The post-pandemic slump

15 April by Michael Roberts

The coronavirus pandemic marks the end of longest US economic expansion on record, and it will feature sharpest economic contraction since WWII.

The global economy was facing the worst collapse since the second world war as coronavirus began to strike in March, well before the height of the crisis, according to the latest Brookings-FT tracking index.

2020 will be the first year of falling global GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
since WWII. And it was only the final years of WWII/aftermath when output fell.

JPMorgan economists reckon that the pandemic could cost world at least $5.5 trillion in lost output over the next two years, greater than the annual output of Japan. And that would be lost forever. That’s almost 8% of GDP through the end of next year. The cost to developed economies alone will be similar to that in the recessions of 2008-2009 and 1974-1975. Even with unprecedented levels of monetary and fiscal stimulus, GDP is unlikely to return to its pre-crisis trend until at least 2022.

The Bank for International Settlements Bank for International Settlements
The BIS is an international organization founded in 1930 charged with fostering international monetary and financial cooperation. It also acts as a bank for central banks. At present, 60 national central banks and the ECB are members.
has warned that disjointed national efforts could lead to a second wave of cases, a worst-case scenario that would leave US GDP close to 12% below its pre-virus level by the end of 2020. That’s way worse than in the Great Recession of 2008-9.

The US economy will lose 20m jobs according to estimates from @OxfordEconomics, sending unemployment rate soaring by greatest degree since Great Depression and severely affecting 40% of jobs.

And then there is the situation for the so-called ‘emerging economies’ of the ‘Global South’. Many of these are exporters of basic commodities Commodities The goods exchanged on the commodities market, traditionally raw materials such as metals and fuels, and cereals. (like energy, industrial metals and agro foods) which, since the end of the Great Recession have seen prices plummet.

And now the pandemic is going to intensify that contraction. Economic output in emerging markets is forecast to fall 1.5% this year, the first decline since reliable records began in 1951.

The World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

reckons the pandemic will push sub-Saharan Africa into recession in 2020 for the first time in 25 years. In its Africa Pulse report the bank said the region’s economy will contract 2.1%-5.1% from growth of 2.4% last year, and that the new coronavirus will cost sub-Saharan Africa $37 billion to $79 billion in output losses this year due to trade and value chain disruption, among other factors. “We’re looking at a commodity-price collapse and a collapse in global trade unlike anything we’ve seen since the 1930s,” said Ken Rogoff, the former chief economist of the IMF.

More than 90 ‘emerging’ countries have inquired about bailouts from the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
—nearly half the world’s nations—while at least 60 have sought to avail themselves of World Bank programs. The two institutions together have resources of up to $1.2 trillion that they have said they would make available to battle the economic fallout from the pandemic, but that figure is tiny compared with the losses in income, GDP and capital outflows.

Since January, about $96 billion has flowed out of emerging markets, according to data from the Institute of International Finance, a banking group. That’s more than triple the $26 billion outflow during the global financial crisis of a decade ago. “An avalanche of government-debt crises is sure to follow”, he said, and “the system just can’t handle this many defaults and restructurings at the same time” said Rogoff.

Nevertheless, optimism reigns in many quarters that once the lockdowns are over, the world economy will bounce back on a surge of released ‘pent-up ‘ demand. People will be back at work, households will spend like never before and companies will take on their old staff and start investing for a brighter post-pandemic future.

As the governor of the Bank of (tiny) Iceland put it: “The money that now being saved because people are staying at home won’t disappear – it will drip back into the economy as soon as the pandemic is over. Prosperity will be back.” This view was echoed by the helmsman of the largest economy in the world. US Treasury Secretary Mnuchin spoke bravely that : “This is a short-term issue. It may be a couple of months, but we’re going to get through this, and the economy will be stronger than ever,”

Former Treasury Secretary and Keynesian guru, Larry Summers, was in tentative concurrence: “the recovery can be faster than many people expect because it has the character of the recovery from the total depression that hits a Cape Cod economy every winter or the recovery in American GDP that takes place every Monday morning.” In effect, he was saying that the US and world economy was like Cape Cod out of season; just ready to open in the summer without any significant damage to businesses during the winter.

That’s some optimism. For when these optimists talk about a quick V-shaped recovery, they are not recognising that the Covid-19 pandemic is not generating a ‘normal’ recession and it is hitting not a just a single region but the entire global economy. Many companies, particularly smaller ones, will not return after the pandemic. Before the lockdowns, there were anything between 10-20% of firms in the US and Europe that were barely making enough profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. to cover running costs and debt servicing. These so-called ‘zombie’ firms may have found the Cape Cod winter the last nail in their coffins. Already several middling retail and leisure chains have filed for bankruptcy and airlines and travel agencies may follow. Large numbers of shale oil companies are also under water (not oil).

As leading financial analysts Mohamed El-Erian concluded: “Debt is already proving to be a dividing line for firms racing to adjust to the crisis, and a crucial factor in a competition of survival of the fittest. Companies that came into the crisis highly indebted will have a harder time continuing. If you emerge from this, you will emerge to a landscape where a lot of your competitors have disappeared.”

So it’s going to take a lot longer to return to previous output levels after the lockdowns. Nomura economists reckon that Eurozone GDP is unlikely to exceed Q42019 level until 2023!

And remember, as I explained in detail in my book The Long Depression, after the Great Recession there was no return to previous trend growth whatsoever. When growth resumed, it was at slower rate than before.

Since 2009, US per capita GDP annual growth has averaged 1.6%. At the end of 2019, per capita GDP was 13% below trend growth prior to 2008. At the end of the 2008–2009 recession it was 9% below trend. So, despite a decade-long expansion, the US economy fell further below trend since the Great Recession ended. The gap is now equal to $10,200 per person—a permanent loss of income. And now Goldman Sachs is forecasting a drop in per capita GDP that would wipe out all the gains of the last ten years!

Then there is world trade. Growth in world trade has been barely equal to growth in global GDP since 2009 (blue line), way below its rate prior to 2009 (dotted line). Now even that lower trajectory (dotted yellow line). The World Trade Organisation WTO
World Trade Organisation
The WTO, founded on 1st January 1995, replaced the General Agreement on Trade and Tariffs (GATT). The main innovation is that the WTO enjoys the status of an international organization. Its role is to ensure that no member States adopt any kind of protectionism whatsoever, in order to accelerate the liberalization global trading and to facilitate the strategies of the multinationals. It has an international court (the Dispute Settlement Body) which judges any alleged violations of its founding text drawn up in Marrakesh.

sees no return to even this lower trajectory for at least two years.

But what about the humungous injections of credit and loans being made by the central banks around the world and the huge fiscal stimulus packages from governments globally. Won’t that turn things round quicker? Well, there is no doubt that central banks and even the international agencies like the IMF and the World Bank have jumped in to inject credit through the purchases of government bonds, corporate bonds Corporate bonds Securities issued by corporations in order to raise funds on the Money Markets. These bonds resemble government bonds but are considered to be more risky than government bonds and other guaranteed securities such as Mortgage Backed Securities, and therefore pay higher interest rates. , student loans, and even ETFs on a scale never seen before, even during the global financial crisis of 2008-9. The Federal Reserve FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank :
’s treasury purchases are already racing ahead of previous quantitative easing programmes.

And the fiscal spending approved by the US Congress last month dwarfs the spending programme during the Great Recession.

I have made an estimate of the size of credit injections and fiscal packages globally announced to preserve economies and businesses. I reckon it has reached over 4% of GDP in fiscal stimulus and another 5% in credit injections and government guarantees Guarantees Acts that provide a creditor with security in complement to the debtor’s commitment. A distinction is made between real guarantees (lien, pledge, mortgage, prior charge) and personal guarantees (surety, aval, letter of intent, independent guarantee). . That’s twice the amount in the Great Recession, with some key countries ploughing in even more to compensate workers put out of work and small businesses closed down.

These packages go even further in another way. Straight cash handouts by the government to households and firms are in effect what the infamous free market monetarist economist Milton Friedman called ‘helicopter money’, dollars to be dropped from the sky to save people. Forget the banks; get the money directly into the hands of those who need it and will spend.

Post-Keynesian economists who have pushed for helicopter money, or people’s money, are thus vindicated.

In addition, suddenly the idea, which up to now was rejected and dismissed by mainstream economic policy, has become highly acceptable, namely fiscal spending financed, not by the issue of more debt (government bonds), but by simply ‘printing money’, ie the Fed or the Bank of England deposits money in the government account to spend.

Keynesian commentator Martin Wolf, having sniffed at MMT before, now says: “abandon outworn shibboleths. Already governments have given up old fiscal rules, and rightly so. Central banks must also do whatever it takes. This means monetary financing of governments. Central banks pretend that what they are doing is reversible and so is not monetary financing. If that helps them act, that is fine, even if it is probably untrue. …There is no alternative. Nobody should care. There are ways to manage the consequences. Even “helicopter money” might well be fully justifiable in such a deep crisis.”

The policies of Modern Monetary Theory (MMT) have arrived! Sure, this pure monetary financing is supposed to be temporary and limited but the MMT boys and girls are cock a hoóp that it could become permanént, as they advocate. Namely governments should spend and thus create money and take the economy towards full employment and keep it there. Capitalism will be saved by the state and by modern monetary theory.

I have discussed in detail in several posts the theoretical flaws in MMT from a Marxist view. The problem with this theory and policy is that it ignores the crucial factor: the social structure of capitalism. Under capitalism, production and investment is for profit, not for meeting the needs of people. And profit depends on the ability to exploit the working class sufficiently compared to the costs of investment in technology and productive assets. It does not depend on whether the government has provided enough ‘effective demand’.

The assumption of the radical post-Keynesian/MMT boys and girls is that if governments spend and spend, it will lead to households spending more and capitalist investing more. Thus, full employment can be restored without any change in the social structure of an economy (ie capitalism). Under MMT, the banks would remain in place; the big companies, the FAANGs would remain untouched; the stock market would roll on. Capitalism would be fixed with the help of the state, financed by the magic money tree (MMT).

Michael Pettis is a well-known ’balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. sheet’ macro economist based in Beijing. In a compelling article, entitled MMT heaven and MMT hell, he takes to task the optimistic assumption that printing money for increased government spending can do the trick. He says: “the bottom line is this: if the government can spend these additional funds in ways that make GDP grow faster than debt, politicians don’t have to worry about runaway inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. or the piling up of debt. But if this money isn’t used productively, the opposite is true.

He adds: “creating or borrowing money does not increase a country’s wealth unless doing so results directly or indirectly in an increase in productive investment… If U.S. companies are reluctant to invest not because the cost of capital is high but rather because expected profitability is low, they are unlikely to respond to the trade-off between cheaper capital and lower demand by investing more.” You can lead a horse to water, but you cannot make it drink.

I suspect that much of the monetary and fiscal largesse will end up either not being spent but hoarded, or invested not in employees and production, but in unproductive financial assets – no wonder the stock markets of the world have bounced back as the Fed and the other central banks pump in the cash and free loans.

Indeed, even leftist economist Dean Baker doubts the MMT heaven and the efficacy of such huge fiscal spending. “It is actually possible that we could be seeing too much demand, as a burst of post-shutdown spending outstrips the immediate capacity of the restaurants, airlines, hotels, and other businesses. In that case, we may actually see a burst of inflation, as these businesses jack up prices in response to excessive demand.” – ie MMT hell. So he concludes that “generic spending is not advisable at this point.”

Well, the proof of the pudding is in its eating and we shall see. But the historical evidence that I and others have compiled over the last decade or more, shows that the so-called Keynesian multiplier has limited effect in restoring growth, mainly because it is not the consumer who matters in reviving the economy, but capitalist companies.

And there’s new evidence on the power of Keynesian multiplier. It’s not been one to one or more, as often claimed, ie. 1% of GDP increase in government spending does not lead to a 1% of GDP increase in national output. Some economists looked at the multiplier in Europe over the last ten years. They concluded that “in contrast to previous claims that the fiscal multiplier rose well above one at the height of the crisis, however, we argue that the ‘true’ ex-post multiplier remained below one.”

And there is little reason that it will be higher this time round. In another paper, some other mainstream economists suggest that a V-shaped recovery is unlikely because “demand is endogenous and affected by the supply shock and other features of the economy. This suggests that traditional fiscal stimulus is less effective in a recession caused by our supply shock. … demand may indeed overreact to the supply shock and lead to a demand-deficient recession because of “low substitutability across sectors and incomplete markets, with liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. constrained consumers.” so that “various forms of fiscal policy, per dollar spent, may be less effective”.

But what else can we do? So “despite this, the optimal policy to face a pandemic in our model combines as loosening of monetary policy as well as abundant social insurance.” And that’s the issue. If the social structure of capitalist economies is to remain untouched, then all you are left with is printing money and government spending.

Perhaps the very depth and reach of this pandemic slump will create conditions where capital values are so devalued by bankruptcies, closures and layoffs that the weak capitalist companies will be liquidated and more successful technologically advanced companies will take over in an environments of higher profitability. This would be the classic cycle of boom, slump and boom that Marxist theory suggests.

Former IMF chief and French presidential aspirant, the infamous Dominique Strauss-Kahn, hints at this: “the economic crisis, by destroying capital, can provide a way out. The investment opportunities created by the collapse of part of the production apparatus, like the effect on prices of support measures, can revive the process of creative destruction described by Schumpeter.”

Despite the size of this pandemic slump, I am not sure that sufficient destruction of capital will take place, especially given that much of the bailout funding is going to keep companies, not households, going. For that reason, I expect that the ending of the lockdowns will not see a V-shaped recovery or even a return to the ‘normal’ (of the last ten years).

In my book, The Long Depression, I drew a schematic diagram to show the difference between recessions and depressions. A V-shaped or a W-shaped recovery is the norm, but there are periods in capitalist history when depression rules. In the depression of 1873-97 (that’s over two decades), there were several slumps in different countries followed weak recoveries that took the form of a square root sign where the previous trend in growth is not restored.

The last ten years have been similar to the late 19th century. And now it seems that any recovery from the pandemic slump will be drawn out and also deliver an expansion that is below the previous trend for years to come. It will be another leg in the long depression we have experienced for the last ten years.

Michael Roberts

has worked in the City of London for over 30 years as an economist. He is author of several books on the world economy: The Great Recession, The Long Depression and World in Crisis. He blogs at

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