[D66] Coronavirus has sparked a perfect storm

[A.OUT]

Coronavirus has sparked a perfect storm of nationalism and financial 
speculation
By
Yanis Varoufakis
theguardian.com
5 min
View Original

Nationalism and speculation have seldom had a better opportunity to 
combine forces as the one riding today on the coattails of Covid-19, 
known as the coronavirus.

When Covid-19 leapfrogged from China to Italy, even ardent Europeanists 
normally appreciative of open borders joined the deafening calls to end 
freedom of movement across Europe’s national borders – a longstanding 
demand of nationalists. Meanwhile, the money men speculating on 
government debt are performing a classic flight from Italian to German 
government bonds, seeking the financial safety that only the continent’s 
hegemon can offer during any crisis. As if in a bid to remind us of the 
great contradiction of our times, Covid-19 is illuminating gloriously 
the freedom of money to transcend a borderless financial universe while 
humans remain as fenced in as ever.

Meanwhile in the United States, President Trump is combining his 
standard call for taller walls with a fresh instruction to moneymen to 
“buy the dip” in Wall Street, rather than to follow their natural 
instinct to seek refuge in the boring but safe bond markets. A great 
deal will depend on whether financiers believe Mr Trump or not, and not 
just because this is an election year.

If speculators do believe the American president, Wall Street will 
recover swiftly even before the epidemic subsides. The forces of 
xenophobic financialisation will then have triumphed and America’s 
progressives will face an uphill struggle on every political front. As 
for the European Union, ruling elites will breathe a sigh of relief that 
a new depression was avoided and return to managing as best as they can 
the economic stagnation of recent times, tinged this time with a large 
dose of additional, coronavirus-reinforced, xenophobia.

Will Wall Street follow Mr Trump’s advice to “buy the dip”? For now, the 
large players are in two minds. The drop in the stock market does not 
worry them as such. Their concern is that the recent bull market was 
running on increasingly suspect debt and that Covid-19 may have pricked 
a bubble that was going to burst anyway. Similarly in Europe, the worst 
spectre hovering over investors’ heads is that large corporations, 
relying for too long on free money from the European Central Bank, may 
be downgraded from investment to junk-grade – especially so at a time of 
stagnant domestic demand and a collapsed Chinese import market.

Taking a leaf out of the aftermath of the crash of 2008, and the 
Eurozone crisis that followed, bullish speculators are looking at their 
central banks, primarily the Fed and the ECB, to do, once again, 
“whatever it takes” to re-float their flagging fortunes. Two questions 
keep them up at night: will the central banks oblige? And if they do, 
will it be enough?

The first question is easy to answer: governments are impotent on both 
sides of the Atlantic. In the United States the federal budget deficit 
is already at a historic high, especially in the context of a tight 
labour market, while the Eurozone remains in the straightjacket of its 
fiscal compact. Therefore the central banks will be forced, whether they 
like it or not, to step up to the mark. Already we have seen 
announcements of lower interest rates, even of Japanese-style 
semi-direct purchases of government and private debt by the monetary 
authorities.

But will it be enough for the central banks to throw more money at the 
Covid-19-infected money markets? Will the economy go back to where we 
were a month ago if enough liquidity is pumped into the system? Or will 
it resemble a slow puncture that demands increasing pump-priming to stay 
inflated? Moreover, will the new wall of public money push back the wall 
of xenophobia? The sad answer to the last question is instructive about 
the economic ones too.

When a border closes down, it does not open again easily even if the 
conditions that caused its closure are largely reversed. This is a safe 
lesson from Europe’s recent experience. Take, for example, Austria, 
which closed its border with Italy following the rise of refugee 
arrivals in the summer of 2015. For a couple of years after that refugee 
wave had died out, the borders remained shut. Similarly with the borders 
along the Western Balkans. Why is this relevant to the question of 
whether increased central bank liquidity will ameliorate the effects of 
Covid-19 on the economy? To answer, we need to remind ourselves of what 
happened after the crash of 2008.

There were two responses to the 2008 crisis that saved capitalism from 
total collapse: the gigantic injection of liquidity into the economy by 
central banks, the Fed above all else; and China, whose government took 
it upon itself intentionally to build up the greatest private credit 
bubble in history to replace the lost export demand by a stupendous 
investment boost. The Fed’s and China’s intervention succeeded in 
re-floating global finance and putting stock markets onto the path of 
their longest growth spurt. However, the world did not go back to its 
pre-2008 ways.

Before 2008, Wall Street played a crucial role in recycling non-US 
surpluses that were the repercussion of American deficits into global 
investment funding. After 2008, the refloated Wall Street could not 
perform that task, channelling much of the abundant liquidity not to 
fixed capital investment but to share buy-backs and other asset 
purchases. The result was that the post-2008 economy is characterised by 
savings being permanently in excess of capital goods investment. Since 
savings are the supply of money and investment its demand, the permanent 
excess supply of money explains the permanently low, or negative, 
interest rates. It also explains the downward pressure on median wages 
against a background of rising asset prices causing unbearable 
inequality and thus producing the political triumphs of xenophobic 
nationalism.

In precisely the same way that the increased liquidity after 2008 failed 
to rebalance savings and investment globally, so will any renewed 
monetary “easing” to counter the ill effects of Covid-19 fail to return 
the global economy to its pre-February state. Of course, as happened 
after 2008, speculators will make a mint and nationalist forces will 
milk the ensuing discontent for all its worth.