9 Nov 2021

Covid and the economy - what we've learnt so far

From Afternoons, 3:10 pm on 9 November 2021

If a black swan is an unpredictable event, the Covid-19 pandemic is a grey rhino, says economic historian Adam Tooze.

“A grey rhino is a rhino and is scary and you really ought to be paying attention... but somehow you don't."

Adam Tooze

Adam Tooze Photo: Supplied

Adam Tooze is the author of Shutdown: How Covid Shook the World's Economy. He also hosts the podcast Ones and Tooze.

We were warned repeatedly that another pandemic would befall the planet, Tooze tells Jesse Mulligan.

“For about half a century, epidemiologists and virologists have been warning us of precisely this kind of a thing.”

In that community, optimism from eradicating or controlling many diseases such as smallpox and polio had been giving way to pessimism as new diseases and mutations emerged, Tooze says.

“Since the early 2000s the world has periodically gone through a whole series of panics; there was the very widespread concern about a series of avian flu outbreaks in Hong Kong.

“Then we had the swine flu panic, then there was MERS, Zika... and there are certain parts of the world, furthermore, where virologists stressed that we really need to be paying attention, and one of them is central China.”

Governments had been modelling for just such an event, yet the Covid-19 pandemic seems to have come as a surprise, he says.

“Economists tried to actually model the scale of a pandemic. in 2019, people were running war game exercises and simulations; the Davos World Economic Forum hosted a bunch of these, national governments do it all the time.

“So, really, we have been anticipating it, but when it came, it was nevertheless a huge sort of baffling incomprehensible shock.”

In March 2020, as news of Covid spread, something shocking was also happening to the financial markets, Tooze says.

“What people were selling was not just private debt and private equities - so, shares - they were also selling the thing that normally folks run to in a crisis, which is they were selling US treasuries [bills, notes and bonds issued by the US federal government].”

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Photo: supplied

The US treasury market is “deep, liquid and gigantic" – you can pretty much always sell a US government bond, he says.

“It’s like the market for some generic family car … there’s always a buyer and somebody will pick it up, and then they'll resell it.”

“It was $US18 trillion before the crisis began. All of the big financial players are in there because they use US treasuries as the piggy bank for much more dangerous things they have in their portfolio.

“So as long as you've got enough US treasuries in there, you know, you can cash them for cash. So, you don't actually have to hold cash.”

Early last year prices were going in the wrong direction, people were selling US treasuries when you'd expect them to be buying them.

“The price was going down rather than up, which is what you'd like to see.

“The other thing is the market just wasn't working. No one was buying, everyone wanted to sell. And that was the truly terrifying thing.”

The Federal Reserve stepped in and started to buy these securities themselves, Tooze says, and a “staggering" amount had to be purchased in order to stabilise the economic markets.

“They were buying $1 million a second. They bought $70 to $80 billion a day of this stuff. They bought 5 percent of the market in a matter of weeks.”

Tooze met a banker in Hong Kong who couldn't stop talking about how traumatic it was to be working in the financial market at that time.

“He said ‘There was this day I tried to sell like 2 billion treasuries. as you do. And I couldn't get rid of them ... I stumbled out of my office in Hong Kong and looked up at the skyscraper that my apartment’s in and said 'If I can't sell those treasuries, I can't even figure out what I'd be able to sell my apartment for’.

“Because that's how closely these things are coupled, everything is anchored on the Treasury. The Treasury is the thing which you know you can sell and so from that everything else is benchmarked in degrees of non-saleability and therefore rate of return.

“So if this thing which normally yields a very small return but is essentially infinitely sellable, is no longer sellable, your entire world collapses.”

The market distortion caused by that huge intervention isn't going anywhere, Tooze says.

“How far away are we from the precipice now? And can we start pretending as though everything's normal again? And that's what [central banks] are discussing.”

A similar level of policy aggressiveness has not been observable with vaccine roll-outs, he says.

“[We've seen] an absolutely mind-bending failure of imagination and political leadership. I think social scientists are going to look back at this moment forever after and go 'it's extraordinarily difficult to explain really, other than simply to say that politicians are totally lacking in imagination and totally parochial'.

“And this is a global issue, so they don't care. But it's so short-sighted because we desperately need to minimise the risk of a new variant emerging.

“That's the one thing that could really blow up everyone's happy outlook for 2022. And we know how to do it, and it doesn't cost a lot of money. And it's in everyone's economic interest to do it. And yet we're still not doing it.”

Covid-19 case numbers are on the rise worldwide, Tooze says.

“We're sitting idly as the cases pile up, hundreds of thousands of new infections a day, 7000 people dying a day globally, and every single one of those bodies is a possible incubator of something that could blow up everyone's expectations for next year.”

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