As COVID-19 wreaks havoc around the world we look at how investors could be well positioned in bond markets to succeed in the new global economy.
If humans are ever to explore distant planets and the vast outreaches of space, scientists must decide how to keep people alive (and sane) through enormous journey times. Astronauts must arrive at their strange new destinations rested and ready to work, even after years of travel. Current thinking points to a form of hibernation where, at the outset, astronauts are chilled and metabolisms depressed to a fraction of their typical rate – so called ‘hypothermic torpor’1.
So far, so much science fiction. But now governments, policy makers and economists around the world wrestle with a similar problem. How to safely put economies into hibernation so that companies and workers emerge from their sleep pods of isolation fit and raring to go when the COVID-19 crisis has passed?
Tried and tested techniques are of no use. In past downturns, policy makers have relied on approaches that supported current spending; so for example lower mortgage rates and tax cuts. But clearly these will not work today when consumers and business are in lockdown. If more direct life support was not provided, then productive capacity (both capital and labour) would be so damaged that a full recovery from the crisis would take years.
Instead, most countries have rightly taken a far more interventionist approach, and one that just a few weeks ago would have read like economic science fiction for many capitalist and market led economies; an unprecedented peacetime expansion of fiscal spending, tax and mortgage holidays, corporate bailouts, wage subsidies, corporate loan guarantees, unlimited quantitative easing and extensive support for financial markets. The numbers are staggering, with packages in many countries easily reaching 10-20% of GDP if fully exercised. And that is before we can be sure how the crisis will evolve and how the global economy will cope. We should not imagine we have seen the end of the life support.
The immediate problem is dealing with the havoc wreaked by COVID-19 to the demand and supply side. But so large are the numbers, and so frequent the announcements, that it is easy to become blasé about how extraordinary these government programs are and how uncertain the long-term consequences will be. As every sci-fi movie-goer knows, when the sleep pods open and astronauts emerge bleary eyed into a new world, that is usually when the monsters appear.
You can read the full report here.