Renowned economic historian Adam Tooze shares his insights on the economic history of Nazi Germany, the global economic and political order post World War I, and the economic effects of the 2008 financial crisis.
He also discusses the economic impacts of the 2020 pandemic, comparing it to the Spanish flu of 1918-1919, and the potential for a Chinese financial crisis resulting from the coronavirus.
Unlikelihood of V-shaped Recovery
A V-shaped recovery, similar to the one after the Spanish flu, seems unlikely due to differences in modern economies, such as the percentage of agriculture versus face-to-face services, differences in inventory, and differences in personal risk aversion.
Possibility of a Bank-Centered Crisis
A bank-centered crisis could occur if a significant percentage of Americans are not able to pay their mortgages.
Even with liquidity injections from the Federal Reserve, banks may not be able to overcome this hurdle unless the issue is addressed more directly.
Potential for Stagflation
The massive monetization that has occurred could lead to a price response, potentially causing stagflation and a higher rate of price inflation.
However, the current macroeconomic circumstances suggest a scenario of secular stagnation is more likely.
Inflation Risk
The potential for inflation risk to rise and whether we would be able to target a rate of price inflation is uncertain.
It’s either the status quo and what bond markets expect now, or a leap to 15 or 20 percent because the velocity of money may not be predictable or controllable in traditional ways.
Potential Weak Points in China’s Economy
The real estate sector and the shadow banking system in China could be potential weak points leading to a financial crisis.
A foreign exchange run, similar to what happened in China in 2015-2016, is also a possibility.
Emerging Economies’ Vulnerability
Emerging economies are vulnerable due to a range of different pressures acting on them.
These include their relative exposure to the medical crisis, the oil crisis, the degree of foreign ownership of their sovereign debt, and their dependence on foreign borrowing in dollars.
Risk of Non-Bank-Centered Financial Crisis
There is a concern about a financial crisis that is not centered on banks, but rather on various credit markets.
The risk is more diffuse this time around, and it’s unclear how a densely packed urban service sector economy recovers under a regime of periodic lockdowns and managed social distancing.
Tracking the Financial Crisis
The liquidity of Treasury securities and the bid-ask spread on Treasuries can be used as a way of tracking the financial crisis.
Fluctuations in price and gaps in the market were of concern to central banks in March, but the normal relationships between equity markets and bond markets seem to have been restored.
Treaty of Versailles and Keynes
While Keynes’ critique of the Treaty of Versailles is valid to an extent, the evidence of the 1920s shows that with the right framework, the Weimar Republic was capable of bearing a reasonable burden of reparations.
The problem was that the German political class had no interest in accepting that responsibility.
What’s been striking about the 2020 pandemic is that we have chosen an extraordinarily high-cost route. We have chosen a comprehensive lockdown as the default strategy for dealing with this. – Adam Tooze
Asset Purchases by Central Banks
The large scale of asset purchases by central banks has restored the normal set of relationships between equity markets and bond markets, with government debt markets performing a safety function.
If this were to become destabilized, it would set off warning lights.
Conditions for Stagflation
The conditions under which stagflation and a higher rate of price inflation become the most likely possibility include massive monetization that could lead to inflation of 4 or 5 percent, which could solve many problems by acting as a tax on nominal assets.
