The pandemic

How well will vaccines work?

Covid-19 may become endemic. Governments need to start thinking about how to cope


Even miracles have their limits. 

Vaccines against the coronavirus have arrived sooner and worked better than many people dared hope. 

Without them, the pandemic threatened to take more than 150m lives. 

And yet, while the world rolls up a sleeve, it has become clear that expecting vaccines to see off covid-19 is mistaken. 

Instead the disease will circulate for years, and seems likely to become endemic. 

When covid-19 first struck, governments were caught by surprise. 

Now they need to think ahead.

To call vaccination a miracle is no exaggeration. 

A little more than a year after the virus was first recognised, medics have already administered 148m doses. 

In Israel, the world’s champion inoculator, hospital admissions among those aged below 60, who have not received a jab, are higher than ever. 

By contrast, among the largely inoculated over-60s they are already nearly 40% below their mid-January peak and they will fall further. 

Although vaccines fail to prevent all mild and asymptomatic cases of covid-19, they mostly seem to spare patients from death and the severest infections that require hospital admission, which is what really matters. 

Early evidence suggests that some vaccines stop the virus spreading, too. 

This would greatly slow the pandemic and thus make it easier to alleviate lockdowns without causing a surge of cases that overwhelms intensive-care units. 

Those findings, and many more, will harden up over the next few months as more data emerge.

However, despite all this good news, the coronavirus is not finished with humanity yet. 

Covid-19 will continue to circulate widely. 

There is a growing realisation that the virus is likely to find a permanent home in humans, as “The Jab”, our new podcast, which launches on February 15th, will explore. 

That has profound implications for how governments need to respond.

One reason the coronavirus will persist is that making and distributing enough vaccine to protect the world’s 7.8bn people is a Herculean task. 

Even Britain, which is vaccinating the population at a faster rate than any other big country, will not finish with the over-50s until May. 

To add to the burden, the potency of a jab may fade, making boosters necessary. 

Outside the rich world, 85% of countries have yet to start their vaccination programmes. 

Until the billions of people who live in them have felt the prick of a needle, which may not bebefore 2023, they will remain fuel for the virus.

Another reason for covid-19’s persistence is that, even as vaccines are making sars-cov-2 less infectious and protecting people against death, new viral variants are undoing some of their good work. 

For one thing, successful variants are more infectious—anything from 25-40% in the case of b.1.1.7 which was first found in Britain. 

Infection is governed by the dizzying mathematics of exponential growth, so cases and deaths accumulate rapidly even if the variant is no more deadly. 

To get a given level of viral suppression, more onerous social distancing is needed.

In addition, new variants may withstand current vaccines. 

The ones found in Brazil and South Africa may also be defeating the immunity acquired from a previous covid-19 infection. 

The hope is that such cases will be milder, because the immune system has been primed by the first encounter with the disease. 

Even if that is true, the virus will continue to circulate, finding unprotected people and—because that is what viruses do—evolving new strains, some of which will be better at evading the defences that societies have mounted against them.

And the third reason sars-cov-2 will persist is that lots of people will choose to remain a target by refusing vaccination. 

A total of 10m Britons are vulnerable to the disease, because of their age or underlying conditions. 

Modelling suggests that if just 10% of them declined to be vaccinated and if social distancing were abandoned while the virus was still liable to circulate at high levels, then a tremendous spike in infections and deaths would result.

In reality, the share of the overall population that remains unvaccinated is likely to be much higher than in that thought-experiment. 

Vaccines are not yet licensed for children. 

Minority communities in many countries, which are most vulnerable to infection, tend to have less trust in the government and the medical establishment. 

Even among some care workers, as many as half refuse vaccination, despite having seen the ravages of covid-19 at first hand. 

With the new variants, about 80% of the overall population needs to be immune for an infected person, on average, to pass on the disease to less than one contact, the threshold at which the epidemic subsides. 

That will be a tall order.

For all these reasons, governments need to start planning for covid-19 as an endemic disease. 

Today they treat it as an emergency that will pass. 

To see how those ways of thinking differ, consider New Zealand, which has sought to be covid-free by bolting its doors against the world. 

In this way it has kept registered deaths down to just 25, but such a draconian policy makes no sense as a permanent defence: New Zealand is not North Korea. 

As vulnerable Kiwis are vaccinated, their country will come under growing pressure to open its borders—and hence to start to tolerate endemic covid-19 infections and deaths.

Across the world governments will have to work out when and how to switch from emergency measures to policies that are economically and socially sustainable indefinitely. 

The transition will be politically hard in places that have invested a lot in being covid-free. Nowhere more so than China, where vaccination is slow. 

The Communist Party has defined every case of covid-19 as unacceptable and wide circulation of the disease as a sign of the decadence of Western democracies.

The new coronormal

The adjustment to living with covid-19 begins with medical science. 

Work has already started on tweaking vaccines to confer protection against variants. 

That should go along with more surveillance of mutations that are spreading and accelerated regulatory approval for booster shots. 

Meanwhile treatments will be required to save more of those who contract the disease from death or serious illness. 

The best outcome would be for a combination of acquired immunity, regular booster jabs of tweaked vaccines and a menu of therapies to ensure that covid-19 need rarely be life-threatening. 

But that outcome is not guaranteed.

To the extent that medicine alone cannot prevent lethal outbreaks of covid-19, the burden will also fall on behaviour, just as it has in most of the pandemic. 

But rather than national lockdowns and months-long school closures, which come at a huge price, the responsibility should fall more heavily on individuals. 

Habits like mask-wearing may become part of everyday life. 

Vaccine passports and restrictions in crowded spaces could become mandatory. 

Vulnerable people will have to maintain great vigilance. 

Those who refuse vaccination can expect health-education and encouragement, but limited protection. 

As our special report on the travel industry makes clear, people’s desire to live their lives will ultimately be hard to resist, even in autocracies like China that may be reluctant to leave zero-tolerance behind.

The persistence of acute infections and chronic, debilitating “long covid” means that the next stage of the pandemic sounds grim. 

But even if covid-19 has not been completely put to rest, the situation is immeasurably better than what might have been. 

The credit for that goes to medical science. 

Containing China is not a feasible option

Unlike with the Soviet Union, the US and its allies have to co-operate and compete with its rising power

Martin Wolf

    © James Ferguson


How should the US respond to a rising China? 

This is among the biggest questions facing the new US administration. 

Many Americans argue that a form of containment is feasible. 

Indeed, this is one of the few points on which Joe Biden’s administration and its predecessor tend to agree. 

One can also see the political advantage: common enemies may unify a divided country. But is this really a feasible policy? 

I believe the answer is: no.

Such an essentially zero-sum view of the US-China relationship is contained in The World Turned Upside Down by Clyde Prestowitz. He insists that: “There is no contest between the Chinese people and those of the United States.” 

His objection is rather to the Communist party. A similar view infuses The Longer Telegram: Toward A New American China Strategy, written by an anonymous “former senior government official” (in reference to George Kennan’s celebrated long telegram of February 1946, which proposed containment of the Soviet Union). 

This also states that: “The single most important challenge facing the United States in the 21st century is the rise of an increasingly authoritarian China under President . . . Xi Jinping.” 

The challenge, it argues, is not China but its despotic state.



I sympathise with the anxiety that infuses these publications. China’s actions in Xinjiang and Hong Kong underline its contempt for human rights and international agreements. 

Beijing threatens Taiwan’s de facto autonomy and is expanding its sway over the South China Sea. In brief, China increasingly behaves like a rising great power ruled by a ruthless and effective despot.

The Longer Telegram argues that the threat from China’s attempt to achieve global dominance must be met by defending a long list of vital US interests: retaining collective economic and technological superiority; protecting the global status of the US dollar; maintaining overwhelming military deterrence; preventing Chinese territorial expansion, especially forcible reunification with Taiwan; consolidating and expanding alliances and partnerships; and defending (and, as necessary, reforming) the rules-based liberal international order. 

Yet, simultaneously, the paper calls for addressing shared global threats, notably climate change.



Is all this achievable? No, I think not.

First, China is a far more potent adversary than the Soviet Union. It has a far more successful economy, a more dynamic technology sector, a far larger population, a more cohesive polity and a much more competent government. China’s relative economic performance has been stunning.

More important still is its potential. 

China faces huge economic challenges. But it need not manage them all that well to have much the world’s largest economy. 

At present, China’s output per head (at purchasing power parity) is a third of the US’s (up from 8 per cent in 2000) and half of the EU’s. 

Suppose that this rises to only half of the US level by 2050. China’s economy would then be as big as those of the US and EU, together.



Second, China’s economy is highly internationally integrated. Although this is a source of vulnerability for China, it is also a source of influence. 

The Chinese market exerts a magnetic pull on a host of countries across the globe. 

As the Singaporean scholar Kishore Mahbubani stresses, most countries want good relations with both the US and China. They will not willingly choose the US over China.

Finally, over the last two decades and especially the last four years, the US has devastated its reputation for good sense, decency, reliability and even adherence to basic democratic norms. 

This matters, because its allies will be crucial in the envisaged contest. 

As Jonathan Kirshner states in Foreign Affairs, “the world cannot unsee the Trump presidency”, especially its disgraceful end. Worse, that aspect of the US is evidently still alive. The US used to talk about the need for China to be a “responsible stakeholder”. 

But after the hubris of the “unipolar moment”, the Iraq war, the financial crisis and Donald Trump’s presidency, is the US a responsible stakeholder?



This is not meant to counsel despair. It is to recognise reality. So what might be done?

First, the US and its allies have to revitalise their democracies and their economies. On the latter, they must indeed protect their technological autonomy. But the most important way to do this is by revitalising their scientific and technological infrastructure, including by refurbishing education and encouraging immigration of talented people.



Second, they have to defend the core values of adherence to truth and freedom of speech against all enemies, domestic and foreign (including China). They must, moreover, unite in doing so. China should not be allowed to pick off and bully smaller countries, one by one.

Third, they need to refurbish the institutions of the global economy they created, and propose new multilateral rules that bind China’s behaviour and by which they too will be bound.



Fourth, the US and its allies need to make clear which core interests they will defend, if necessary by force.

Last and most important, they must focus attention, as Mr Biden has now done, on the shared project of protecting the global commons for us all.

The relationship of the US with China is not like that with the Soviet Union. Yes, there will be much competition, but there must also be deep co-operation. 

To the extent that there is a war of ideologies, the west’s freedom and democracy remain more attractive. 

The real challenge they face is not China, but restoring these values at home.

 Joe Biden is no guide for Europe’s lost left

The weakness of the US welfare state gives Democrats a reason to exist that other parties lack

Janan Ganesh 

Joe Biden: for workers who like to see a safety net laying taut beneath them, there is a cost, or at least a risk, in voting any other way than Democrat © Mandel Ngan/AFP/Getty


The archive of the US broadcaster C-Span is among the internet’s little wonders. 

In January 1993, an “Anthony Blair” toured Washington with another British MP named Gordon Brown. 

Their brief: to divine how president-elect Bill Clinton had won office and what their four-times defeated Labour party might learn. 

Their interview with a C-Span anchor of the just-the-facts school (“How many MPs in the House of Commons?”) is immortalised.

Absent Covid-19, Washington’s floating population would include similar clue-seeking foreigners of a progressive bent. 

President Joe Biden’s centre-left peers are out of power and often out of sorts in the UK, France, Australia and the Netherlands. 

In Germany, they have not held the federal chancellery since 2005. Brazil, too, was in social-democratic hands then. Rightwing populists now reign there.

In truth, travel restrictions have saved these eager learners a wasted journey. If the Democrats stand out from a centre-left malaise, it is for reasons that are not much imitable outside the US.

A couple are obvious. A strict two-party system protects (in truth, over-protects) the incumbents, so that even a bumbling Democrat would clinch near half the vote in a presidential election. 

The liberal, labour and green veins of thought, so often distinct in Europe, are crammed into just one US movement.

Race adds to this structural advantage. The leftward tilt of minorities can be overdone (Republicans have gained, especially among Latinos) but it holds often enough to matter. Few democracies have the ethnic diversity of the US, so few parties of the left have the electoral reach of the Democrats.

By themselves, these variables would save the party from the near-terminal throes of progressives elsewhere. But a third really makes the Democrats impossible for others, at least in Europe, to emulate.

It does not over-flatter the European left to suggest it is cursed by past success. The welfare state is so large, and support for it so deep, that voters can turn to the right or far-right without endangering it. 

Germany’s Christian Democrats are mostly at ease with the mixed economy. 

The French National Front tends to equate free markets with social dislocation and foreign influence. 

Britain’s Conservatives exalt Singapore more in thought than word or deed. 

They know the public’s aversion to looser labour laws.

For all the fame of the US culture war, it is Europe’s poor to middle class that is freer to vote on values. Their material interest in public services and statutory paid leave does not hinge so much on a change of government.

The weakness of the US welfare state, both in extent and cross-party backing, gives the Democrats a raison d'être. For workers who like to see a safety net laying taut beneath them, there is a cost, or at least a risk, in voting any other way. 

The question is not why so many poor Americans support Republicans. It is how many more might if the party called a ceasefire on mostly well-liked programmes and regulations. 

Had Donald Trump ruled half as paternalistically as he ran in 2016, this column would be about the first meanderings of his second term.

Viewed from afar, Europe’s left is not uniquely inept, then, just uniquely otiose. 

What is a movement for when its central cause — redistribution — has the assent of its rivals, at least in the essentials? 

Even if progressive parties offer more and better welfare (a costly choice), it cannot compare to the pledge of universal healthcare in a country that lacks it. The US left benefits from its historic failure. 

Having never completed the welfare state, far less entrenched it, Democrats have an existential purpose. This is not an omission that sister movements would aspire to replicate, even if they could bend time and space to do it.

Petitioned for help, Democrats can still dispense advice of immense value. Try not to elect radioactively unpopular leaders (UK Labour’s age-old wont). 

Avoid complacency about youth unemployment (French Socialists). 

Corruption, or even the aroma of it, is bad (various). 

But these are verities or banalities. 

They require no study or Tocquevillian tour.

What is distinctively American is the gap between the two parties on the social contract. 

And the subsequent indispensability of the Democratic voice. 

That the Biden and Republican plans for pandemic relief are $1.3tn apart could not be more eloquent of the stakes. 

To look at their electoral record, then the lot of the US poor, it is hard to tell if the Democrats are the most successful progressives in the rich world or the most consistently disappointing.

Peru: Staff Concluding Statement of the 2021 Article IV Mission


A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. 

Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. 

The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. 

Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

Recent Developments, Outlook, and Risks

1. Peru was hit hard by the COVID-19 pandemic in 2020. 

At the onset of the pandemic, the limited capacity of the health system forced the authorities to impose a very strict lockdown. 

With sizable contact-intensive sectors and limited teleworking capacity, the containment measures crippled the economy, causing a deep recession despite a strong policy stimulus. 

The same measures, however, could not halt soaring infections. 

Combined with weaknesses in the health system, this caused a surge in fatalities, with Peru recording one of the highest mortality rates globally.

2. The broad-based fiscal policy response was essential in limiting the impact of the pandemic. 

The policy package included measures of direct support to the health system, households, and businesses, and a sizable credit-guarantee program to support lending to businesses (Reactiva Perú). 

The latter was very successful in providing a lifeline to many businesses, including small ones. 

Support to household incomes was, however, limited and its delivery initially hampered by administrative problems. 

Other measures, such as allowing withdrawals from individual accounts in private pension funds, were not as effective in providing relief to most vulnerable groups while at the same time they compromised the integrity of the pension system.

3. Swift monetary accommodation helped stabilize financial markets. 

The Banco Central de Reserva del Perú (BCRP) reduced the benchmark rate to a record low and provided ample liquidity mainly by implementing guaranteed-credit repo operations under the Reactiva Perú program, extending the amount and maturity of security and currency repo operations, fostering credit reprogramming through repo operations, and lowering reserve requirements. 

In addition, the BCRP made available foreign currency liquidity during periods of stress and concluded an agreement with the New York Fed to access a dollar repo line. 

Together with the approval of the FCL by the IMF in May, these measures helped reassure markets, limiting the increase in risk spreads and the depreciation of the exchange rate.

4. Peru is currently experiencing a second wave of the pandemic that is likely to dampen the economic recovery. 

Infections began rising again in January 2021, with excess deaths climbing to levels last seen in May 2020. 

The health system’s capacity is being stretched again, and the authorities are taking targeted measures to contain infections with a more limited impact on economic activity. 

If the health emergency is brought under control by end-March, restrictions could be gradually eased in the second quarter, and activity could regain momentum led by domestic demand and historically favorable terms of trade. 

Under these assumptions, GDP growth would reach 8.5 percent in 2021. 

The crisis is leaving significant scars, with output returning to its pre-pandemic level only in 2022. 

A large negative output gap is expected to persist, dampening inflation pressures. After recording a mild surplus in 2020, the current account balance is projected to return to a deficit of 1.6 percent of GDP in the medium term.

5. The outlook is highly uncertain and downside risks prevail, but policy buffers are ample. 

The second wave of the pandemic could be more acute and more prolonged than expected, reflecting persisting weaknesses in the health system and delays in vaccination plans, requiring broader and stricter containment measures. 

Political uncertainty and social unrest could dampen investment, while changes to the institutional framework could weaken policies, with significant medium-term implications. 

Externally, main risks include a global reversal in trade integration, a sudden change in foreign investors’ sentiment, and the intensification of natural disasters in the medium term owing to climate change. 

A significant increase in public investment execution is an upside risk. Peru has ample buffers to mitigate these risks, including sizable international reserves (over 37 percent of GDP), low public debt, access to a two-year Flexible Credit Line (FCL) arrangement with the IMF and other funding sources, and a strong financial sector.

Policy Recommendations

The heightened health risks and reduced economic activity require continuing supportive macroeconomic policies. 

Using the ample fiscal space that is available, fiscal policy should address the new health emergency and continue sustaining household incomes to reduce poverty and ensure against downside risks to growth. 

With no inflationary pressures, monetary conditions should remain accommodative. 

Structural reforms should target the weaknesses exposed by the pandemic, focusing on policies that enhance productivity, improve governance, and strengthen the social safety net.

Fiscal Policy

6. Despite its deterioration in 2020, the fiscal position remains strong. 

The fiscal deficit is expected to fall from 9 percent of GDP to 5.2 percent of GDP in 2021. 

Public debt would peak at about 38 percent of GDP in 2025 before declining steadily toward the 30-percent-of-GDP ceiling. 

Gross debt and debt burden indicators are well below the corresponding benchmarks for emerging economies and are expected to remain sustainable under standard shocks. 

Market access is ample as evidenced by the century-bond issuance in November. 

According to standard metrics, Peru has fiscal space to provide more support.

7. Given substantial fiscal space, policy support should be maintained until the pandemic is entirely under control and the economic recovery is consolidated. 

The second wave of the pandemic and large downside risks surrounding the outlook argue against a premature withdrawal of the fiscal stimulus. 

Moreover, additional support to households is necessary to soften the impact of the pandemic on most vulnerable groups. 

According to the World Bank’s preliminary estimates, poverty increased significantly in 2020. 

A third round of the Bono Universal would help reduce poverty to pre-pandemic levels. 

Moreover, the government should prepare contingency measures in the event potential downside risks to growth materialized, including by accelerating further the execution of the public investment budget, which played a significant role in driving the rebound of economic activity in the second half of 2020. 

In particular, the authorities should finalize as soon as possible the special projects undertaken in the health sector. 

Similar vehicles could be considered for investment in water, sanitation, and housing.

8. Anchoring fiscal policy to a credible medium-term framework remains essential.

Following the 2020-21 suspension of the fiscal rules, converging back to the targets will take time, in a situation initially dominated by extreme uncertainty. 

A new Marco Macroeconómico Multianual (MMM) based on conservative growth projections and underpinned by adequate measures will be essential to guide the adoption of the 2022 budget. 

The new MMM should also identify contingency measures based on the analysis of risks. 

The pandemic has highlighted spending needs in the medium term in several areas, including healthcare, social safety net, pension, digital and other infrastructure. 

In this regard, it will be important to close the revenue gap of 0.7 percent of GDP identified in the recent Informe Pre-Electoral by outlining specific tax policy, revenue administration, and spending rationalization measures.

Monetary and Exchange Rate Policies

9. Monetary conditions should remain supportive. 

In its December forward-guidance, the BCRP has highlighted that easy conditions are likely to persist for an extended period. 

In the absence of inflationary pressures, continued monetary accommodation would facilitate a gradual return to normality as the impact of the extraordinary measures taken in 2020 dissipates. 

In addition, the BCRP has created new security repos conditional on the expansion of long-term lending, which can enhance the transmission of monetary policy and allow further easing of monetary conditions if necessary.

10. The central bank will continue to smooth excess volatility in foreign exchange markets, but the need to intervene is likely to decline in the medium term. 

With reserve levels adequate for precautionary purposes, the BCRP has intervened on both sides of the foreign currency market since the beginning of the pandemic, without preventing the exchange rate from depreciating but contributing to reducing its volatility relative to Peru’s regional peers. 

As dollarization continues to decline, the need for foreign exchange intervention will also weaken, leaving more room for the exchange rate to play a role as shock absorber and for financial markets to develop further.

Financial Sector Policies

11. The authorities have taken significant steps to strengthen financial sector oversight, but vulnerabilities have increased in some segments. 

Reforms that have been fully or partially implemented include expanding financial co-operatives’ oversight by Superintendencia de Bancos, Seguros y AFPs (SBS), monitoring of banks’ off-balance-sheet exposures, introducing new risk-monitoring tools, implementing risk-based supervision for all insurers and brokers, strengthening crisis preparedness and management, and enhancing the emergency liquidity assistance framework. 

Several measures are being prepared, including higher capital surcharges for systemically important banks, enhanced supervision of financial groups, and requirements for recovery and resolution planning for domestic systemically important banks and financial groups. 

Top-down stress tests point to a resilient financial system and limited solvency problems even under adverse scenarios. 

Nevertheless, default rates are expected to rise significantly in the microfinance sector. 

While weakening in 2020, Peru’s corporate sector performance has remained robust, notably relative to global and regional trends.

12. Macroprudential policies may start shifting focus by encouraging banks to put more emphasis on the viability of clients. 

At the onset of the pandemic, the SBS reduced the countercyclical capital buffer for financial institutions and allowed them to adjust the terms of lending to households and enterprises without changing loan classification. 

Considering the credit cycle and financial vulnerabilities, macroprudential policies could start encouraging banks to focus on corporates' viability and direct resources to viable but illiquid firms. 

For unviable ones, efficient bankruptcy frameworks will be needed. In this regard, the authorities should aim to reduce lengthy administrative proceedings and encourage out-of-court restructurings.

Structural Reforms

13. Priorities in the reform agenda should be informed by the important structural fragilities exposed by the pandemic. 

Weaknesses in health care contributed to high mortality, requiring stringent containment measures that seriously affected economic growth. 

Poverty, low financial inclusion, high informality, and political instability hampered the authorities’ efforts to provide relief to households and contain the contagion. 

Low digitalization, combined with a large share of contact-intensive industries and limited teleworking, aggravated the economic impact of the lockdown. 

Against this background, a multi-pronged strategy to address these fragilities should focus on:

a) boosting productivity , including by improving health and education, enhancing infrastructure, facilitating labor reallocation, and improving the business climate, in line with the National Plan for Competitiveness and Productivity launched in 2019. 

The new agriculture promotion law and its regulations, while gradually removing fiscal incentives to create a level-playing field, should preserve the flexibility in labor contracts that has been a key ingredient in the success of the agro-export sector.

b) enhancing social protection while reducing incentives to informality from the tax-benefit system. 

Investment in health care, education, and adequate social security, including pensions, is key but moving to universal health care should be accompanied by measures that reduce its adverse impact on incentives.

c) strengthening governance . 

Additional transparency in the public sector, including at the local level, and stronger anti-corruption enforcement would improve the business climate. 

Sufficient resources and adequate training for the newly created Offices of Institutional Integrity would be important in this regard.


The mission would like to thank the authorities for their generous hospitality and the candid and constructive discussions that took place during January 18–29, 2021.

The Fed Must Step Up Again

Extraordinary times call for extraordinary measures, which in the context of the COVID-19 pandemic means additional fiscal stimulus of the kind promised by US President Joe Biden. To alleviate sustainability fears, the Federal Reserve must prepare to expand its balance sheet and monetize the deficit.

Willem H. Buiter


NEW YORK – The unprecedented fiscal stimulus unleashed in the United States since the start of the COVID-19 pandemic calls for commensurate additional monetary stimulus. The restrictions imposed to control the spread of the coronavirus have caused the deepest global recession since World War II.

Government-imposed lockdowns have varied in duration and intensity, and this is likely to continue as the medical threats posed by the pandemic evolve. But there have also been wide variations in the degree to which privately imposed and enforced behavioral restrictions have complemented and reinforced the publicly mandated ones. 

In any case, the fact that the current recession is largely self-inflicted provides grounds for optimism about the speed of the recovery that we can expect once the public-health disaster is under control.

Recall that, although the virus was identified in January 2020, the scale and scope of the coming economic damage did not become clear until March. In the first quarter of 2020, real (inflation-adjusted) GDP in the US decreased at an annualized rate of 5%, but then plummeted by 31.4% in the second quarter. 

In the third quarter, after lockdowns had been relaxed and the private sector had learned to cope better with the new realities, US real GDP bounced back at a respectable 33.4% annualized rate, though it remained far short of the level expected at the start of the year. 

The last quarter is likely to have produced further weaknesses (official data are not yet available), as will the first quarter of 2021, owing to the recent mutations of the virus and the attendant return of restrictions.

This picture of an incomplete recovery is further supported by labor-market data, which hint at additional economic weaknesses to come. 

According to the US Bureau of Labor Statistics, the unemployment rate as of December 2020 was 6.7%. That is certainly better than the 14.8% rate recorded in April 2020, but it is well below the 3.5% figure reported last February. 

The loss of 22 million jobs between March and April 2020 underscores both the breathtaking damage caused by the lockdowns and the potential speed of recovery; indeed, between April and December 2020, 16 million people had already returned to work.

In large part, this is because the US fiscal response to the pandemic has been little short of staggering. 

Before the $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act last March, an additional $200 billion of stimulus measures were approved that same month. 

Then, in December, a $900 billion pandemic aid bill was signed into law. And now, Joe Biden’s administration is pushing for a $1.9 trillion package.

The Biden plan would bring the US pandemic fiscal response to $5.2 trillion, which is about one-quarter of US annual GDP. 

For comparison, the primary fiscal-policy response to the global financial crisis, the American Recovery and Reinvestment Act of 2009, totaled around $800 billion.

While that $5.2 trillion figure will likely be administered over the course of two or more years, stimulus amounting to 12% of GDP per year still should raise concerns both about fiscal sustainability and crowding out interest-rate-sensitive private expenditures. 

Thus, while proceeding with additional fiscal stimulus is still the right thing to do, it must be accompanied by the appropriate monetary policy. Simply put, the additional federal fiscal deficits must be monetized.

To be sure, the US Federal Reserve has done a great job so far. 

Since March 2020, its balance sheet has expanded by 70%, from $4.2 trillion to more than $7.4 trillion, while its securities (public and private) held outright have increased from $3.9 trillion to $6.8 trillion. 

And on the liability side, most of the increase has taken the form of larger reserve balances (deposits of depository institutions) and a larger Treasury balance.

But the Fed now must prepare to buy up the federal debt issued by the Treasury to fund its latest fiscal ambitions. 

That means expanding its balance sheet by up to $2.8 trillion, in order to accommodate December’s $900 billion Consolidated Appropriations Act and the forthcoming $1.9 trillion Biden package.

Such action from the Fed would alleviate concerns about fiscal sustainability and crowding out private investors. 

And though monetizing the deficit could add to inflationary concerns, I believe this is a risk worth taking. 

After all, there is still considerable slack in the economy, which makes it unlikely that monetization of the most recent stimulus packages would have a meaningful inflationary impact. 

Moreover, the damage caused by any surprise return of inflation would almost certainly be manageable.1

Most likely, inflation won’t become a salient issue again until the last quarter of 2021 at the earliest. 

By that time, significant progress in COVID-19 vaccinations and treatment will obviate the need for more extreme fiscal and monetary stimulus. 

If properly timed and intelligently designed, monetary and fiscal restraint will then be able to counter and neutralize any inflationary impulses without tipping the economy back into recession.1


Willem H. Buiter is Visiting Professor of International and Public Affairs at Columbia University.

What Wall Street’s ‘Short Squeeze’ Means for Investors and Regulators


Equity stock investors of all sizes woke up this past week to a powerful new market force – individual investors congregating on social media and acting on their own, but with a common motive. 

They grouped together on Reddit, Discord, Facebook, Twitter and other platforms to drive sharp surges in the stock prices of chiefly online video game retailer GameStop and movie theater operator AMC Entertainment. 

The market capitalization of GameStop briefly soared to $26.5 billion on Wednesday, January 27, surpassing that of Delta Air Lines; by the next day, it had plunged 44%.

All that drew scrutiny from the Securities and Exchange Commission, Treasury Secretary Janet Yellen and others in the Biden administration, as well as House Speaker Nancy Pelosi. 

As the frenzy calms, retail investors could end up hurting, warranting scrutiny by securities regulators, said experts at Wharton.

In the latest rally, the collective purchasing power of retail investors singed big hedge funds and other short sellers who were forced to buy those stocks to meet margin requirements or delivery commitments. 

Gleeful individual investors, such as those on Reddit’s wallstreetbets page, saw that “short squeeze” (Wall Street parlance for pressure on short sellers) as comeuppance for hedge funds and professional money managers, whose market heft and perceived predatorial behavior they have long resented.

“The hedge funds that were engaging in short-selling activity are certainly the ones feeling the most acute pain right now,” Wharton finance professor Sasha Indarte said in an interview on the Wharton Business Daily radio show that airs on SiriusXM 

“Bearish investors who took short positions have lost $23.6 billion this year on GameStop alone,” The Wall Street Journal reported, citing financial analytics company S3 Partners. 

Melvin Capital Management, a prominent hedge fund that lost 30% of its $12.5 billion asset base in its bets on GameStop, secured a $2.75 billion in emergency financing to stabilize its finances.

Clearly, the newest actor in stock price discovery is social media, bringing along concerns over the authenticity of the information that is shared. 

“The recent price fluctuations of these companies (GameStop and AMC) seem at least partially driven by social-media coordinated demand effects,” said Wharton finance professor Jules H. van Binsbergen. 

“The influence of attention and diffusion of information – or misinformation – through social media is growing in importance in financial markets, as it has in the rest of society.”

Stocks like GameStop and AMC that hedge funds had shorted have seen rallying cries on social media forums for several months now, culminating in the trading session on Wednesday. 

A flurry of developments sent the stocks recoiling on Thursday, even as the broader Dow Jones index inched up 1%. 

Popular online investment brokerages Robinhood, E*Trade and WeBull suspended or restricted trading in the stocks in question; Robinhood has since raised $1 billion to meet “surging cash demands” and also lifted some of the trading curbs on 13 stocks, including retailer Bed Bath & Beyond, Blackberry and headphones maker Koss.

A Question of Price

The consternation over the stock price surges at GameStop and AMC is rooted in their disconnect with their financial performance – both companies are losing money, made worse by the pandemic lockdowns.

The other shoe is yet to drop for those who bid up the share price of GameStop, according to Indarte. “I think we’re going to see more pain felt potentially by the retail investors that are in effect bidding up the price of GameStop,” she predicted. 

“It’s hard to justify the prices that we’ve been seeing for the company, based on the company’s fundamentals.” 

In the latest quarter, GameStop reported a 30% fall in revenues to $1 billion and a loss of $18.8 million. Similarly, AMC has also shuttered most of its theaters, and recently secured $917 million in financing to stave off bankruptcy.

In addition to the soundness of its fundamentals, a company’s stock price can also be driven by investor sentiment, “but there is large heterogeneity between different companies for the importance of both,” according to Binsbergen. 

Much of the price discovery depends on the liquidity and the total market capitalization of the stock, he noted. Small and illiquid stocks are more susceptible to non-fundamental price movements than larger stocks, he explained.

Short sellers sell shares before they buy them, hoping to sell high and buy low, Indarte explained. “It’s a trade that allows you to bet on a price decrease.” 

Short-selling is more common among financial institutions or investment professionals and less so with retail investors, she noted. 

In addition to short-selling being “a potentially opaque type of transaction” with which retail investors are less familiar, they are also wary of the downsides, she said. 

“Retail investors are more hesitant to participate in shorting because the risks are potentially much higher when you short sell a stock, compared to when you’re just outright buying and then later selling a stock.”

Short-sellers and the companies they target have often clashed. Tesla CEO Elon Musk has for long battled short sellers. 

“We’ve typically seen [short-seller interest] with companies where there’s uncertainty about growth,” said Indarte. 

In the case of GameStop, its “business model might face some challenges during a pandemic, where more people are buying online rather than going to stores in person,” she noted. However, some investors drew optimism from management changes at the company, she added.

Social Media and Regulation

Regulators don’t have easy or ready solutions to prevent the speculation in stock prices that can occur on social media, and the harm it can cause unsuspecting or relatively less-savvy investors. At the same time, social media can also be a good and desirable actor in price discovery with information dissemination.

“The complication for regulators is that actual information that is supposed to be incorporated in prices can also be diffused through social media,” said Binsbergen. 

“This can still lead to sizeable price changes, but those price changes make financial markets more informative, which is beneficial to the real economy.”

The GameStop and AMC cases can be tricky for regulators. “What makes this case even more interesting is the claim that the other side of the trade was made up of professional investors that were betting in the other direction,” said Binsbergen. 

“I do not think that regulators should pick a side in that debate. That said, cases like this could potentially qualify as pump-and-dump schemes based on misinformation, warranting further investigation by regulators on a case-by-case basis.”

Many traders have been questioning whether users who have been posting about the company and urging others to buy shares and calls could be considered a “group” by the SEC’s definition, according to the Wall Street Journal report.

Differing investor viewpoints on the fortunes of companies will refine price discovery, but “in the current environment, stocks are especially sensitive to changes in their long-term growth prospects,” Binsbergen said. 

“On the rational (fundamental) side of the debate, market-wide discount rates are at very low levels today, which makes the duration of stocks, and thus their sensitivity to long-term growth expectations large. (Equity duration is a measure of the time it will take for investors to recover their investments through dividends.) 

Many investors are struggling to separate the short- and potentially permanent long-term effects of the COVID-19 pandemic.”


Jules H. van Binsbergen teaches in Wharton Executive Education’s Investment Strategies and Portfolio Management, designed to help investment professionals and financial advisors interpret and understand market data and capitalize on investment opportunities that are emerging today.