Summary

In Niall’s view the economic consequences of the pandemic have been vastly greater than the public health consequences and that’s because, for the first time in history, we decided to deal with an infectious pathogen by shutting down significant parts of the economy and indeed of social life and this is what differentiates 2020⁄2021 from previous public health crises - in the past we couldn’t have done that. Niall thinks that is one of the paradoxes of the past 12 months that we’ve been able to do great economic harm by measures that in almost any previous era would simply have been impossible. That’s why Larry Summers and his co-author came up with a very large number when they estimated the cost of the pandemic - close to 90% of annual GDP, a much, much larger number than the contraction in economic activity that we saw last year around the world. The story here is that fundamentally the impact of COVID is greater economically than you would infer if all you knew were the excess mortality stats. Although debt levels are comparable with war time, Niall does not believe the consequences of the pandemic will be political as they were in war time. In fact the political outcome last year in the US was a narrow win for the normalcy candidate. The big question for Niall is whether Larry Summers is right, and it is actually the case that this apparently normal president is presiding over a very abnormal policy that will overheat the US economy because the fiscal response is vastly larger than is actually needed at this point. Lots of people in the Administration have bitter memories of the Obama years and are confusing financial crisis with a pandemic. Pandemics end, we’re going to get to herd immunity really soon, next month, probably May and when that happens the vaccine will have been the stimulus. The economy really doesn’t need $1.9 trillion of additional fiscal stimulus or if it needs any, it needs a lot less than that. The Fed has a theory of inflation expectations, which basically says they’re mean reverting. They’re not going to get unanchored, even if inflation jumps in the second half of the year. Niall does not see any strong evidence for that in the economic history literature. On the contrary, he sees lots of evidence that inflation expectations do not mean revert and can take off if you administer a big enough fiscal and monetary shock. Policymakers will tend to underestimate tail risk - if they’ve had 20 years of inflation below their target, they will start to believe that inflation is always going to be very close to or below their target. And that actually is a typical policy-making mistake. The myopia that comes of only studying the history of your own career. Greenmantle exists to try to push back against the tendency of the people to base their expectations on only the history of their own career. Geopolitics war risk matters a lot. If you look at British history all the way back to 1688 the striking thing is that moves in inflation expectations are nearly always linked to big wars and especially to big wars going badly - see 1917 and 1940. The only big shift in inflation expectations in British history that wasn’t driven by a war that Britain was fighting was in the 1970s. That was also geopolitically driven. It was closely linked to the oil shock that followed the 1973 Yom Kippur War. Niall says the thing to watch from here is not so much what Jay Powell says or what Janet Yellen says, but actually what Tony Blinken says, because that is the thing that is most likely to cause inflation expectations to move - just on the basis of history - a geopolitical shock rather than simply a big increase in the deficit or big expansion of the central bank balance sheet. Here the rhetoric of the Biden Administration has surprised Niall by its hawkishness on China. In some ways it’s even tougher than the rhetoric of the Trump Administration.

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