Global finance

The real revolution on Wall Street

High tech meets high finance

Events on Wall Street have become so strange that Netflix is said to be planning a show to immortalise them. But what should be the plot? 

One story is of an anti-establishment movement causing chaos in high finance, just as it has in politics. 

Another is how volatile shares, strutting online traders and cash-crunches at brokerage firms signal that a toppy market is poised to crash. Both gloss over what is really going on. 

Information technology is being used to make trading free, shift information flows and catalyse new business models, transforming how markets work. And, despite the clamour of recent weeks, this promises to bring big long-term benefits.

Don’t expect screenwriters to dwell on that, obviously. Their focus will be the 8m followers of WallStreetBets, an investment forum on Reddit, who have invented a new financial adventurism: call it swarm trading. 

Together, they bid up the prices of some obscure firms in late January. This triggered vast losses at hedge funds that had bet on share prices falling. 

And it led to a cash squeeze at online brokers which must post collateral if volatility rises. Since January 28th the most prominent, Robinhood, has raised $3.4bn to shore itself up.

The swarm seems to have moved on. This week the price of some favoured shares sank and silver leapt. 

Meanwhile, in many markets the normal rules of play have been suspended. 

Almost 300 “spacs” listed last year, raising over $80bn and allowing firms to float without the hassle of an initial public offering (ipo). 

Tesla has become America’s fifth most valuable firm. Bitcoin, having gone from the fringe to the mainstream, has a total value of $680bn. Trading volumes for shares are at their highest in at least a decade and those for some derivatives are off the charts.

Part of the reason for this is that government bail-outs have put a floor under risky debt. Banks have so much spare cash—JPMorgan Chase’s pile has risen by $580bn in the pandemic—that they are turning depositors away. Instead of using the lockdown to learn Mandarin and discover Tolstoy, some people have used their stimulus cheques to daytrade. 

Although the whiff of mania is alarming, you can find reasons to support today’s prices. 

When interest rates are so low, other assets look relatively attractive. Compared with the real yield on five-year Treasuries, shares are cheaper than before the crash of 2000.

Yet the excitement also reflects a fundamental shift in finance. In recent decades trading costs for shares have collapsed to roughly zero. 

The first to benefit were quantitative funds and big asset managers such as BlackRock. 

Now retail investors are included, which is why they accounted for a quarter of all trading in January. 

Meanwhile, information flows, the lifeblood of markets, are being disaggregated. News about firms and the economy used to come from reports and meetings governed by insider-trading and market-manipulation laws. 

Now a vast pool of instant data from scraping websites, tracking industrial sensors and monitoring social-media chatter is available to those with a screen and the time to spare. 

Last, new business models are passing Wall Street by. spacs are a Silicon Valley rebellion against the cost and rigidity of ipos. 

Robinhood, a tech platform from California, executes trades through Citadel, a broker in Chicago. In return for free trading, users’ trades are directed to brokers who, as on Facebook, pay to harvest the data from them.

Far from being a passing fad, the disruption of markets will intensify. 

Computers can aggregate baskets of illiquid assets and deploy algorithms to price similar but not identical assets, expanding the universe of assets that can be traded easily. 

A sharply rising proportion of bonds is being traded through liquid exchange-traded funds, intermediated by a new breed of marketmakers, such as Jane Street. 

Contenders such as Zillow are trying to make housing sales quick and cheap, and in time commercial-property and private-equity stakes may follow.

On paper this digitisation holds huge promise. More people will be able to gain access to markets cheaply, participate directly in the ownership of a broader range of assets and vote over how they are run. 

The cost of capital for today’s illiquid assets will fall. It will be easier to match your exposure to your appetite for risk.

But financial progress is often chaotic. First time around, innovations can cause crises, as the structured-credit boom did in 2007-09. The capacity of social media to spread misinformation and contagion is a worry. 

It is hard to see how some underlying assets justify the price rises of the past few weeks. 

Some fear that powerful firms hoarding the data of individual investors will exploit them. 

Already the Robinhood saga has led politicians on the right and the left to fret about losses for retail investors, mispriced assets and the threat to financial stability if market infrastructure should be overwhelmed as investors stampede from one asset to the next. 

Tellingly, the only big stockmarket dominated by technologically sophisticated retail investors is China’s. Its government employs censorship and an array of price and behavioural controls to try to keep a lid on it.

Although that is thankfully not an option in America, the regulators’ toolkit does need to be updated. 

It must be made clear that speculators, amateur and professional, will still bear losses, even if they attract sympathy from politicians. 

Irrationality thrives in online politics because it imposes no direct cost. 

By contrast, in markets losses act as a disciplining force. If today’s frothiest assets collapse, the bill could be perhaps $2trn: painful but not catastrophic in a stockmarket worth $44trn.

Don’t forget season two

Insider-dealing and manipulation rules also need to be modernised to deal with new information flows. 

Stupidity, greed and a killer instinct are all perfectly acceptable: deception, including the spread of misinformation, is not. 

Price-sensitive data need to be kept widely available. 

And the plumbing must be renovated. 

America’s trade-settlement system works with a two-day delay, creating a timing mismatch that can lead to cash shortfalls. 

It needs to be able to cope with faster trading in an expanding range of assets so that the system can withstand a crash. 

Netflix’s tv drama will doubtless pitch daytrading heroes like Roaring Kitty against the wicked professionals on Wall Street. 

Off-screen, in the real revolution in finance, a far bigger cast can win.

In Response to "New York," Re: GameStop

The Big Apple mag takes a shot at purveyors of “balefully misguided progressive discourse,” i.e. me and a few others who cheered the GameStop rally. A note in reply

Matt Taibbi

Eleven years ago I did a story for Rolling Stone about a foreclosure court in Jacksonville, Florida. 

After the 2008 crash, banks were kicking people out of their homes at such a furious pace that states couldn’t keep up. 

In Florida, an old judge was pulled out of retirement to preside over a special high-speed “rocket docket” court. 

He sat at the head of a small conference table in a cramped room, and I watched as he rubber-stamped stacks of foreclosures, sending a queue of bewildered homeowners on the street — one every few minutes, on average. 

The people lining up to surrender their homes were middle- and formerly middle-class Americans, who’d managed to scratch out enough to buy a home at one point, but were certainly not rich. 

One worked at a pool-cleaning company, another was a waitress, a third was a school administrator, and so on. 

They were white, African-American, Latino, Asian, and they expressed a range of emotions, from shock to shame to anger.

One woman was bewildered to learn that she couldn’t learn, for sure, the identity of the note-holder on her home. 

The hack lawyer filing for the banks that day — a bumbling character who entered court with two hands around a stack of foreclosure petitions that accordioned like Dagwood’s sandwich — claimed to be suing her on behalf of Wells Fargo. 

But the documents in her file claimed Wells had purchased her loan from Wachovia in May of 2010, two years after Wachovia went out of business, and three months after Wells originally sued her, a logical impossibility.

The woman seemed too confused to be angry. Mainly, she couldn’t believe what was happening. 

“The land has been in my family for four generations,” she said. 

“I don’t want to be the one to lose it.” 

She got a temporary reprieve that day, but a hundred others like her did not.

About a year after that, at Zuccotti Park in New York, it struck me that if Occupy Wall Street could attract the people from places like that Rocket Docket in Jacksonville, it might have overrun the country. 

At the time, the emerging criticism of Wall Street that was coming from younger, urban, college-educated activists had not yet lined up with the gigantic reservoir of rage that was out there among the millions who’d lost homes, jobs, pensions, etc. 

Not only were many of those people who’d been foreclosed upon or laid off or forced to watch their 401Ks lose half their value still in emotional shock, but the underlying corruption was not exactly easy for them to see. 

Propaganda blasted out on every channel, to the effect that it was your own fault if you took on an adjustable-rate mortgage that went sideways, or bought too big of a house. 

People above all feel shame when they can’t pay their debts, and many took it to heart when pundits said the crash was caused by people buying houses they couldn’t afford.

Those criticisms often came out as racial politics, as conservative media figures hammered the theme of the “water drinkers” who crashed the economy at the expense of the “water carriers.” 

Listening to these takes, resentment in some neighborhoods grew toward the family down the street who’d been foreclosed upon, leaving a boarded-up eyesore on the block and collapsing property values for those left. 

The Tea Party movement, launched by a rant on CNBC against a proposed bailout for minority homeowners in particular, steered public anger away from Wall Street and toward the “bad behavior” of the “losers” down the street. 

“How many of you people want to pay your neighbor’s mortgage, that has an extra bathroom, and can’t pay their bills?” screeched Santelli, to “America,” which was actually a group of booing traders on the Chicago Board of Exchange:

A decade later, it’s understood that while the subprime scam did disproportionally target minority homeowners — a typical victim was an elderly Black woman sold a refi by a door-to-door shark, who promised her a little extra spending money each month — the scale of the crash was so massive that everyone suffered. 

By 2021, people are not only unafraid to admit their lives were altered by the collapse of the housing bubble, they’re no longer blaming neighbors but bigger players, and the system protecting them. 

This was one of the subtexts of the interview I did this week with “SP,” the GameStop investor whose post, “This is for you, Dad,” went viral during the GME frenzy. 

SP’s family was devastated by the 2008 crash. 

His uncle lost his house to foreclosure. 

“They were in an ARM and got adjusted right out of the house,” SP says (an “ARM” is an adjustable-rate mortgage). 

“We didn’t even know they’d been foreclosed on. 

We went over and the place was empty and the lights were off. 

There were a bunch of houses like that on the street.”

SP, whose father also was put out of his house and job at that time, recalls the messaging about the homeowners themselves being at fault. 

“There was the macro scapegoating of the financial crisis in 2008, when they said people should know better than to take out loans they can't afford,” he says. 

“I was like, ‘Okay, well, people should go and smoke. 

People should know not to speed. People should know not to drink and drive.’ 

But they have warning labels on those things, right? 

Police officers will pull you over, if you speed.

“However,” he goes on, “with the financial crisis, you had a system that was incentivized for bad behavior. 

And some didn't have to pay the price for that bad behavior.”

That last point is relevant to a recent article by Eric Levitz in New York magazine, “The GameStop Rally Exposed the Perils of ‘Meme Populism.’” 

The piece among other things takes a shot at me and a few other media figures, for driving what he called a “balefully misguided progressive discourse” through hype of the GameStop story. 

It seems people like me mistook “the cause of recreational investors for that of the proletariat,” and failed to understand that while “the showdown between WallStreetBets and Melvin Capital was not a class war, it did play one on CNBC.”

I was particularly at fault, apparently, for decrying the TARP, zero-interest-rate policy, Quantitative Easing, the CARES Act, and other “artificial stimulants” that have been keeping asset prices high, and the 30 percent of American companies that are functionally broke, alive. 

In doing so, Levitz said, I implied that “there is some ‘natural’ benchmark interest rate that exists outside of politics and policy, and that the Fed is corruptly flouting this natural market law” — in other words, a “libertarian argument for central banks to tolerate deeper recessions and higher unemployment.”

It was the betrayal of betrayals, he said, “the kind of thing one might expect to find in a column by Taibbi’s archnemesis, Thomas Friedman.”

As to the question of whether or not the people in wallstreetbets are genuinely the “proletariat” or “working-class,” I’ll defer to Levitz. He seems interested in litigating that issue, which I’m not. 

I’d only point to the interview with SP, and to the others on wallstreetbets who chimed in with stories about the aftermath of 2008, and say these tales make sense to me. 

I listened to similar stories for almost ten years: the Black prison guard in Boston with the cancer-stricken wife who lost his house because he was sold an ARM when he thought he was buying prime, the firefighter in Providence who lost his pension, the clerk of a California city that had to slash services after losing millions in the Lehman disaster, etc. 

Is that the “cause of the proletariat?” 

I have no idea. 

I do know that I ran into a lot of pissed-off people over the years.

Why they were pissed off gets to the second question, about the bailouts, ZIRP, the TARP, even the CARES Act. 

While so many people went into personal tailspins from 2008 on, their nightmares were often compounded watching as the very people who caused the crash — including the banks and mortgage originators who knowingly pumped mountains of fraudulent subprime instruments into the economy — not only got saved but were further enriched, by bailouts and an array of extravagant Fed programs.

Some people got ripped off three times. 

First, they were personally sold dodgy exotic mortgages. 

Next, their retirement funds were sold the same kinds of dicey loans in the form of securities. 

Lastly, when it all blew up, they paid taxes to bail out the whole shooting match.

The issue with the “artificial stimulants” isn’t that some form of rescue wasn’t necessary, but rather that the rescues that were implemented were both executed poorly and inherently unfair in design. 

From the TARP through the CARES Act to the now interminable programs of Fed purchases, bailouts led directly to massive booms for banks and financial asset-holders, while everyone else saw personal wealth decline. 

Market forces exist for some, but not others.

Perhaps some form of rescue was necessary, but there’s something odd going on when a bank executive can be looking at closing up shop one day, as many were last March, only to go on to secure record profits and over $30 million in personal compensation, with nothing changing in between but a bailout. 

Meanwhile, at the bottom of the economic spectrum, there were no such reversals of fortune. 

You lost your job, you got foreclosed on, that was it. 

As Vice-Chairman of Berkshire Hathaway Charlie Munger said all the way back in 2010, addressing individual homeowners who might want bailouts, “Suck it in and cope.” 

One $2000 check doesn’t change the pattern.

The financial crisis among other things was worsened by a hyper-concentration of capital, and the systemic risk giant supermarket financial firms caused to the economy (which made them difficult to regulate). 

In rescuing the banking sector, the Fed and the Treasury not only didn’t address this problem, they worsened it, folding small problem banks into bigger ones in a series of mega-mergers, leaving us with a handful of giganto-banks even bigger and more systemically dangerous than before. 

The implied promise of bailouts also resulted in lower borrowing costs for big banks versus small ones, a subsidy one study calculated to be worth $34 billion a year. 

And that was before we even got to the question of all the unpunished fraud and crime that was swept under the rug as an implied part of the various rescues, with the Fed creating special facilities to hoover the problem loans out of circulation (using the euphemism, “toxic assets”). 

This sense of built-in unfairness is what animated at least some of the GameStop investors. 

Seeing the field isn’t level, they saw the GME trade as a rare chance to tilt tables in their direction, even if fleetingly. 

For people like SP, this was an explicit consideration. 

He says he was motivated to hold not just by his own family experiences after the dot-com crash and after 2008, but by looking at the landscape in pandemic America, which once again contrived policies to make smaller smaller, and bigger bigger. 

“Your favorite sandwich shop, closed. If you've got 200 of those sandwich shops, open,” is how he puts it. 

One last note: when I first started covering this topic all those years ago, most of the flak that came my way (and toward other critics of Wall Street) came from the right, or from Ayn Rand acolytes like Megan McArdle. 

During Occupy Wall Street, criticism of finance sector antagonists came out as pure aristocratic sneering, i.e. these whiners need to stop listening to Phish, get a job, and take a shower:

Now, in response to exactly the same criticisms of the inequities of the financial system, including the use of public funds to once again massively enrich private companies (like the banks that just scored record profits underwriting the Covid-19 bailouts), the defense of these policies is more likely to be framed as coming from the left. 

If you think it’s not fair that a small business faces a different market risk than Morgan Stanley, if it seems wrong that a restaurant is allowed to fail but not a bank, you’re a libertarian. 

In the Trump era, every criticism of establishment politics apparently has to be framed as conservative grift.

GameStop is a complex story. 

There are big institutional players on all sides. 

It’s not necessarily a “good” thing that a struggling video game firm became worth more than international airlines overnight. 

Trading in the stock may indeed have been restricted because of laws requiring that brokers have the capital to cover trades, although Robinhood’s collateral calls dropping from $3 billion to $1.4 billion in few hours seems a bit odd (as does the fact that the Depository Trust Clearing Corporation has rarely been so finicky about compliance issues before, across a generation of naked short-selling and other practices).

For all that, there’s a reason this story resonated. 

There’s a lot of anger out there, and it will jump at chances to express itself, no matter how much those of us in the media argue over what to call it. 

The Perils of an Uneven Global Recovery

Heightened global economic risks mean that many poorer countries could take years to return to their pre-pandemic growth trajectories. And if higher inflation leads the US Federal Reserve to raise rates somewhat sooner than it currently plans, emerging markets will be hit particularly hard.

Kenneth Rogoff

CAMBRIDGE – Economic recovery, like COVID-19 vaccines, will not be evenly distributed around the world over the coming two years. 

Despite enormous policy support provided by governments and central banks, the economic risks remain profound, and not just to frontier economies facing imminent debt problems and low-income countries experiencing an alarming rise in poverty. 

With the coronavirus far from tamed, populism rife, global debt at record levels, and policy normalization likely to be uneven, the situation remains precarious.

This is not to deny the overall good news of the last 12 months. 

Effective vaccines have become available in record time, far sooner than most experts originally anticipated. 

The massive monetary and fiscal response has built a bridge toward a much-hoped-for end to the pandemic. 

And the public has gotten better at living with the virus, with or without the help of national authorities.

But although growth outcomes around the world have been vastly better than most expected in the early days of the pandemic, the current recession is still catastrophic. 

The International Monetary Fund forecasts that the United States and Japan will not return to pre-pandemic output levels until the second half of this year. 

The eurozone and the United Kingdom, again declining, won’t reach that point until well into 2022.

The Chinese economy is in a league of its own, and is expected to be 10% larger by the end of 2021 than it was at the end of 2019. 

But at the other end of the spectrum, many developing economies and emerging markets could take years to return to their pre-pandemic trajectories. 

The World Bank estimates that the COVID-19 pandemic will push up to 150 million additional people into extreme poverty by the end of 2021, with food insecurity rampant.

The differing performance projections have much to do with the vaccine delivery timetable. 

Vaccines are expected to be widely available in advanced economies and some emerging markets by the middle of this year, but people in poorer countries will likely be waiting until 2022 and beyond.

Another factor is the staggering difference in macroeconomic support between rich and poor countries. 

In advanced economies, additional government spending and tax cuts during the COVID-19 crisis have averaged nearly 13% of GDP, with loans and guarantees amounting to another 12% of GDP. 

By contrast, government spending increases and tax cuts in emerging economies have totaled around 4% of GDP, and loans and guarantees another 3%. 

For low-income countries, the comparable numbers are 1.5% of GDP in direct fiscal support and almost nothing in guarantees.

In the run-up to the 2008 financial crisis, emerging economies had relatively strong balance sheets compared to developed countries. 

But they entered this crisis burdened with far more private and public debt, and are thus much more vulnerable. Many would be in deep trouble but for near-zero interest rates in advanced economies. 

Even so, there has been a growing rash of sovereign defaults, including in Argentina, Ecuador, and Lebanon.

In fact, a “taper tantrum 2.0” is near the top of the list of things that can go wrong, and if (or when) it happens, not only emerging markets will suffer. 

The 2013 taper tantrum occurred when the US Federal Reserve started signaling that it would someday normalize its monetary policy, triggering huge outflows of funds from emerging markets. 

This time, the Fed has taken great pains to signal that it does not plan to raise interest rates for a long time, even introducing a new monetary framework that basically amounts to a promise to keep its foot on the gas until unemployment is extremely low.

Such a policy makes perfect sense. 

As I have frequently argued since 2008, allowing inflation temporarily to rise above the Fed’s 2% target would do far more good than harm in an environment where debt levels are high and output is still below potential. 

After all, there are nine million fewer people working in the US today than a year ago.

But if the US has achieved its vaccination targets by this summer and coronavirus mutations remain contained, forecasts of a Fed “lift-off” from zero interest rates may well be brought forward significantly. 

This is especially likely given the huge reserve of savings that many Americans have built up, owing partly to rising asset prices and partly to government transfers that many recipients chose to save.

Ultra-low interest-rate policies across the world are helping to prevent long-term scarring, but many larger companies, including Big Tech firms, do not need the support that is driving their stock prices through the roof. 

This is inevitably fueling populist anger (a small taste of which was evident in some US politicians’ reactions to the recent GameStop stock-price war).

Inflation may be stubbornly low for now, but a big enough blast of demand could push it higher, leading the Fed to raise rates somewhat sooner than it currently plans. 

The ripple effects of such a move on asset markets would separate the strong from the weak, and hit emerging markets particularly hard. 

At the same time, policymakers, even in the US, will eventually have to allow bankruptcies to pick up and restructuring to take place. 

A rising tide of recovery is inevitable, but it will not lift all boats.

Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. He is co-author of This Time is Different: Eight Centuries of Financial Folly and author of The Curse of Cash.

The COVID Tsunami and Emerging Markets

No one is sure why poorer countries have suffered proportionally fewer infections and deaths during the pandemic: weaker health systems, worse nutrition, and larger numbers of people with pre-existing medical conditions suggested the opposite outcome. But the economic implications have been clear.

Andrés Velasco

LONDON – A tsunami-watcher’s job is thankless. 

If an earthquake hits Australia, or an underwater volcano erupts near Java, naval stations in Japan, Vietnam, the Philippines, New Zealand, and even far-away Peru and Chile go on alert. 

Residents of coastal areas are warned that a big wave may be coming. 

Get it right, and tsunami-watchers save millions of lives; get it wrong, and they try to ignore the scorn, knowing that next time may be the big one.

In 2020, the COVID-19 tsunami was expected to devastate poor and middle-income countries everywhere. 

The wave did come, and its consequences were painful, but less so than anticipated.

Contrary to most forecasts, rich Western Europe and North America have suffered much worse loss of life and economic damage. 

Former World Bank Chief Economist Pinelopi Koujianou Goldberg and Tristan Reed report a strong positive correlation between income per capita and deaths per million inhabitants. 

As of late January, deaths per million in the United Kingdom were twice as high as in South Africa, 13 times higher than in India, and approximately 30 times higher than in Bangladesh, Pakistan, Syria and The Gambia. The United States is little different.

Countries with more deaths have suffered larger declines in income. The much-feared trade-off between lives and incomes has failed to materialize; on the contrary, fewer deaths have meant greater economic activity, so per capita incomes dropped by more in richer countries.

As a result, the expected tsunami of increased global inequality did not arrive. 

Within countries, income distribution in all likelihood became more skewed (restaurant workers and taxi drivers lost their jobs, while lawyers and bankers worked from the safety of their homes) but, as the Nobel laureate economist Angus Deaton has shown, the gap between rich and poor countries actually narrowed.

No one is sure why poorer countries have suffered proportionally fewer infections and deaths: weaker health systems, worse nutrition, and larger numbers of people with pre-existing medical conditions suggested the opposite outcome. 

Some early assessments point to the alleged advantage of warmer weather, but there is little evidence of that. 

Having younger populations is thought to help, yet that explanation does not explain why health outcomes diverged in countries with similar age distributions (India and Bangladesh, for example, or Nigeria and Zimbabwe).

Aging populations may help explain Latin America’s dismal performance. 

Peru, Mexico, Brazil, Argentina, Panama, and Colombia all have death rates above 1,000 per million inhabitants – among the highest in the world. 

Snobby Latin Americans who long thought of themselves as misplaced Europeans had their wish fulfilled: the region now resembles Europe not just demographically (particularly in South America), but also in its appalling inability to control the pandemic.

So, who are the heroes of this tale? 

Not the International Monetary Fund and the other multilateral lenders, which once again offered too little, too late. 

The $250 billion lent by the IMF represents just a quarter of its lending capacity and a pittance compared to what countries needed and to what rich countries spent on pandemic relief for themselves. 

And former US President Donald Trump’s administration vetoed an expansion of the IMF’s reserve asset, special drawing rights, which would have allowed poorer countries to borrow more.

China, the only major economy to record positive growth last year, has propped up demand (and prices) for developing countries’ commodity exports, bolstering these countries’ finances. 

But China’s role is secondary compared to what the world’s major central banks accomplished.

We knew from the 2007-09 global financial crisis that keeping interest rates low for long is a powerful tool for recovery.

Plus, this time around, investors’ search for yield has caused the newly printed money to percolate to remote corners of the world. 

Markets did experience a tantrum in March and April 2020, withdrawing unprecedented quantities of funds from emerging and frontier economies. 

But the outflows soon ceased (and sometimes were reversed). Investors had nowhere else to go.

This set the stage for the real paladins of this tale: the macroeconomic authorities in many emerging and developing countries. 

A dozen years ago, few had the monetary and fiscal space to mount a robust response to the crisis. 

During the COVID-19 episode, by contrast, central banks and finance ministries took advantage of ultra-low world interest rates and created policy space where none was thought to exist.

Central bankers in countries like Chile, Colombia, Hungary, India, the Philippines, Poland, and Thailand engaged not just in interest-rate cutting but also in quantitative easing and local-currency asset purchases – not as large as those carried out by their rich-country counterparts, but large enough to make a difference, reducing funding costs and easing market strains. 

The prevalence of flexible exchange rates also helped, allowing the local currency to depreciate when adjustment to external shocks required it.

The fiscal response has been much more robust as well. 

The October 2020 IMF Fiscal Monitor reports that in Brazil, Chile, Peru, Poland, South Africa, and Thailand, measures involving additional spending and forgone revenue reached more than 5% of GDP. 

Other countries mounting a sizeable fiscal effort include Argentina, Bulgaria, Colombia, China, Indonesia, and Romania.

The 2020 economic contraction in the non-rich world will end up being much smaller than was once feared. 

In the January 2021 update to its World Economic Outlook, the IMF estimates that the GDP drop was nearly 5% in advanced economies, and only half of that in emerging and developing economies, where the 2021 recovery will be faster as well. 

Even in Latin America, where public-health conditions and lockdowns help explain a whopping 7.4% contraction in output, the number is less dismal than the 10% drop expected just a few months ago.

How long can this last, and how fragile will the underlying macroeconomic situation turn out to be? 

Consider Brazil. 

The good news is that a vigorous fiscal and monetary response has contained the recession and job destruction. 

The bad news is that public debt will soon reach 100% of GDP.

Debt has already hit that level in the US and UK, but the yield curve in those countries is flat, allowing governments to borrow at record-low rates for long maturities. 

In Brazil, by contrast, the yield curve is one of the world’s steepest, pushing the government into borrowing at ever-shorter maturities. 

Granted, Brazil’s debt is mostly in domestic currency. Still, conditions are building toward a run on Brazilian debt.

No one can be sure whether such a panic will occur. 

But more than a few tsunami watchers are again sounding the alarm – and not just in Brazil.

Andrés Velasco, a former presidential candidate and finance minister of Chile, is Dean of the School of Public Policy at the London School of Economics and Political Science. He is the author of numerous books and papers on international economics and development, and has served on the faculty at Harvard, Columbia, and New York Universities.