LONDON (Reuters Breakingviews) - It’s hard to rustle up a hearty breakfast in the coronavirus era. Eggs are in short supply at UK shops. Across the pond, bacon is disappearing from supermarket shelves. These shortages have a common origin. The food industry on both sides of the Atlantic has become highly concentrated, making supply vulnerable to the Covid-19 shock. Many other industries are in a similar spot. Ideally, now is the time for antitrust regulation and fiscal measures to make business more competitive and less concentrated. Yet when the lockdown ends, Big Business will probably emerge in an even more dominant position.
LONDON (Reuters Breakingviews) - The world economy is hurtling towards its most severe contraction since the 1930s. Historians generally agree that the Great Depression was exacerbated, if not caused, by the ill-fated resurrection of the gold standard in the years following World War One. The pivotal moment came in the summer of 1925 when Winston Churchill, then chancellor of the exchequer, pegged sterling to the U.S. dollar at its pre-war value. This turned out to be an act of economic self-harm unrivalled in history. Governments around the world jumping headlong into the “Great Lockdown” may prove its match.
LONDON (Reuters Breakingviews) - Everyone is an epidemiologist in a lockdown. As former UK Supreme Court Justice Jonathan Sumption told the BBC, “it is the right and duty of every citizen to look and see what the scientists have said and to analyse it for themselves and to draw common-sense conclusions.” Lord Sumption was concerned that his government’s fight against the pandemic might weaken civil liberties. The decisions of businesspeople and investors are necessarily affected by their thinking about Covid-19. It’s more important than ever to avoid allowing cognitive biases to overwhelm better judgement.
LONDON (Reuters Breakingviews) - Past cycles of globalisation have shown themselves vulnerable to sudden shocks. The First World War brought the Victorian free-trade era to a shuddering halt. Trade picked up after the conflict, but the 1929 crash was followed by beggar-thy-neighbour tariffs and another violent contraction in world trade. The fallout from the Lehman Brothers crisis damaged faith in globalisation. The Covid-19 pandemic could well be a harder blow. A world that turns increasingly inward will look very different to the one we know.
LONDON (Reuters Breakingviews) - The language commonly used to describe speculative manias is borrowed from epidemiology. A new technology sparks “contagion”. Investors are “infected” with greed. Speculative “fever” breaks out. During the panic phase, contagion becomes more “virulent”. After the South Sea Bubble collapsed 300 years ago, contemporary observers likened the market situation to a plague. In fact, by late 1720 the bubonic plague was spreading across Europe. Today, the world is faced with another epidemic. The response to coronavirus resembles the inverse of a speculative mania, with fear replacing greed, and errors of pessimism those of optimism.
LONDON (Reuters Breakingviews) - If all you have is a hammer everything looks like a nail. The Federal Reserve is employing two major tools to combat coronavirus: cutting short-term interest rates to near zero and expanding its balance sheet by a further $700 billion. The Bank of England has likewise taken UK interest rates to their lowest level in its 300-year history.
LONDON (Reuters Breakingviews) - Next year marks the 300th anniversary of England’s most notorious speculative mania. The South Sea Company owned the monopoly rights to trade with South America but never made much from those activities. It was the Company’s offer in 1720 to acquire 32 million pounds of Britain’s national debt, in exchange for its own shares, that juiced its returns. Between January and August of that year, the price of South Sea stock traded in London rose sevenfold. At its peak, the Company’s market worth was around twice the total value of land in all of England. The South Sea bubble contains lessons for contemporary investors - even if many of the tales told about the affair are the stuff of legend.
LONDON (Reuters Breakingviews) - Just over 300 years ago, in early December 1718, a Parisian bank was nationalised by the French state. This marked the beginning of the Mississippi Bubble, which captivated France over the following couple of years. The aristocratic world of the “ancien regime” may seem impossibly distant to modern minds. Yet there are parallels between this saga and the modern age of quantitative easing, ultra-low interest rates and highly valued asset prices. As central bankers struggle to reverse their post-crisis monetary measures, the lessons imparted by the Mississippi Bubble are more relevant than ever.
LONDON (Reuters Breakingviews) - The Federal Reserve failed to anticipate the global financial crisis. Its hundreds of economists were too entranced by their abstruse mathematical models to see the storm clouds gathering. One central bank veteran, at least, was more alert. In April 2005, Paul Volcker publicly warned of “dangerous and intractable problems” besetting the U.S. economy. The lanky former Fed chairman remains famous for crushing the runaway inflation of the 1970s. His new memoir, “Keeping at It: The Quest for Sound Money and Good Government”, reveals the attributes that made him arguably America’s greatest central banker.
LONDON (Reuters Breakingviews) - Interest rates in China may never have turned negative, as they did in neighbouring Japan. Yet China’s economy has also become distorted by the decade of easy money since the 2008 financial crisis. As in the West, low interest rates in China are responsible for inflating asset prices, misallocating capital, aggravating inequality and undermining financial stability.