The excellent Adrian Blundell-Wignall addressing MB, I think, at the AFR:
I have been surprised at just how negative some economists are about COVID-19. Not so much about the near term, where there is general agreement on the severity of the initial rise in unemployment, but rather about what happens on the “other side”. No “V-shaped” recovery and perhaps a stagnating “L”?
The “other side” will be different, but certainly not an “L”.
It’s possible the longer the health crisis and social distancing persists, the more likely some governments will run out of firepower so that more businesses won’t sustain. Banking problems could follow.
An alternative view is that social distancing works, the fiscal and monetary response is enormous, and for once it is putting money in the hands of the household sector instead of being isolated in the bloated interbank markets.
Globalisation supply chains are damaged, so demand is less likely to spill abroad. Wages may begin to rise. High levels of debt encouraged by years of monetary ease to save the banks will restrain central banks from raising rates. Another banking crisis will be avoided. The costs of the full sequence of the crises since 2008 will be sheeted home to where it was always headed: savers.
Oddly, this is also what we expect after the crisis. We just expect the crisis to run further first, and draw in banks, thus slowing the recovery to something more akin to an “L” than a “V”. We should perhaps clarify that to say that all recoveries are “V”-shaped from the bottom on quarterly charts. When we say “L” shaped we mean an annual chart of GDP that rises like a NIKE swoosh, if that is not labouring the metaphor.
There are two key differences between ourselves and Mr Blundell-Wignall on the outlook. The first is that Western governments have done enough in terms of the “hammer and dance”:
It is our view that the Anglosphere, in particular, has not locked down hard enough so it has flattened the curve but not crashed it. That means it will have to keep the dance phase going longer and more harshly than nations that did fully lockdown, inhibiting the recovery.
Second, Blundell-Wignall is not concerned by the credit cycle. But to us, it is obvious that the global private credit cycle has been cruising for a bruising for several years. Corporate debt is off the chart in the US:
European banks are still at risk from weak balance sheets and the failure to integrate the EZ fiscally leaving them forever exposed to a flat yield curve:
Household debt is still off the chart in Australia with less and less ability to pay for it:
Chinese debt is saturated though we expect it to extend and pretend not bust:
A shock of the magnitude of the COVID-19 seems to us more likely than not to force further adjustment to these imbalances, despite public debt support for demand and central bank liquidity.
In short, we reckon that markets still exist to some extent.
A dangerous idea, I know!