Tuesday10 March 2020 ★ FINANCIAL TIMES 9

Opinion

A

nyone who is knowledgea-

ble and plain-speaking will

tell you that the negative

e c o n o m i c i m p a c t o f

the coronavirus outbreak

will probably be big, that monetary

policy will be of little use to counteract

it, and thatco-ordination between polit-

ical leaders nd central bankers is botha

essential and unlikely.

What the US Federal Reservehas to

offer —slightly cheaper borrowing costs

and/or printing money and buying

financial assets — won’t give help to

those who need it. What those people

and companies in distress will need

(besides good medical support) is finan-

cial support to survive through serious

temporary declines in their incomes.

While the emergence of coronavirus,

and the economic shock that will come

from it, is a surprise, several things have

been obvious for some time.

First, it has been clear that an eco-

nomic downturn would someday come

from one trigger or other. Second, that

the US economy isheavily indebted.

Third, that with interest rates near zero

monetary policy alone cannot be very

stimulative.

Fourth, that we are now in the part of

the long-term debt cycle when there

needs to be good co-ordination between

fiscal and monetary policymakers to

handle downturns well. And last, but

not least, it is obvious that the big wealth

and political gaps we are now experienc-

ing will make such co-ordination hard

to come by.

Looking back to periods in history

when this configuration of circum-

stances occurred (the last time was in

the 1930s), the key differentiating fac-

tor between success and failure was the

ability of fiscal and monetary policy

leaders to co-ordinate.

So what needs to be done now? Most

importantly, those who will be hardest

hit by the virus need to be protected via

fiscal policies such as bridge loans and

financial assistance.

Some people will argue that providing

such assistance is a bad idea. They

say that our Darwinian economic

system is designed to shake out those

who don’t manage their finances well,

or that fiscal assistance willwiden

the deficit.

Neither of those arguments makes

any sense to me. This crisis is not a test

of people and companies’ economic via-

bility, and the cost of not providing

assistance will be greater than the cost

of providing it.

The coronavirus is a natural disaster,

like a hurricane, that warrants financial

support for responsible people and

companies that would otherwise be

broken by it.

There are many people living near the

poverty line with no financial cushion

whose economic security will be hit as

hard as their health by coronavirus. A

number of otherwise strong companies

likewise won’t be able to withstand the

downturn.

Now imagine adding the twin health

and economic shocks delivered by the

outbreak and where that will lead.

Imagine many companies suffering

debilitating revenue losses, some too

indebted because of persistently cheap

money and other incentives to borrow,

that will force them to cut payments to

their employees and default on their

debts.

Their economic problems will spread

just like the virus. Providing assistance

in this case is not only humane; it is

good economic policy to save produc-

tive people and companies that would

be broken by this situation.

The scale of the support should be in

line with the scale of the crisis. It will

increase the deficit which, all else being

equal, will raise interest rates.

That’s where the Fed might need to

come in to hold interest rates down, if

need be by printing money and mone-

tising the debt. While this fiscal-mone-

tary co-ordination is controversial, it is

the best policy under the circum-

stances, with the economy so indebted

and with other forms of stimulation

ineffective. It is also a policy we all need

to get used to because it is the only way

economic policymakers will be able to

deal with economic downturn in this era

of near-zero interest rates.

The only remaining question to me is

whether our fragmented political sys-

tem, led by people who are more

inclined to fight each other than to co-

operate, can achieve what needs to be

done.

The writer is the founder, co-chairman and

co-chief investment officer ofBridgewater

Associates

Despite political divisions,

governments need to step

in with co-ordinated fiscal

and monetary stimulus

A

mid the market turmoil,

there is a sense the world is

revisiting the financial

upheavals of 2008 which

almost tipped the world

economy into depression. It is not.

Unlike the global financial crisis, this

is not a cripplingcrunch in the banking

or payments and settlements systems.

Instead, the world economy and

markets are going through a rough

patch that has been years in the making.

The tough times are also being ampli-

fied because governments have fewer

ways to respond to them.

The immediate cause of the turbu-

lence is the erosion of three anchors that

had kept markets steady, or even rising,

despite deteriorating fundamentals.

First, the actual and feared impact of

the coronavirus is destroying supply

and demand simultaneously. This has

undermined the momentum of global

economic growth.

Second, central banks are no longer

seen as able to repress financial volatil-

ity through injections of liquidity and

ever-lower interest rates. Policy interest

rates are already negative in Europe.

Third, Saudi Arabia’s decision to

launch anoil price war, which has sent

the price of crude downmore than

20 per cent, has imperilled he viabilityt

of small oil companies and undermined

parts of thecorporate bond market.

As a result, elevated asset prices

have begun to fall back to where fund-

amentals suggest they should trade

(even as fundamentals are also deterio-

rating). Because this correction is

happening in a disorderly manner,

there is a risk of collateral damage to the

financial world and the real economy.

Today’s turbulent markets recall how

they behaved in the financial crisis 12

years ago. So does thegrowing likeli-

hood of recession mong a lengtheninga

list of countries that already includes

Germany, Italy and Japan. Even so,

today’s situation, as unsettling as it is,

differs in an important way.

Because it did not originate among

banks, it does not endanger the nerve

centre of all modern market-based

economies, namely their payments and

settlements systems.

Unfortunately, today is also different

from 2008 in less reassuring ways.

Governments are starting their race

to address today’s turmoil from a lag-

ging position. For too long, they pursued

an unbalanced economic policy mix

that relied on monetary policy to sup-

port growth. Too much policy ammun-

ition has also been fired inefficiently —

such as last week’s 50 basis point rate

cut by the US Federal Reserve, which

was ill-received by markets.

To stop what could become a vicious

cycle, where a worsening real economy

drags down markets and markets then

drag down the economy, governments

must now do several things.

They must use laser-targeted meas-

ures to create a sustainable economic

floor. These could include medical

measures that help contain the virus,

such as free coronavirus testing; policies

to protect society’s most vulnerable,

such as free treatment to Americans

without health insurance; and ways to

ease specific financial market malfunc-

tions, such as illiquidity.

These measures must also use a

co-ordinated “whole of government”

approach. There has been too much reli-

ance on central bank action to boost

growth; governments must now pursue

true productivity-enhancing reforms.

Lastly, there must be supplementary

international co-ordination to establish

what collective actions can be deployed.

The faster this is done, the stronger

the economic turnround will be. That

eventual recovery will be turbocharged

by extremely low mortgage rates and

energy prices, both of which boost con-

sumer purchasing power. The quicker

that markets see this coming, the faster

they will snap back. And this time,

unlike in 2008, that snap back and eco-

nomic recovery will rest on more genu-

ine and lasting underpinnings.

The writer is Allianz’s chief economic

adviser and president-elect of Queens’

College, University of Cambridge

How this market

crash is unlike

the 2008

financial crisis

Mohamed

El-Erian

There is no threat

to the banking

nerve centre of the

international economy

Policymakers must co-operate to fight coronavirus

democracy. Mr Biden has already prom-

ised to “make American moral again”.

But his desire to stand up for human

rights globally will swiftly run into real-

politik (as it so often does). It is hard to

see even a White House led by Mr Biden

taking a tough line with Narendra

Modi’s India in the midst of a confronta-

tion with China.

The growing authoritarianism of Mr

Modi’s rule in India underlines the fact

that there has been a global shift to

nationalism and illiberalism over the

past few years. That shift has been

encouraged by the Trump administra-

tion — but it began before Mr Trump

took office and the changes it has

brought about will persist, even if he

leaves. Brexit will still take place. Reac-

tionary nationalists will still be in power

in China, Russia, Brazil, India, Turkey

and Saudi Arabia. America’s relative

power will still be in decline. Looking

out from the Oval Office, Mr Biden

would survey a very different world

from the one Mr Obama left behind.

[email protected]

decisions to quit Iraq nd not to inter-a

vene in Syria. As vice-president,

Mr Biden was even more cautious —

opposing he troop surge into Afghani-t

stan. The 2015 nuclear deal with Iran —

destroyed by the Trump administration

— will be hard to revive, not least

because of wariness in Tehran.

Many of the themes and maladies of

the Trump years would therefore con-

tinue during a Biden presidency. But

some important things would clearly

change for the better. The dignity of the

presidency would be restored and trash-

talking and conspiracy-mongering

would no longer be the norm in the Oval

Office. Expertise and professionalism in

public life would be respected again and

some of the damage Mr Trump has

inflicted on branches of the govern-

ment, such as theDepartment of Justice,

would be repaired. Crucially, the US

would rejoin international efforts to

tackle climate change.

A Biden administration would cer-

tainly attempt to reassert America’s

moral leadership, by re-emphasising

the importance of human rights and

competition” with China — arguing only

for a more nuanced and intelligent pur-

suit of that strategy.

Indeed, it is distinctly possible that

tensions between Washington and

Beijing would increase in a Biden pres-

idency — since a Democratic adminis-

tration would be likely to add human

rights and the South China Sea to the list

of disputes.

Those in the Middle East and Europe

who yearn for a reassertion of American

leadership would probably be disap-

pointed. A Biden administration would

mount a charm offensive aimed at US

allies and would drop some of the insults

and threats that emanate from the

Trump White House. But America’s

pullback from the Middle East began

during the Obama years with the

country’s relationship with the outside

world. Social and political divisions

within the US, which widened so bru-

tally during the past four years, are

unlikely to give way to a period of heal-

ing. On the contrary, the Republican

party now seems committed to the

nativist Trump agenda, and the para-

noid style that goes with it. A Biden

victory after acoronavirus-induced

recession would quickly be dismissed

as illegitimate — or even the product of a

deep-state conspiracy.

The Trump years have also pro-

foundly changed the relationship

between the US and China — which is at

the heart of the global order. There will

beno significant “reset” n US-Chinai

relations during a Biden presidency.

Before Mr Trump came along, it was the

Democratic party that was the home of

protectionism in the US. Now both

major parties harbour strong protec-

tionist sentiments. And China is seen

not just as an economic rival, but

increasingly as a challenger to US tech-

nological and geopolitical supremacy.

The version of globalisation that existed

before the advent of the Trump presi-

dency will not be restored.

In arecent article, two of the Demo-

crats’ leading foreign-policy thinkers,

Kurt Campbell and Jake Sullivan,

endorsed the “growing consensus that

the era of engagement with China has

come to an unceremonious close”. Mr

Sullivan and Mr Campbell, both of

whom would be likely to take senior jobs

in a Biden administration, accept the

Trump team’s concept of “strategic

J

ust after the 2016 election of US

President Donald Trump, a

Harvard professor remarked to

me: “I think the US can survive

four years of Trump. Eight

years and we’ll really be in trouble.”

Now with theemergence of Joe Biden

as the probable Democratic candidate

to run against Mr Trump in November

— and the political and economic confu-

sion caused bycoronavirus — the Demo-

crats are daring to hope that Mr Trump

will indeed be gone by January. If that

were to happen, many would echo Ger-

ald Ford, who announced after the

Watergate scandal, “Our long national

nightmare is over”.

Many Europeans, hoping for a revival

of the western alliance, share the hope

that the Trump presidency might soon

be dismissed as a weird aberration —

and that an administration led by the

former vice-president would effectively

reset the geopolitical calendar to Janu-

ary 20, 2017, the day Barack Obama left

office. It is a nice idea. And it is one that

Mr Biden, with his references to “my

buddy, Barack”, has encouraged. But it

is also an illusion.

The Trump years have profoundly

changed both America itself and the

Biden cannot

turn back

the clock

The idea that a victory for

the former vice-president

would reset the geopolitical

calendar is an illusion

W

hen you think about

coronavirus, what is

your thought process?

Perhaps if you are a pol-

icymaker or a global

business leader you think about the hit

to economic growth. But otherwise the

likelihood is that your thoughts are of

the risk to you and your family, followed

by concentric rings of friends, col-

leagues and so on. Do we have vulner-

able relatives? How will we get to work?

Will my job be safe? Should I stockpile?

For now, Boris Johnson’s government

is being judged impressionistically on its

handling of thecrisis in the UK. Voters

are giving him the benefit of the doubt.

Brits can congratulate themselves on

the measured intelligence of Chris

Whitty, the chief medical officer, and

an evidence-based debate over whether

to shut down parts of the economy.

But then the UK is still measuring the

outbreak in the hundreds. Ultimately

the response will be judged by the pop-

ulation’s direct experience. Were the

desperately ill denied respirators or

hospital beds? Did the National Health

Service care for our mothers? Did shops

run out of food? An NHS unable to cope

will do Mr Johnson damage, hence the

emphasis on slowing the spread.

There is nothing remarkable or wrong

in this ingrained behaviour. But it

should remind us that this is how most

people view politics. The phrase “all pol-

itics is local”, most widely associated

with Tip O Neill, former Speaker of the

US House of Representatives, is perhaps

the only real iron law of politics. At one

level, MPs understand this well. They

know how any issue plays in their seat.

Take fuel duties. Globally, MPs see the

need for green taxes; locally they know

how many voters rely on cars.

Yet one reason for the rise of populist

movements is that too many leaders for-

got this law. In the UK, as too many of

globalisation’s spoils stayed in the afflu-

ent south east of England, its cause was

championed in abstract concepts,

explaining the benefits of free trade or

immigration to gross domestic product.

There is no benefit in a sharp-suited

politician in London smugly telling

voters Britain is booming if it does not

feel that way to them; if their experience

is cuts to public services and their

children moving away to find a job.

Economically the globalists had a strong

case — good public services require

a strong economy — but they convinced

themselves they had won the argument

in perpetuity and forgot the iron law.

Progressive leaders like Tony Blair

and Bill Clinton, and other so-called

third way social democrats, had a rising

economic tide lifting all boats to manage

the tension between globalisation and

communities. The 2008 financial crisis

changed that. There are few better

examples of globalist disconnect than

George Osborne’s 2012 decision, while

UK chancellor, tocut the top rate of

income tax ven as he was cuttinge

welfare payments. He can argue that tax

revenues rose but this misses the point.

Before that decision he was claiming

that, “We are all in this together”. After-

wards, voters knew that we weren’t.

The success of nationalist populism —

from Mr Trump to Brexit — has been

built on a keener appreciation of this

iron law. The hard truth for liberal inter-

nationalists is that the right has under-

stood this better. The new third way is

less about the path between controlled

and capitalist economics than the route

between localism and globalism.

Mr Johnson’s Brexit advocacy makes

him an unconvincing pilot for this

course. But the prime minister under-

stands the approach even if we doubt his

commitment to it. His aim is to show

people that their voices are being heard,

that their schools and hospitals will

improve. His demand for “levelling up”

is a recognition of the need for more

equitable redistribution of the rewards

of an open economy.

If all politics is local then localism

must inform all politics. (This is why

Labour leadership contender Lisa

Nandy is right to highlight better bus

networks and why, in this crisis,

ministers are right to pledge help for

gig economy workers who need to self-

isolate. We are demanding altruistic

action from people who experience a

weaker contract with society and to

whom employers feel little duty).

One can be entirely cynical of Mr

Johnson’s politics. He will struggle to

square his global Britain rhetoric with

his actions. His Brexit stance may cause

more economic damage than can be rec-

tified by local policies; his immigration

policy may be too hard line for the needs

of key sectors. But he and his allies have

understood, faster than his rivals, that

the iron law cannot be gainsaid and he is

closer to a new third way than his ene-

mies would like to admit.

Globalists may argue this crisis proves

the need for international co-operation.

But recent years suggest the case for

open economies is going to have to be

remade with an unswerving eye towards

local benefits. Those who wish to beat

Mr Johnson and his ilk must find a new

way to frame their arguments, to dem-

onstrate to all voters how lofty ideals

will directly improve their own lives.

Coronavirus is a global phenomenon

experienced locally. So again is politics.

[email protected]

Lofty ideas about open

economies will have to

be sold on directly

improving voters’ lives

A reminder of the iron law of politics

BRITAIN

Robert

Shrimsley

global affairs

Gideon

Rachman

Ray

Dalio

MARCH 10 2020 Section:Features Time: 9/3/2020- 18:37 User:alistair.hayes Page Name:COMMENT USA, Part,Page,Edition:USA, 9, 1