Six big ideas: what Joseph Stiglitz wants investors to know about the pandemic
The world is facing a myriad of challenges - from rising inequality to deglobalisation, to renewed tensions between the US and China and the mutualisation of European debt. Nobel laureate in Economics, Joseph Stiglitz, spoke at an AXA IM event at the end of May about the potential consequences of the coronavirus pandemic on our lives and our portfolios. Here are six things to know.
1. Economic recovery and the role of the state
The assumption of a ‘V’-shaped economic recovery is, according to Stiglitz, a fantasy. There are, he believes, two fundamental uncertainties – how the pandemic will play out, and how effective the measures taken by governments and central banks to help the economy will be. These add to existing uncertainties - namely structural changes in the economy, due to the digital transition, and climate change. The global economy will not recover until the pandemic is finally under control, the Nobel laureate explained. And it is not going to be quick, as balance sheets of households and firms have been disrupted. However, we can already imagine what the post-COVID-19 world could look like. According to Stiglitz, the pandemic has created awareness of the important role of the state versus the private sector, in terms of tackling emergencies, as well as supporting science, research and funding healthcare.
2. Coronavirus has exacerbated inequality
The pandemic and the flood of money injected into the financial system by governments and central banks are together increasing inequality, Stiglitz believes. This is due in particular to monetary policies put in place after the 2008 crisis, with low or even negative interest rates, and quantitative easing money injections, he said. The result of these policies is that government bond yields have fallen, and equity yields have risen. Stiglitz pointed out that on the whole, it is the wealthiest part of the population that has a strong equity component in their investment portfolios. Those who want security, such as pensioners or the less well off, are forced to invest their savings in government bonds that pay little or nothing today. Coronavirus, according to Stiglitz, exposed all the problems of inequality, with the weakest sections of the population doubly exposed to the virus, because they are poor and generally work in roles where they cannot work from home - leaving them more exposed to the pandemic.
3. Why has the US been so badly affected by coronavirus?
Why does the US have such high unemployment? Why did contagion spread so quickly? Why have there been so many deaths from coronavirus? America was unprepared for the virus because of weaknesses in its health care and social security systems, Stiglitz said, explaining that budget cuts also suppressed a special anti-pandemic task force that former President Barack Obama wanted at the time. There is also an excessive burden on corporate America (and thus on big business) in designing the economic responses to the virus, the Nobel prize winner notes.
4. The European response to the crisis
The European economy is roughly as large as the US economy, Stiglitz points out, but $1trn has already been spent in the US (and he believes more will come), while a €750bn Recovery Fund is being discussed in Europe. The scale of the European response is, in short, less than one third of that of the US. It is clear that individual countries cannot finance a pandemic response on their own, the Nobel prize winner believes. In addition, those most affected by the virus, such as Italy and Spain, unfortunately already had a high level of public debt before contagion. The idea of accumulating more debt in individual countries rather than establishing solidarity mechanisms, according to Stiglitz, is disturbing.
In the short-to-medium term, debt is not a worry for the former economic adviser to US Presidents Bill Clinton and Barack Obama, but no-one can predict what will happen in the long term. If interest rates rise in the future, the most indebted countries will face problems. That is why, according to Stiglitz, Eurobonds - or forms of solidarity and mutualisation of debt - must be implemented, and he believes they must be grants, not loans. It is right that there should be conditionality, he added, as some northern European countries are demanding - perhaps aimed at developing health services and the green economy, but it must be conditional, in line with Europe's values, the US economist concluded.
5. A new ‘Cold War’ and globalisation
The multi-faceted conflict between China and the US is escalating, Stiglitz explained, driven by economic and political competition as well as national security reasons. He sees Europe as crushed in the middle of the two superpowers. Stiglitz believes the US/China tensions have created a ‘new Cold War’ that will not end even if a Democratic president gains the White House. But were that to happen, the conflict could focus more on human rights issues and the search for areas of cooperation to fight climate change and health emergencies such as coronavirus. According to Stiglitz, a Democratic president would bring more rationality and balance to the economic agenda.
As for trade, the era of hyper-globalisation is over, the Nobel holder believes, and the crisis has accelerated a trend that was visible even before the pandemic. Data of the period between 2008 and 2019 show that trade relative to global GDP was declining, capital flow – particularly foreign direct investment in emerging markets – was also declining and people were already talking about the end of the era of hyper-globalisation. The pandemic has accelerated its demise, according to Stiglitz.
6. Stiglitz’s view on investing
People today are afraid, Stiglitz believes. Rather than spending the money they earn, they would leave it in their current account. To get the economy back on track, therefore, a climate of confidence must be restored. For example, a government should reassure people that they will not be left on the street. As for dollar investments, the Nobel laureate emphasises his skepticism about taking currency risks. Foreign exchange movements are linked to political factors that are difficult to predict.
Commenting on the recent technology sector's rally in Wall Street, Stiglitz is convinced that certain parts of the sector are overpriced even if those are the companies of the future. He also noted that we are moving towards the service sector economy within the transition to the green economy, but its potential for profits has not been fully appreciated. Therefore, in Stiglitz’s view, investors should focus on the service sector as we are moving towards a post-pandemic green economy.