José Manuel Suárez Mier*
When you read these lines, dear reader, the 28th annual meeting of the Alamos Alliance will be held virtually, which brings together economists from all over America to discuss current issues, no longer in the three days of face-to-face meetings in the beautiful city of Alamos, Sonora, but in half a day on the internet.
This gathering is titled Economic Analysis of the Disruptions Caused by Covid 19: Radical Uncertainty, Digital Currencies, and Post-pandemic Recovery. Today I will summarize the presentation by Carmen Reinhart, chief economist of the World Bank, who believes that “this time it is different”** because there is no historical precedent that predicts the financial consequences of the pandemic.
Another determining element of things to come results from the consequences of the policies adopted by many countries to successfully contain the contagion, which caused a profound and almost universal economic collapse, unlike the Spanish influenza of 1918-20, which killed 50 million but did not cause economic damage to coincide with the boom that followed the end of World War I.
To find such marked synchronicity of so many economies, one must go back to the Great Depression of the 1930s, and although the pandemic did not start as a financial crisis, it is mutating to be when the economic collapse, enormous unemployment, and a terrifying increase in poverty coincide.
A financial crisis is brewing behind this debacle due to the eventual fall in the price of highly leveraged assets, a bubble caused by a highly expansionary monetary policy, and a fiscal policy of overflowing government spending, with the consequent explosion in public and private indebtedness in many countries.
It is understood that governments have reacted with higher spending and creating liquidity to help the productive sector and avoid many bankruptcies that would have aggravated the decline. Still, it remains to be seen if such policies solved crises that were only short-term illiquidity of the companies or if they were already insolvent.
With the low global interest rates, many emerging countries got into debt in dollars, and while the rating firms lower the quality of their debt, which together with a copious flight of capital due to growing distrust, can lead to the debt being unpayable and countries fall into a new crisis.
Reinhart makes a taxonomy of the different types of financial crises and concludes that the ones to come will be of a “conglomerate nature,” a combination of banking, currency, and debt crises, both sovereign and private, which would represent an additional blow to the collapse caused by the pandemic.
The bleak future that worries Reinhart, especially for emerging countries, can have a devastating social and economic cost, especially when it appears on the back of the economic collapse they are suffering today and that in many countries, there is no end in sight as to when will it be overcome, as shown in the most recent statistics of its economic activity still in decline.
Where to run?
*Consultant in economics and strategy in Washington DC and professor at universities in Mexico and the US. Email: aquelarre.economico@gmail.com
**In a pun that alludes to the masterful book she and Kenneth Rogoff published in 2009, This Time is Different: Eight Centuries of Financial Folly.
This column is also published in Spanish on April 29, 2021, in the Excélsior newspaper, based in México City.