The US congress has just passed a whopping $2tn stimulus package that includes billions of dollars’ worth of loans to businesses and a $1,200 payment to every US adult.
This comes on the back of unprecedented measures by the Federal Reserve, which has now stated that it will expand its quantitative easing programme, making it unlimited in size and wading into corporate bond markets for the first time. The Fed has also resumed the central bank swapline network used during the financial crisis to provide foreign central banks with access to dollars.
In the UK, Chancellor Rishi Sunak has promised £330bn worth of loans to UK companies and has stated the government will pay for 80 percent of employee wage bills up to £2,500 per employee per month until the crisis is over. Today, he looks set to announce further measures to help the self-employed. The Bank of England has also expanded its quantitative easing programme with a £200bn round of asset purchases.
In China, the focus has been on providing direct support to businesses. The authorities will be spending around one percent of GDP on cutting business taxes; they will also be providing subsidies to certain hard-hit industries like aviation, and regional governments have announced they are stepping up public investment.
So far, the People’s Bank of China has been more measured in its response to the crisis – it doesn’t want to inject too much liquidity (via loans) into the market for fear of increasing China’s already high corporate debt levels.
Many of these measures are unprecedented, which speaks to the extraordinary nature of the pandemic itself. Humanity has, of course, faced similar threats before, but never at a time when the global economy has been so complex, financialised and globalised. Wishing to avoid a Minskian-style debt crisis, policymakers are doing everything they can to ensure businesses and corporations have enough cash to meet their immediate liabilities.
Throughout this crisis, we have not heard much from the global south. This is partly due to the nature of the virus itself. Some epidemiologists think that the virus might be sensitive to heat, which is why there have been fewer cases in the areas surrounding the equator and in those parts of the world currently nearing the end of their summertime.
It also seems as though many global south states – especially in sub-Saharan Africa – have mounted an exceptionally well-organised response to the crisis, screening people at airports, imposing social distancing where necessary and rolling out testing where possible. Policymakers are undoubtedly aware that if the virus spreads in these countries, their underfunded healthcare systems could collapse under the pressure, creating a humanitarian crisis of epic proportions.
Despite this, states in the global south will be less able to insulate themselves from the economic impact of the virus. As growth in the global economy tumbles – the Organisation for Economic Co-operation and Development predicts that, in the best case, global growth this year will halve, wiping $1trn off global output – states in the global south reliant on commodity exports will struggle to make ends meet.
Many on the left have argued that the scale of the fiscal response in the global north proves what those on the left have been arguing for years; that governments face no strict limits on their spending. They can issue bonds and create money to spend away, only keeping an eye on inflation to ensure the economy does not overheat. Whilst states were once kept in check by the bond vigilantes, bond investors today look more like puppies, sniffing around the feet of central bankers desperate for scraps of support from wealthy states.
But this only applies to the global north. Part of the reason investors are so keen to purchase the debt of rich states is that they are fleeing to safety, taking their money out of the global south and channelling it into the wealthy world. This represents an inversion of the trend of the last ten years, when low interest rates in the global north have pushed investors into the global south, allowing poorer states to borrow money relatively cheaply on international markets.
With this trend now flung into reverse, many of these same states will struggle to meet their liabilities to international investors. The contraction in global GDP will reduce their incomes and their spending will have to increase in order to contain the impact of the virus. If they cannot access the foreign currency many of them need to pay their debts, these states may tip closer into insolvency.
The World Bank has announced a fairly paltry $12bn to support states around the world in their response to the crisis. This cash will undoubtedly be doled out on a political basis – states friendlier to the US are likely to receive the lion’s share. The International Monetary Fund has made available a further $50bn.
These international financial institutions are likely to keep a watchful eye over any states that borrow from them during this time to ensure that they don’t implement ‘market-unfriendly’ policies in the coming years.
For the wealthy world, the lesson of this crisis is that states can spend without limit to meet the needs of their populations. But for the vast majority of the world’s population, it will simply reinforce what they already knew: poorer, less powerful members of the international ‘community’, quite literally, can’t afford to play by those rules.
Socialists in the global north must learn the right lesson; that the limits of fiscal policy are set not simply by markets, but by political power. International solidarity requires us to return to the issue of debt forgiveness and push for relief for global south states when this crisis is over.
Grace Blakeley is an economics commentator and author of Stolen: How to save the world from financialisation.