We can now say that the world’s current state of affairs is surreal. While we perhaps want to focus on the COVID-19 pandemic and people’s health, we’d be remiss not to look at the paradigm shifts in the economy this current crisis is triggering. All around wealthy nations are opening the floodgates of central banks and unleashing financial stimuli on unprecedented scale. While swift action is commendable, it is now more important than ever to look at who will stand to benefit and what global order or disorder might emerge from this. While there are parallels to the Financial Crisis of 2008 and the economic downturn after 9/11, we urgently need to demand that job market reforms and modernization of infrastructure be part of the response just as corporate and financial market bailouts already are.
I wonder what Greta Thunberg is thinking these days. We have finally mobilized more swiftly and more comprehensively than probably even her most ambitious visions would have asked for. While markets are crashing yet again, governments are racing to get a grip and citizens are under movement restrictions, we all wonder: What is the new normal that eventually will emerge from this?
The Great Equalizer
Just like a body with heightened risk makes itself an easy target for the virus, we have allowed our systems to become easy targets for the disruption and upheaval crises bring. Too long have we focused on systems that incentivize competition and risk instead of systems that incentivize stability, safety and compassion. Now, the cold steel of the virus’s scalpel is opening the puss and exposing the cavities in our systems. A virus can only be as effective as we’ve made ourselves vulnerable. The economic disruption that this pandemic caused is due to the quick sand that western societies have built our financial and labor systems on top of. This pandemic acts as a knife in the sides of those systems such as healthcare and welfare that we have neglected to modernize and acts as a scalpel to incise the activities we have previously spent trillions on.
Lets begin with this: only wealthy countries have the capacities and infrastructure to implement wide-spread testing. Any delays in this mostly originated on the policy level. Only wealthy countries top the lists of most confirmed Corona cases. That should send a shiver down your spine. The virus is everywhere and only we are able to identify and act. The havoc it will wreak in poor corners of this planet that cannot afford to combat it, is unimaginable at this point. Global emancipation and proper integration of all groups is a public health priority more than ever. We simply cannot afford the wanton precarity of so many human lives.
Re-ordering the Economy
The events that we are witnessing in western industrialized countries go beyond testing and medical countermeasures however. Wealthy states worldwide are unloading financial relief packages that dwarf their response to the financial crisis of 2008. This is not wrong in itself, given that the economic disruption and the disruption to people’s lives and livelihoods is much larger than what we saw ten years ago. COVID-19 is causing what star economist Mohamed El-Erian and other experts call a sudden economic stop: The magnitude of this current sudden economic stop is shocking and new. It means that people cannot go out and about on their usual daily affairs, so can not form either the demand nor the supply that usually make up the pulse of our capitalist systems and consequently people’s livelihoods. The ripple effects will be felt for years in our finely spun system of international trade and are likely to create larger problems like a debt crisis or a spiraling housing market. Would the banks that were propped up with taxpayer money refrain from evicting the home owners who default on their mortgage payments in the upcoming recession?
In 2019, western economies were already cooling off and it is now safe to assume that the virus outbreak delivered a final blow. While only felt by few participants in the market, we have actually had an economic boom in western countries since 2009. It marks the longest period of economic expansion in history, yet the main feature of the last ten years was drastic income inequality. We are now firmly in a recession and based on the novelty of the situation you could also say we’re flying blind like never before.
The Dow Jones Industrial Average— one of Trump’s fetishes— has lost a third of its valuation in little more than 20 days. Last time we saw movements like this was during the Great Depression. Whoever thinks we will go back to a slightly different normal might want to give this another thought. How we act now will only make the crucial difference between whether we’ll plunge into a full blown recession or a depression of unknown proportion.
The response on the policy level has been overwhelming thus far. Let's first look at what central banks have done so far in compensating for the fallout of the Virus.
Since the Financial Crisis of 2008, central banks in most wealthy countries of the planet have been in a difficult position. Their main instrument— the key interest rate— was kept on historic lows for years. This reflected both a global trend of declining interest efficacy but also hindered their inability to navigate in an increasingly complex market. Most notably: whenever market disruptions were on the horizon and the financial markets sent distress signals, the central banks were there to act, buying bad papers and assets from banks and making money cheaper. What usually motivates central banks to do this is the hope to stimulate the real economy (meaning you and me) via stimulating the financial markets and more specifically consumer banks. There’s a lot to say about this belief— lets just assume that these days it isn't more than a cargo cult or rhetoric that is applied when huge sums of money are shoveled into the financial sector, which claims to be in the little man’s interest.
So basically, there wasn’t much more appetite for cheap loans left. In the years after the Financial Crisis of 2008 global debt levels had risen to 30% above what we had before 2007. The banks were sitting on the money the central banks were handing out liberally to them. Instead of injecting it into the economy as would have been their job, they used it to speculate and invest in an increasingly dysfunctional and risky market. Bad deals were handed back to the central banks. This whole process is known as Quantitative Easing.
Quantitative Easing wasn’t a new concept in the years after the Financial Crisis, but it had never been applied on this scale. The uncertainty that arose from the calamity and shock of the Great Recession led to risky action. The famous ‘whatever it takes’ approach that central banks resorted to in order to save big banks and others in the financial industry, led to wide-spread and long-term use of instruments that hadn’t been tried and tested before.
Screenshot from Mohammad Al-Hasani
Casino Without Risk
Economists would tell you that Quantitative Easing is only considered a short-term relief instrument. It shouldn’t be applied in the long term. It makes an already dysfunctional market even more fragile— especially to outside shocks. It breeds what economists call zombie-businesses: companies that cannot sustain themselves on their own and increasingly live off of debt and outside money that they will sooner or later default on. Even worse, in such a market, businesses are not incentivized to modernize and evolve. Since 2008, the US Federal Reserve has made available 4 Trillion USD to the US financial markets through these avenues and some of that money has undoubtedly gone into propping up market dysfunction and debt-dependent zombie businesses.
This is where the notorious stock buybacks come from. Instead of using the money to sustainably grow the economy, these taxpayer funds ended up contributing to the super-wealthy. What central banks ended up doing was both controlling volatility on financial markets and overall economic growth in a granular fashion, perhaps seeking to protect Western Democracies from the turmoil and uncertainty the unhinged financial markets created in the aftermath of 2008.
Now, in the face of the Corona crisis, these same central banks have had little room to act to begin with. Key interest rates can’t be lowered much further and the markets had remained in their unresolved dysfunction since the last crisis. In early February, the Chinese central bank was the first to act. It swiftly cut rates and made more than a trillion Yuan available in order to stabilize the financial markets and the economy(1).
Soon after the gravity of the outbreak became apparent to other governments in the EU and US, their central banks followed suit. The US Federal Reserve has been moving at breakneck speed. A headline on Yahoo Finance read: “Bare-knuckle Fed [the US central bank] fires nuclear kitchen sink named ‘Big Bertha’ out of its bazooka”(2). Do you feel reassured yet?
We are right at the beginning of this economic crisis and this is the level of sane and sustainable approaches we are being offered. Most notably, the Federal Reserve announced to continue Quantitative Easing indefinitely. This might sound trivial but it is not. It is the acceptance that this market won’t grow out of its dysfunctional state of affairs. The Fed has also slashed key interest rates and will facilitate loan programs in the hundreds of billions.
Doesn’t it feel like we’re already firing away all our silver bullets?
A few days after, the US government agreed on a 2 Trillion USD stimulus package— the most expensive piece of legislation in the history of Congress. While it also contained short-term financial help to the tune of 250 Billion USD for households (1200 USD per adult) and about 130 Billion USD in financial support for hospitals, a quarter of the entire sum allocated— 500 Billion USD— will go to corporations. This doesn’t even include small businesses who were additionally allocated 350 Billion USD. Again. During an unprecedented global health crisis, the already underfunded health sector receives 130 Billion USD in immediate financial support, while medium and large businesses stand to receive 500 Billion USD of taxpayer money.
Post from Shaun King's Instagram, 25/03/2020
As of Tuesday, March 24th, the German government made available through parliamentarian fiscal packages a total of 750 Billion Euros, while the European Central Bank put together another 750 Billion Euros for the European Financial Markets.
We’re just at the beginning of this and while it is pertinent to act, we don’t even know what direction the current crisis is pushing us. Western economies seem more than willing to give in to their age-old impulses and muscle memory. But what if we’ve safeguarded the money markets from their own risk-driven volatility and still haven’t achieved anything meaningful? For good or bad what we’re witnessing right now is perhaps the greatest transformation in the post-WWII era. We need to be vigilant with the time and resources that are left and take charge of the inevitable transformation of the systems in which we live and work.
Reverse-contamination is a term Mohamed El-Erian has used in almost every of the many interviews he gave last week. What it basically means, is that the financial sector and the dysfunction it has accrued over the last ten years (conservatively speaking) won’t be capable of sending healthy impulses into the real economy. On the contrary: it will reverse contaminate the real economy. Instead of making things better, it will make things more volatile and amplify risks instead of mitigating them. Already, investors have been betting their money on the prospects of government-bailouts and giant government stimulus packages.
If all fails, you can still bet on governments swooping in to save the stock markets in what would be the stock-buy-backs-on-steroids of the century.
A working family in the United States might receive anything between 3000-4000 USD as a one-time help payment from the US government stimulus package mentioned above, during this sudden economic stop of uncertain duration. It might get them through a month or two. But what then? They will certainly have to pay off the 2 Trillion USD the American government has put on the taxpayer’s credit card.
The New Normal
Do you remember how in the year before this crisis erupted, Bernie Sanders was constantly being lambasted for how he planned to pay for Medicare for All? This stimulus proves that Medicare for All was not only possible but probably a safe investment as it would have made the American health care system more resilient to this health-crisis.
A question that I keep coming back to over the past weeks is: What are we normalizing right now that perhaps we shouldn’t?
After 9/11 we accepted a new normal of government surveillance. We got used to being listened to, our data gathered and people zapped away from the face of the earth in hyper-technocratic extrajudicial drone killings. We were in a state of shock and witnessed how the financial markets were being prioritized over people’s actual livelihoods. What else could we have done? We were busy watching governments restrict our freedom, and surveil our activity online and off at an unprecedented magnitude. A couple wars in the Middle East just added the right pazzazz to how we felt back then…
After the Financial Crisis of 2008 we accepted economic dysfunction. We became used to the 1%, and that giant corporations, like the auto industry, would be bailed out with taxpayer money and we got used to unlimited liquidity from central banks that only ended up serving the financial sector. What did they deliver in return for our complacency? Safe jobs and sustainable cars?
We accepted that people would lose their homes while the banks who had run those same people into that mess, received giant bail-outs. We named the one percent and noticed dropping numbers of unemployment in western economies yet didn’t critique the rising levels of precarity for those same workers. We didn’t challenge our governments enough to care for us, we didn’t expect them to reform and modernize and look out for people amid a growing global climate of fear and catastrophe. We didn’t press them to enforce meaningful labour markets and health care reforms. We didn’t ask for the financial sector to be reformed. Instead, we witnessed how endless amounts of money disappeared into it. We watched our governments wrangle a debt-driven market that would still pay out giant bonuses to execs and free their entrepreneurial risk-taking from consequences via continuous tax cuts, bailouts etc. When you hear people use the phrase “socialism for the rich and rugged individualism for the poor”, this is what they mean.
Now what? What is the new normal after this?
We are experiencing an unprecedented wave of Crisis Communism and Disaster Capitalism. Companies that are falling flat on their faces are being bailed out with giant sums of money. Will this translate into an economy the consumer/voter/citizen/human envisions? An economy that looks forward in order to mitigate risks like the current outbreak? Remember the virus’s scalpel. It exposes what is functional and where dysfunction lies. We recognize now that healthcare workers, teachers, and cashiers are system critical— a good reminder they should not only be applauded but compensated to reflect that status.
Years ago, Naomi Klein delivered a framework for this: The Shock Doctrine (2007). Now Slavoj Žižek and Byung-Chul Han are speculating on what trajectory this shock will send us in. Authoritarian, sterile police states with citizens under constant lockdown or the unmasking of a dysfunctional capitalist system and the birth of something new. At least, no one talks about the post-truth era, as the undeniable virus is revealing how faulty that concept was in explaining our state of reality. This crisis exposes autocrats who want to cement their power more than they want to avert a crisis. It also shows where our hidden autocrats are.
Amazon Must be Nationalized
Amazon is looking to hire 100.000 new workers. The company has seen huge gains in revenue since their deliveries have also become system-critical to societies under quarantine. At the same time, the profile of the health crisis allows Amazon to dictate that henceforth workers shall not congregate, let alone unionize. In a moment like this, when a private company becomes so powerful over workers' lives and so rich off of a public health crisis, shouldn’t it be nationalized? At least for the time being?
US weekly unemployment claims from 2000 to last week, Graph from The Guardian - notice the vertical increase denoting the latest numbers from this week
Nobel-laureate Joseph Stiglitz expressed his concern in a recent interview that we’ve left too many exposed for too long. The economic fallout after a crisis wouldn’t need to be like this— homeschooling your kids and performing your job over months of such a lockdown not knowing how long your employment is gonna last. Today a record of 3.3 Million Americans filed for unemployment (a mere week into the economic crisis). The Dow Jones however is rallying for the second day after the extent of the financial and monetary packages have become clear.
Tweet from Robert Reich, 18/03/2020
Similarly, former Clinton-labour-secretary Robert Reich has been tweeting for weeks: not corporations and banks but workers should receive bail-outs. If no one defaults on their mortgage payment, mortgage loans and markets wouldn’t go bad. The banks won’t see destabilization. It’s the opposite of El-Erian's soon to be famous reverse-contamination: Healthy workers and households send healthy impulses and stabilize markets.
This is maybe the last time for quite some time that we can spend resources on this level, depending on how long we will be in a recession. Already a few weeks into the crisis, unseen amounts of resources have been spent and allocated before the underlying tectonic shifts in power and wealth have become clear. We cannot foresee how we will work, consume, socialize, and care for ourselves, our families or communities (4), after this but our governing bodies have already decided who will get a head start. What societal contract are we writing for the decades ahead? If you have kids and you think of the moment, when they will live free from your influence and support, don’t you wish tremendous changes will have manifested by then?
Our economic system was created in the image of a shark. If it stops moving, it dies. Do you want to suffocate alongside it? Do you want to live in a world, where based on a virus outbreak, Jeff Bezos gains billions in a couple of weeks, while at the same time nurses in New York are being handed garbage bags to use as personal protective equipment?