How the coronavirus has exposed the global economy’s pre-existing vulnerabilities – an overdependence on easy money

While lockdowns and other pandemic-related restrictions have hit economies hard, the world was already grappling with record levels of debt, asset inflation and an over-reliance on monetary stimulus

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A man walks his dog along a street lined with closed cafes and stores in Madrid, Spain, on May 7. Italy and Spain, the two European countries most severely hit by the coronavirus, are suffering even deeper economic slumps after record contractions in the first quarter. Photo: Bloomberg

Published: 1:00am, 1 Jun 2020Updated: 1:17am, 1 Jun 2020

If a lack of maintenance undermines a structure’s foundations, the damage can be hidden by a bigger disaster such as an earthquake. Similarly, a sudden heart attack may disguise the patient’s underlying conditions or the poor medical treatment they have received.

These are simple analogies for what is happening to the global economy and the international financial system. The economy is in deep recession and the financial system is traumatised, but few are asking why. The assumption is that it is all the fault of the coronavirus.

The pandemic has inflicted grievous harm on human health while policy reactions in the shape of lockdowns and other restraints on commerce have dealt a severe blow to economic and financial systems. This should not be allowed to obscure deeper, pre-existing maladies, though.

Some commentators have long pointed to record levels of global debt, spectacular asset inflation – especially stock prices – and over-reliance on monetary stimulus. Now that a crisis is upon us, policymakers have a convenient smokescreen to mask such excesses.

A trader looks forward to the new year at the New York Stock Exchange on December 31, 2019. Despite the uncertainty surrounding the US-China trade war, the S&P 500 started the year on a high. Photo: Reuters

Policymakers’ chief sin in recent years has been to regard unconventional monetary policy – ultra-low, zero or even negative interest rates, plus huge central bank buying of financial assets – not as an emergency weapon but as a new norm.

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