World stock markets think that the worst of the pandemic is over. The global Dow index, which reached its low point in March, has now clawed back more than a third of its losses. On Wall Street, the recovery has been even stronger, reaching two-thirds of the early losses: the DJIA is now only 20% from its pre-coronavirus all-time highs.
While political leaders in other countries by and large refrain from rosy predictions about the economy, the Trump Administration has no such qualms. It is pushing the country to open up. Young Jared Kushner, Donald Trump’s son-in-law as well as senior advisor, predicted that the U.S. economy will be “rocking” by July.
Coming from a government that has had one of the world’s worst records in coronavirus response, resulting in roughly one-third of global cases and over 60,000 deaths, it is hardly a reassuring prediction. While Kushner also called his government’s response to the pandemic “a great success story”, the reality is that America not only was caught with its pants down but even now, two months after the onset of the disease in the country, it still lacks a consistent strategy of combating the pandemic and its medical professionals are still experiencing shortages of basic personal protective equipment.
Economic management has been equally woeful, suggesting that the chicken-without-a-head routine will be repeated when it comes to salvaging the economy. In fact, Congress has established the Paycheck Protection Program, designed to make sure that workers can keep their jobs. The program was allocated to $670 billion — more than the gross domestic product of any country in the world except the 20 richest. And yet, the number of people filing for unemployment benefits reached 30 million by late April.
When April U.S. unemployment figures are released in early May, the jobless rate will be around 20%, vs. 25% at the height of the Great Depression — and it was reached in just four weeks, not four years.
There is one other key aspect that makes the current global economic situation similar to the Depression nine decades ago. Economists agree that the protectionist response at the time exacerbated economic hardship and deepened the overall crisis rather than alleviating it for each individual country. In the U.S., Congress passed the infamous Smoot-Hawley Tariff Act in 1930, which has come to symbolize the wrong-headed nationalistic reaction to an economic crisis.
In 2008, there was a high degree of coordination among leading economies as they responded to the U.S. subprime mortgage bust. This time, we’re seeing a different picture. Each country is adopting its own strategy in dealing with the pandemic, and all have isolated themselves by closing national borders. This happened even in the European Union, where borders between nation-states had effectively ceased to exist. Now, borders are not only back but are likely to stay closed for the rest of the year.
Attempts to recover are also likely to be of the every-man-for-himself variety. Northern European nations are not interested in backing their hardest-hit neighbors or making individual countries’ debt a common responsibility. As a result, Italy and Spain, which only recently recovered from the eurozone debt crisis, will go bankrupt, and so will Belgium, dragging the rest of the EU down with them.
The world’s most important economic relationship is between the two largest economies, the U.S. and China. Some economists even termed. their symbiotic relationship Chimerica. However, now that the Trump Administration is looking for ways to deflect blame for its mind-boggling incompetence, it is zeroing in on China. Trump’s Republicans at the state level are suing Beijing for damages and the White House is drafting plans to make China pay for its transgressions.
There have been suggestions that Trump has instructed U.S. intelligence agencies to look for evidence that the coronavirus was created at a Wuhan lab.
Tariffs have also been mentioned in connection to the economic hardship during the pandemic — so far, limited to imported oil in order to protect the U.S. oil industry. But Trump loves tariffs and he may revisit his previously mooted idea to slap tariffs on European cars.
The 1930s’ brand of protectionism didn’t come out of the blue but was a culmination of previous trends. After a false dawn of international cooperation at the end of World War I three had been a retreat. The U.S., after intervening in the European war, turned isolationist once more, refusing to join the League of Nations founded by its own president. Nation-states on the periphery of Europe, also created on Woodrow Wilson’s insistence, became nastily nationalistic. So when the Depression came, they all happily turned inward.
Likewise, globalization was under attack before the advent of COVID-19. Just as the pandemic began to bite, the U.K. blithely left the EU. Well before that nationalist anti-EU forces had been gaining support in other countries. At the opposite end of Europe, Poland and Hungary have reverted to their pre-World War II illiberal selves. Authoritarian buffoons around the world, from India to Brazil, have taken up the banner of nationalism.
Against this background, the America First slogan proclaimed by Trump was especially dangerous, since before that Washington politicians — and the Republicans in particular — had been the strongest advocates of openness and free trade. Well before the pandemic struck, Trumpism had gone a long way toward dismantling the global free trade system.
Also harking back to the Depression, Trump has been blaming immigrants for taking away American jobs and sapping the safety net. As part of his response to coronavirus, he has curbed immigration further.
In the 1930s, protectionism and tariffs did serious damage to all involved. But it was like nothing compared to the disaster that the retreat from globalization will mean today, when big companies depend on global markets and on global suppliers.
This is why the rally in stocks is fools’ gold. However, it is an indispensable part of the coming Depression. The U.S. Federal Reserve has committed up to $8 trillion to support the U.S. financial system.
Congress provided another $2.3 trillion in funding and will doubtless add another trillion or so. But when the DJIA hit its recent bottom in March, it meant that some $11.5 trillion of wealth had been destroyed. Money is being pumped into the stock market but all those trillions will flow into sand once there is another, more brutal selloff.
