Don’t Bet on a Quick Global Resurrection

The speed of the economic recovery will be more tortoise than hare.

By Niall Ferguson, the Milbank Family senior fellow at the Hoover Institution, Stanford, and managing director of Greenmantle, and cross-posted from The Sunday Times

Easter never felt more Eastery. The world economy looks dead. Can it be resurrected? Just over a century ago, amid the worst flu pandemic in history, the greatest economist of his generation fell ill. John Maynard Keynes was in Paris, attending the peace conference that would in time produce the Treaty of Versailles. Having collapsed on May 30, 1919, he wrote to his mother: “Partly out of misery and rage for all that’s happening and partly from prolonged overwork, I gave way last Friday and took to my bed from sheer nervous exhaustion, where I have remained ever since.”

He remained prostrate for close to a week, getting up only for meetings with the prime minister, David Lloyd George, and “a daily stroll in the Bois [de Boulogne]”. Did Keynes have the dreaded Spanish flu, as Lloyd George did? His biographer, Lord Skidelsky, says we cannot be sure. If so, he was lucky to survive it. According to the latest estimate, that pandemic killed 39 million people — 2% of the world’s population — dwarfing the battlefield fatalities of the First World War.

Among the victims of the pandemic were the South African prime minister Louis Botha, the Bolshevik leader Yakov Sverdlov, the German sociologist Max Weber and the grandfather of the current US president Frederick Trump.

It was shortly after his recovery and return to Britain that Keynes wrote the inflammatory tract that made him famous, The Economic Consequences of the Peace. In it he deplored the punitive terms of the Versailles treaty — which imposed on Germany an unspecified but potentially vast war reparations debt — and prophesied an inflationary economic disaster, followed by a political backlash.

Who among today’s great economists will write The Economic Consequences of the Plague? Large parts of the world’s economy have been brought to an abrupt standstill by the Covid-19 pandemic. To contain the contagion, countless businesses have been told to cease trading and millions of workers have been told to stay at home. To offset this “supply shock”, and to prevent a catastrophic downward spiral of shrinking demand and debt deflation, the world’s central banks and finance ministries are injecting even more “liquidity” — that’s money, to you and me — than they did in the wake of the 2008-9 financial crisis.

The effects of these measures can be seen in the remarkable performance of corporate stocks and bonds. As I write, the S&P 500 is just 18% below its peak on February 19. At its low point — March 23 — it was down 34%. Those who expected carnage in the low-grade, or “junk”, bond market are amazed. Who could have foreseen that the Federal Reserve would buy even junk?

Yet I feel a bit like Keynes did in 1919. Of course, I see the need to get money to those workers who will be unemployed for as long as it takes the scientists and pharmaceutical companies to find and distribute a Covid-19 vaccine. But the Fed’s current policy would appear to be a generalised bailout of investors, even those whose positions were known to be risky

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