Chief economics commentator for the Financial Times and one of the foremost voices of global economic liberalism, Martin Wolf discussed the coronavirus pandemic, fears that deflation could lead to a global catastrophe and Argentina’s debt restructuring proposal.
You have said that we are facing a catastrophe, one from which we may not really recover from for decades. Why is this one worse than all the previous ones?
I am not completely sure where I said that but it’s not necessarily wrong!
The crucial point is that right now we are experiencing an extraordinary and unprecedented quick collapse of economic activity across the entire globe. That, in itself, will be very bad and lead to very long-run costs, there’s not doubt about that. As it happened in the 1930s, this is leading to very profound changes in international relations, in trade policy and in the world system. If it turns out to be as transformative in those respects over the next two years as it looks like it could be, it could be a catastrophe. Not only a long economic downturn but also, we will not be able to recover in the way we would have hoped due to a resurgence in protectionism, because of increased international conflicts, a breakdown in international cooperation, to the abandonment of poorer countries. For these reasons I fear this could end up as a true catastrophe.
In relation to the 1929 crisis, will this be worse?
I very much hope not. I don’t think we would survive the consequences of something worse. The 1930s led to the Second World War. It’s important to remember that if we look back at the 1930s, what made it a disaster was a set of mistakes. First there was the crash, that was very bad. That led to banking collapses across the world. Those in the early 1930s led to massive depressions. These depressions then led to the elections of fascists in Germany and they led to massive protectionisms and a collapse in world trade. Those disasters led to the great catastrophe of 1930, which was very important for Argentina too … There’s no reason to believe it will end up in that way. But we have been warned and what someone has to do in such a crisis is not to keep making mistakes ... We must cooperate to get out of this. It is a global shock, we have to deal with it globally and we don’t have time to spend blaming other people. Saying China should pay reparations to us won’t do any good. As I said to my colleagues, the last time a major power was asked to pay reparations was Germany after the war and that didn’t end well. We have to remember history and come out of this as well as we possibly can.
In a recent column, you wrote that "the global economy would collapse even if policy makers weren't imposing blockades." Would the crisis have been just as disastrous without quarantines?
One of the questions I have been trying to evaluate is what would have happened to our economies if the governments had simply said ‘Do what you like.’ We don’t know the answer, but it’s pretty clear that a large number of people over 40, who don’t have to go out to work because they have savings, would stay at home. I went into lockdown long before the government told me to because it seemed sensible.
Many activities like tourism services that involve travel and face-to-face contact would have disappeared anyway. We would have a deep recession if governments did nothing at all. If governments lift the blockades and the disease comes back or people don’t think it’s gone, they won’t go out and the economy won’t recover. That’s why I think containing the disease and reducing it to low levels is a necessary condition for a sustained resurgence of the economy. I emphasise the idea – which is widely accepted by economists and epidemiologists – that we would have very weak economies, even if the governments did nothing. It’s crucial to emphasise that the normal human response to a disease like this would have to create a recession anyway, it’s wrong to blame the governments.
When will the economic and social costs of closing everything become exponentially greater and more unmanageable than the spread of coronavirus?
That’s a very good question. If we chose a path of doing nothing there will come a time when the coronavirus is gone from society. I have been reading a paper today that suggests that it would be reduced when 60 percent of the population has the disease and disappear when 90 percent have it. That’s a long way from where we are now.
There’s no easy way of saying if there’s a point at which letting the disease rip is better than the damage to the economy. It’s difficult to make that judgment because they are both terrible. I think of it in a different way. The cost of the lockdown gets bigger over time. We want the lockdown to be brief and we want them to be effective so they get control of the disease. We want to get it under control. And for that, the lockdowns have to be effective and long enough to get the disease down to low levels. In Europe we are halfway there. The upward surge has stopped, it's beginning to fall everywhere and we will reduce the reproduction rate of the disease. When that happens we will have the capacity to test sufficiently, follow up well and the number of people infected will be small. That is the best policy … We must get control of the disease, so as to manage the economic cost, all other options are terrible.
What possibilities do you assign to the fact that, after the coronavirus pandemic, the world is transformed for the worse or for the better, and why?
This is a profound question and brings us to where we started. In the last 30 years we have lived through four historical moments. The collapse of the Soviet Empire, 9/11 and the rise of Islamic terrorism, the financial crisis and this. In each of them, I remember I was struggling to understand what this meant. Looking back on them, we misunderstood them – the one I was closest to being right about was terrorism.
I feel that this is potentially a hinge moment in history, not in of itself but because it comes at a time when we already have very large unsolved problems. There are three in particular that can’t coincide with this. We never, in the West, recovered from the global financial crisis. Our economies are still weak with debt, people’s incomes grow slowly and that has led to populist anger. We have become Latin American – politics, European and American, look like they were in Latin America after the Great Depression. The second thing is the globalising dynamic stopped and went into reverse. That was true before the financial crisis. The third is that we are in the middle of an enormous shift in the global balance of power. These three challenges were already there. It looks that the coronavirus crisis is an accelerant, a catalyst that reinforces those tendencies towards more international conflict, more inward-looking and national policies, less international cooperation and the breakdown of the American order. We’ve lived, since the Second World War, in the era of the American order and it is now breaking down. Like the 1930s revealed the collapse of the capacity of the old European powers to sustain order. I feel we are at the beginning of a shift in the world system towards chaos and disorder. This is being accelerated by the coronavirus crisis and could run out of control.
Niccolò Machiavelli said: “Whoever controls people's fear, becomes the master of their souls.” Will states have more capacity to control people's souls?
Machiavelli said things so beautifully and poetically. I think what we are reminded of – in a crisis of this kind – is that ultimately, we rely for our state as the last resource. That was the state is for, that’s why it was created. As an institution, the state is 8,000 years old. It was created to establish order and provide protection. The more frightened we are, the more we look at the state and its leaders to protect us. We are very frightened now so we are doing that. It’s an age of the resurgence of the state. Whether it controls people’s souls I don’t know, but it controls their allegiance.
Are we observing a new economic paradigm where liberalism has been replaced by a sort of new Keynesianism, as countries spend aggressively and even the EU relaxes deficit and debt limitations?
It certainly is a striking transformation. We already saw this to a certain degree after the global financial crisis. It might be a fundamental shift but because of the political consequences than more of the economic aspects of it. For people like me that are economically liberal, I believe in markets and trade.
I have always recognised that in an economic crisis we won’t repeat the Great Depression. We have the tools and the obligation to ensure that the economic crisis is managed in a way that we get through it smoothly and the financial system doesn’t collapse. That’s what we did after the global financial crisis and was a big change from the 1930s. We are doing the same thing but in a different way. We are not trying to sustain demand as we closed the economy, we are trying to give people their livelihoods, the means to sustain themselves and at the same time to keep companies in existence so they are still around when we start lifting the constraints. We are being reminded that in a crisis the economy needs help from the governments and that’s what we have governments for. You are asking something deeper, which is if this is a permanent shift. If the government will never go away and will have a greater intervention in the economy than we would have thought plausible 20 years ago. Here, I think, this is the political debate that is now opening up. We see people on the left saying that that is the case and people on the right some saying we have to go back to liberalism and others saying we have to go back to protectionism nationalism.
I don’t know who will win the debate. But we have to recognise something regarding where we are going to be at the end of this crisis. We will have mountains of public debt, in the Western world it will reach levels not seen since the Second World War. Deficits will be very high and countries continue to be ageing. Slow growth. It’s not an easy environment for governments. It’s going to be impossible to do anything related to spending. They might try monetary expansion policies after the crisis and inflation will become a big problem.
Government spending is already big, debt is already high, deficits will be high and economies won’t be fast growing. The more likely outcome is a protectionism nationalism policy rather than an aggressively redistributed Keynesian far-left policy.
Central banks around the world are printing money. Will this generate a return of inflation?
Well, there are two answers to that. As we have seen after the global financial crisis there was an expansion of the balance sheets of the central banks and a lot of people told me there would be hyperinflation and I consistently argued year after year that there was no chance of that. And I was right. I would say the same again. In the medium run in the next two, three years, the danger is that we will go into deflation.
You talked about the oil price. It seems plausible that the collapse in demand is so severe that companies will have to cut prices to survive and that will generate a real rise in global deflation. That leads to the terrifying possibility of what Irving Fisher, a brave American economist, described in 1933 as “debt deflation.” If prices fall and you have lots of debt, the real interest on your debt shoots up and everyone goes bankrupt. This is the biggest fear right now – this is one of the reasons why I want the banks to print lots of money.
If we get through the deflation without a whole set of defaults, including public-sector defaults, then three years after we will emerge with governments with large deficits and debts. Real interest rates will still be very low but many governments will not be able to close the deficit and the debt will continue to grow. In that situation there might be a limited number of willing private-sector holders of this debt. In which case the central banks can keep buying it or cease to do so and there are defaults. If they continue to do so, their balance sheet expands and we have hyperinflation. You in South America are familiar with this.
If in five years from now, public finances are not under control and central bank money continues to grow faster than the GDP, as it is now, there is a real risk of hyperinflation. It’s not tomorrow but in the medium term. My expectation is that Western countries in that situation will not allow inflation to shoot up to colossal levels. The central bank balance sheets will shrink slowly. That’s a political bet and at this stage we can’t be confident on how it will unfold. Deflation first, inflation later. The first seems more certain than the latter, which is just possible.
Developed nations like the United States and the European Union nations have the capacity to spend aggressively to limit the impact of the crisis, but poor nations like Argentina and the Latin American region in general don't have those capacities. How much worse will this crisis be for poor nations?
This is one of my biggest concerns and I have written a lot about this in my own analyses and in our editorials. The general conclusion is that they are very vulnerable. Their vulnerability is linked to their fiscal position, their vulnerability to the disease, which is very important, they are highly indebted in dollars, their current account deficit is very big, the nature of their exporting dependence. It depends on the [individual] economy but looking overall, disregarding the immense differences, broadly speaking it’s more difficult for these countries to sustain long lockdowns and for their people to bear them – they can’t afford them and there’s a lot of people depending on informal economies. The effects of the disease will be difficult to manage if it gets pervasive. A lot of countries can’t borrow substantially in their own currencies. That has always been the big problem, it has been called a regional sin as the cost is that you have to borrow in foreign currency.
You said that rich countries have a moral obligation to poor countries. How do you evaluate the recent proposal to renegotiate the Argentine government's external debt with reductions of 60 percent in the value of the nominal debt?
I will make a general point and a specific point. The general point is that obviously a large amount of the debt that was accumulated in the last 10 to 20 years will end up being restructured or defaulted. That is inevitable, and the only question is how we do it. My own preference is to provide enough funds to hold demands for service during the duration of the crisis, stop payments of service. After the crisis is over we can start discussing how it should be restructured permanently. I would go for a stop on debt now. It will be very difficult to negotiate a large restructuring across all this debt in the middle of this enormous crisis without the institutors to do that.
Then the question of whether it should be a 60 percent debt haircut, I have no idea. It is obvious that Argentina has borrowed too much, there is no surprise about that. The people who lent to Argentina given what happened before were fools, it should have never happened and they must expect to lose their money.
Argentina has just submitted a plan to restructure its sovereign debt where it proposes a large haircut and a three-year grace period. Economy Minister Martín Guzmán worked with Nobel laureate Joseph Stiglitz, who has warned of a wave of defaults and asked for major debt forgiveness for poorer nations. Can you comment on what Stiglitz said and on Argentina's debt plan?
It is clear for me that we need a debt plan. The easiest thing to do now is a cessation of service. It would be reasonable for countries in such a crisis to go there. It would be better if it can be agreed but it is very difficult.
For restructuring it is very difficult. The other aspect is what will be the consequences for Argentina or other countries of unilateral decisions of this kind. The answer to that is I don’t know. They won’t lose a lot of inflow of capital due to not servicing the debt as there was not going to be inflow of capital anyway. There might be lawsuits. Most of the fears of lawsuits are not credible as there is nothing to cease. I would guess that effectively ceasing to service debt would not cause Argentina or anyone else much now. At some point there will be another process of negotiation.
Most of the creditors will accept a new deal. I don’t know if the holdout problem will re-emerge, it will depend on the contract of the new loans. The governments who have this debt won’t repeat the same mistake and the holdouts problem will be a much bigger problem if it exists. At some point, the debt will be restructured.
Argentina's last president, Mauricio Macri, was welcome by the global community as the "slayer of populism," while international investors allowed Argentina to borrow recklessly. The IMF bailed out the country, yet the country sank deeper into stagflation. How much responsibility do private creditors and the IMF have in Argentina's collapse?
It takes two to tango. I thought the policies of President Macri’s government were profoundly mistaken. I didn’t write about them, but he made understandable mistakes given Argentine politics. I am astonished about the number of people that were ready to give money to Argentina. The default is not surprising and they have responsibilities. There was a lot of pressure from the US administration to support the Macri administration as a right-wing pro-American government, so they have responsibility, of course. The failure of the Macri government was very sad. Argentina will go through austerity. I would love to see the cycle of left and right in Argentina broken.
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