The normal economy was broken by the coronavirus pandemic and is never coming back

The economic fallout from these immense human dramas defies calculation. We are left with the humdrum but no less remarkable statistic that this year, for the first time since reasonably reliable records of GDP began to be computed after World War II, the emerging market economies will contract. An entire model of global economic development has been brought skidding to a halt.

This collapse is not the result of a financial crisis. It is not even the direct result of the pandemic. The collapse is the result of a deliberate policy choice, which is itself a radical novelty. It is easier, it turns out, to stop an economy than it is to stimulate it. But the efforts that are being made to cushion the effects are themselves historically unprecedented. In the United States, the congressional stimulus package agreed within days of the shutdown is by far the largest in U.S. peacetime history. Across the world, there has been a move to open the purse strings. Fiscally conservative Germany has declared an emergency and removed its limits on public debt. Altogether, we are witnessing the largest combined fiscal effort launched since World War II. Its effects will make themselves felt in weeks and months to come. It is already clear that the first round may not be enough.

An even more urgent task is to prevent the slowdown from turning into an immense financial crisis. It is commonly said that the U.S. Federal Reserve under Chairman Jerome Powell is following the 2008 playbook. This is true. Day by day, it spawns new programs to support every corner of the financial market. But what is different is the scale of the Fed’s interventions. To counter the epic shock of the shutdown, it has mobilized an immense wave of liquidity. In late March, the Fed was buying assets at a rate of $90 billion per day. This is more per day than Ben Bernanke’s Fed purchased most months. Every single second, the Fed was swapping almost a million dollars’ worth of Treasurys and mortgage-backed securities for cash. On the morning of April 9, at the same moment that the latest horrifying unemployment number was released, the Fed announced that it was launching an additional $2.3 trillion in asset purchases…

And even once current production and employment have restarted, we will be dealing with the financial hangover for years to come. The argument over fiscal policy is rarely engaged in the heat of the moment. In a crisis, it is easy to agree to spend money. But that fight is coming. We are engaged in the largest-ever surge in public debt in peacetime. Right now we are parking that debt on the balance sheet of central banks. Those central banks can also hold the interest rate low, which means that the debt service will not be exorbitant. But that defers the question of what to do with them. To the conventional mind debt must be eventually repaid through surpluses generated through tax increases or spending cuts.

History suggests, however, there are also more radical alternatives. One would be a burst of inflation, though how that would be engineered given prevailing economic conditions is not obvious. Another would be a debt jubilee, a polite name for a public default (which would not be as drastic as it sounds if it affects the debts held on the account of the central bank). Some have suggested it would be simpler for the central banks to cut out the business of buying debt issued by the government and instead simply to credit governments with a gigantic cash balance.

And on 9 April that is exactly what the Bank of England announced it would be doing. For all intents and purposes, this means the central bank is simply printing money. That this is even being considered, and under a conservative government, is a measure of how extreme the situation is. It is also symptomatic that, rather than howls of outrage and immediate panic selling, the Bank of England’s decision has so far produced little more than a shrug from financial markets. They are under few illusions about the acrobatics that all the central banks are performing.