and could be particularly attractive because of the ability to take a tax-free cash lump sum.

However, it will mean accepting a lower income for life, which could prove more costly over the long-term.

A DB pension is usually reduced for each year it is taken early. For example, 3 per cent per annum for someone retiring 5 years early would result in an overall reduction of 15 per cent, but this allows for the fact the pension would be paid for five years longer.

Barnett Waddingham, the actuarial services firm, calculates for individuals not taking a tax-free cash lump sum and retiring at 55, it would take 20 years before the benefit of having the income early might outweigh the potential for future loss.

“It is therefore important that individuals considering this option in light of the current situation take independent financial advice before making a decision, so that they fully understand the implications of doing so,” says Simon Taylor, a partner with Barnett Waddingham.

“An independent financial adviser will also be able to help them consider whether transferring to a DC arrangement in order to access their pension more flexibly would be more worthwhile.”

Another option could be to ask if the scheme will consider a partial transfer.

“If so, part of the scheme benefits could be transferred to a personal pension arrangement, allowing income to be drawn for as long as required, and then switched off if new employment is found,” adds Ms Ross.

“Meanwhile, the individual would retain an entitlement to future guaranteed benefits within the DB scheme.”

Will I be able to find a financial adviser during the lockdown period?

Under current rules, if you are looking to transfer a DB pension valued at more than £30,000, you are legally required to obtain advice from a regulated pension transfer specialist before the switch can take place.

Just like other workplaces, IFAs have been sent home during the lockdown, so this has restricted face-to-face meetings but most will still do business with you remotely.

In spite of this, finding an advisory firm that is prepared to take on pensions transfer work has become more difficult as increasing numbers of firms step away from DB advice as they cannot get the insurance needed to operate.

“It is increasingly difficult to find an adviser willing to provide transfer advice,” says Keith Richards, chief executive of the Personal Finance Society, which represents advisers. “Large numbers have withdrawn from the market due to [lack of ] access to insurance cover, creating issues for those still needing advice.”

In addition, advisers will be on alert for clients looking to transfer but who are considered “financially vulnerable”. Mr Richards says vulnerability is understood to be when people are susceptible to making financial decisions which they do not fully understand, and which may bear long-term consequences.

“There are already serious concerns about some people accessing their pension pots to meet short-term objectives stemming from Covid-19, which could have a profound impact on people’s wellbeing later in life and even the risk of a retirement in poverty instead of comfort and security,” he says.

“Advisers will recognise that the benchmark for assessing whether an individual is vulnerable or not is how well-equipped a client is to make a decision.”

Advisers say that losing your job will not increase the chances of a transfer being recommended.

“I can think of few circumstances where Covid-19 and its financial impact would make transferring more likely to be suitable,” says David Penney, director and a chartered financial planner with Penny, Ruddy and Winter, an advisory firm.

“If there is an alternative to transferring, and by remaining in the scheme they can achieve their objectives, then our advice process would be the same whether they are in a vulnerable position or not.”

Only connect

How will humans, by nature social animals, fare when isolated?

Covid-19 will harm people’s mental health


IN MANY WAYS Claudia (not her real name), a 33-year-old art dealer, feels prepared for the covid-19 lockdown in London. As a recovering alcoholic who has had a “mental breakdown or two”, she has spent time in rehab. Her movements there were restricted. She had to follow a strict routine, waking and eating her meals at the same time each day.

That routine is now serving her well. Along with the rest of Britain, she is in lockdown as the country battles to slow the spread of covid-19. Its inhabitants are allowed out of their homes only in the most limited circumstances. The government has told people to avoid meeting anyone they do not live with, even family members.

“On difficult days I tell myself to make the bed, have a shower and eat,” says Claudia. Each morning she writes down things that she is grateful for: she no longer lives in a “sober house” with 12 other women, but in a flat on her own; her sister’s new baby, whom she has not yet met, is healthy. She also avoids social media. Even so, she is anxious: “I worry that in a week or two I will feel like screaming.”

Traumatic events, from natural disasters to war, can damage people’s mental health. The covid-19 pandemic is no different. It has brought the fear of contagion and of loved ones falling sick. It has created huge uncertainty about every aspect of life. And with a fifth of the world under lockdown, protracted isolation is also bringing loneliness, anxiety and depression.

Quarantines and “social distancing”, policy measures needed to slow the spread of the novel coronavirus that causes covid-19, are against human nature. Touch and social networks are essential for both people and non-human primates: female baboons who have more grooming partners, or friends, exhibit lower levels of cortisol, a stress hormone.

It has been less than a month since the Italian government imposed a national quarantine, but the strain on people’s mental health is starting to show. More than 13,100 people there have died from covid-19; at least two nurses who were working in intensive-care units where they were treating patients suffering from the disease have killed themselves.

The Italian national nursing federation said that one of the nurses who committed suicide, Daniela Trezzi, had been off work ill and that Ms Trezzi was deeply worried that she had infected patients (though the local health authority said she had not tested positive). In Germany, which imposed restrictions after Italy, the finance minister of the state of Hesse, who was said to be deeply worried about the economic impact of the pandemic, killed himself on March 28th.

Awareness of the strain on people’s mental health is growing. In Britain Public Health England, a government agency, along with the Duke and Duchess of Cambridge, released a set of guidelines on “the mental health and well-being aspects of coronavirus” on March 29th. In the same week, 62% of Britons said that they were finding it harder to be positive about the future compared with how they felt before the outbreak, according to Ipsos MORI, a pollster.

“People are struggling with the emotions as much as they are struggling with the economics,” said Andrew Cuomo, governor of New York, America’s hardest-hit state, on March 21st. Four days later he set up a free hotline for those whose mental health was suffering.

Some are particularly susceptible to stress during a pandemic. Health-care workers are most exposed to the virus. The sense of camaraderie and of being part of a team that is helping people can buoy their spirits. But many doctors and nurses are being forced to isolate themselves away from their families because they may be infectious, which adds to their strains, points out Dhruv Khullar, a doctor in New York.

The lack of personal protective equipment for medics in many countries will only make that stress worse. Nicholas Christakis, now at Yale, worked as a doctor in the 1990s during the HIV/AIDS epidemic. There was a “lot of fear among health workers that if you looked after an AIDS patient you would contract the disease,” he recalls.

But back then they had enough protective equipment. That made the risk of infection, which comes with the job, more bearable. Covid-19 is much easier to catch. “The current situation is like sending a fireman into a building naked,” he says.

Among the population at large, some may be especially worried. Those who have lost their jobs, who now number in the millions, may have lost not just their income, but also their identity, routine and much of their social network, says Jan-Emmanuel De Neve, head of the Wellbeing Research Centre at Oxford University.

Single people who once whiled away their days with friends, or those who live separately from their partners, suddenly find themselves spending most of their time alone. Many who exercise in teams or groups—or simply enjoy spending time outside—have to make do with a cramped living room and online classes.

Mike, a 29-year-old Briton who works in finance in Brussels, is relieved that so far he is still allowed out for runs (though police move him along if he sits down to catch his breath): “Otherwise I’d just feel like Robinson Crusoe with Netflix.” Isolation will affect the mental health of even those who appear to be in less danger from the virus: 67% of Britons between the ages of 18 and 34 said they were finding it hard to remain upbeat, compared with 54% of those between the ages of 55 and 75.

If lockdowns stretch on for months, old people will suffer particularly acutely. Even before they were confined to their homes, they were more likely to feel lonely. Elderly women in Europe are more than twice as likely as men to live on their own. They rely on seeing family and friends to keep up their morale, or simply for a routine.

Alfredo Rossi, an 80-year-old in Casalpusterlengo, one of the first areas of Italy to be put under lockdown in February, says that what upsets him most about the restrictions is being unable to see his grandchildren who live just 16km (ten miles) away in Piacenza across the River Po.

Domestic violence, already endemic everywhere, rises sharply when people are placed under the strains that come from confined living conditions and worries about their security, health and money, says Phumzile Mlambo-Ngcuka, the head of UN Women, a UN agency. Based on early estimates, she thinks that in some countries under lockdown, domestic violence could be up by about a third.

The scale of the lockdowns is unprecedented. But research into previous traumatic events and other types of isolation offers some clues about the likely mental-health fallout. According to a rapid review of the psychological effects of quarantines, published on March 14th in the Lancet, a British medical journal, some studies suggest that the impact of quarantines can be so severe as to result in a diagnosis of post-traumatic stress disorder (PTSD).

The condition, which may include symptoms such as hyper-vigilance, flashbacks and nightmares which can last for years, became a formal psychiatric diagnosis in 1980, when veterans were still experiencing stress from the Vietnam war, which ended in 1975.

One study from 2009 looked at hospital employees in Beijing who in 2003 were exposed to severe acute respiratory syndrome (SARS), which, like covid-19, is caused by a coronavirus. The authors found that, three years later, having been quarantined was a predictor of post-traumatic-stress symptoms. Another study, from 2013, used self-reported data to compare post-traumatic-stress symptoms in parents and children who had been quarantined because they lived in areas affected either by SARS or the H1N1 outbreak in 2009, with those who had not.

It found that the mean post-traumatic-stress scores were four times higher in children who had been isolated. Among the parents who had been quarantined, 28% reported symptoms serious enough to warrant a diagnosis of a trauma-related mental-health disorder. For those who had not been in isolation, the figure was 6%.

The longer a quarantine goes on, the greater the effect on people’s mental health. Another study, which also looked at the impact of SARS, found that those who were quarantined for more than ten days were significantly more likely to display symptoms of PTSD than those confined for fewer than ten days.

Cynthia Dearin, a consultant in Australia who spent four years in Iraq between 2006 and 2010 in various military camps that restricted her movement, said that whenever she returned to Iraq after a “decompression break”, she felt an “instant Baghdad depression”. Living in a war zone is very different from living through a pandemic, but she sees parallels in the loss of freedom and the sense of danger.

“We also had the choice to leave the lockdown,” she reflects. “What is different now is that nobody can escape.” In Iraq many of her contemporaries turned to alcohol to numb the boredom and the fear. Increased sales of alcohol suggest that many are doing the same today. In Britain they were up by two-thirds in the week to March 21st compared with 2019, according to Nielsen, a market-research firm.

Those who have willingly isolated themselves in less traumatic circumstances may provide examples of how to ease the current crisis. In addition to the loneliness they experience, astronauts, who spend prolonged periods away from their loved ones or indeed any other human beings, suffer from disturbed sleep, heart palpitations, anxiety and mood swings. Cooped up together, they may also fall out with their fellow crew members.

Couples who suddenly find themselves in enforced proximity may sympathise. There are reports that some cities in China, such as Xi’an and Dazhou, have seen a spike in divorce proceedings since the lockdown was lifted in parts of the country in early March.

Writing in the New York Times, Scott Kelly, a former astronaut who spent a year on the International Space Station, suggested that keeping a routine and writing a journal can help ease loneliness. He also encouraged people to get outside, if they could. He found that after “being confined to a small space for months, I actually started to crave nature—the colour green, the smell of fresh dirt, and the feel of warm sun on my face.”

Even under the tightest restrictions, people find ways to cope. “People are rediscovering that they live in roads full of people,” says Robin Dunbar, an anthropologist and evolutionary psychologist at Oxford University. Neighbours can be irritating, but in a crisis they can also be a comfort.

Groups have formed in many places to support local vulnerable people. According to Julianne Holt-Lunstad, an expert in loneliness at Brigham Young University, studies have shown that those who feel they have “supportive people” in their social networks are less likely to react to stressful circumstances than those who do not. Simply knowing you have others on whom you can rely can reduce spikes in blood pressure and heart rate, she says.

Live in fragments no longer

Abigail, a 32-year-old charity worker in Brussels, says that her student neighbours used to get on her nerves because they played loud music. But as she spends the lockdown alone, she has got to know them. She now welcomes their music: “They bring the party.” In Belgium, Britain, Italy and the Netherlands people have started to clap and bang pans from their windows and doors to thank medics and other essential workers.

Talking to friends and family over video calls helps, too—though the clunkiness of much of the software makes them an imperfect substitute for an encounter in person. A pixelated version of spending time with a friend merely slows down the “rate of decay” of that relationship, says Professor Dunbar, but will never be able to replace the experience of seeing someone in the flesh. “You have to see the eyeballs—the whites of the eyes—and be able to physically hold on to them,” he says, in order to maintain a friendship and feel a social bond.

For Claudia that moment will come when her football team, which for her is both exercise and a kind of group therapy, can meet up once more, rather than just chat virtually. “It is going to be beautiful,” she says.