The Post-Covid Global Economy: Could Negative Supply Shocks Disrupt Other Fragile Systems?

Yves here. I am preserving the title of this post by William White from the Institute of New Economic Thinking website, even though “post-Covid” will justifiably trigger some readers. However, the position of the article is that Covid continues to affect global supply chains and therefore the economy generally, so “post-Covid” is more accurately “post-Covid onset”.

Financial crisis followers may recall that William White, with Claudio Borio at Bank of International Settlements, was early to identify the growth of substantial and not real economy driven housing price increases in many advanced economies. He warned central banker of the risk af an unwind that could impair banking systems. Alan Greenspan and other pooh poohed White’s and Borio’s warnings because they were merely empirical, and at odds with the prevailing orthodoxy that markets always set prices that allocated capital and resources efficiently.

However, although it is not strongly evident in this article, White is of the Paul Volcker hairshirt school of central banking, that government budgets should be balanced over time. In other words, he does not accept the Modern Monetary Theory perspective, that the constraint on government spending for a fiat currency issuer is real resources. But in the MMT framework, it is arguably often enough said that therefore the composition of government spending also matters. In my humble opinion, MMT might get more traction if it argued for industrial policy, as in using government deficits to mobilize resources and direct them toward building long term capacity, and give priority to things like infrastructure, education, and basic research. White notes that productivity investment has been falling and does not connect that to pervasive short term corporate priorities and the vogue for outsourcing government functions to the private sector, which typically serves as an exercise in looting.

It was also predictable, and predicted, that the failure to engage in root and branch economic reforms would lead to voters favoring more right wing and even authoritarian candidates. White proposes what ought to be seen as a moderate list of reforms, but adequate remedies weren’t implemented during the crisis, when frame breaking was not only desirable but would have been welcomed.

By William White, Former Economic Adviser at the Bank for International Settlements, OECD. Originally published at the Institute for New Economic Thinking website

There is a reasonable likelihood that the next global economic crisis could threaten the future of our democratic political systems. The global economic system is a complex, adaptive system, like many others in nature and in society, and shares their basic characteristics. Underlying stresses can result in crises which, moreover, can feed through to destabilize other systems. There is a growing understanding of the damage that can be done to the economy by health pandemics and environmental degradation. In contrast, this new INET Working Paper focuses on interactions working in the opposite direction: more specifically the possible repercussions of economic crisis on the stability of democracies already showing significant signs of fragility.

The global economic system is already showing worrisome signs of stress. Ratios of debt to GDP have been rising for decades and in many jurisdictions are now at record levels. Debt exposes debtors to default in both good times (when interest rates rise) and in bad (when revenues shrink). Moreover, due to low investment and declining productivity growth in recent years, a huge, inverted pyramid of measured “assets” is now supported by a narrowing base of real production. While the “everything asset price bubble” has recently shrunk, the scope for further declines still seems significant. The migration of credit from regulated banks to less well-regulated financial institutions and markets also implies that the good health of less transparent entities cannot be assumed. Finally, in recent years, many financial markets have been showing signs of malfunctioning, including the market for US Treasuries.

The global economy has recently been subject to two negative supply shocks; the covid pandemic and the Russian invasion of Ukraine. The macroeconomic authorities in advanced economies initially underestimated the magnitude of the inflationary effects and then erred in assuming they would be only of short duration. In combination with massive demand-side support for the economy, this led to an unexpected upsurge in inflation. In turn, this led to a belated and unprecedentedly aggressive monetary response from an equally unprecedented number of countries. As of early 2023, credible arguments are being advanced for both further aggressive tightening and for some moderation of these policy actions.

Looking forward, a number of negative supply shocks can be identified that will intensify or prolong inflationary pressures. While the short-run effects of the two recent shocks have clearly abated, longer-run effects (for example, long covid and supply chain restructuring) will continue. For various reasons, there also seems likely to be secular upward pressure on commodity prices, especially metals, food, and energy. Demographic evolution will reduce the number of workers while increasing the number of pensioners with adequate means to maintain their consumption. Environmental change will constrain output in a variety of important ways, while time will increasingly reveal the effects of “malinvestments” encouraged by expansionary monetary policy over many years. Adding to all these negative supply effects, there are many reasons to anticipate the need for higher investment levels; to mitigate and adapt to climate change and replace scarce workers, and for other purposes. Combined, these forces imply a future of higher inflation and higher real interest rates. This could potentially lead to problems of private debt distress, leading towards debt/deflation, or public debt distress, leading towards much higher inflation.

This raises the issue of how economic distress might affect political developments in democratic countries. Democracies are also CAS and inherently fragile. Many requirements must be met for them to work properly. As well, there exists a natural tension in such systems between individual rights and concern for the common good. Historical experience indicates that such tensions can lead to excesses in both directions and an eventual rupture with the democratic order.

Today, ordinary citizens in many countries are legitimately concerned about the rise of inequality of income, wealth, and opportunity for their children. This disquiet is being fanned by vested interests, both internal and external, and is further amplified by the “echo chambers’ of social media. Many objective measures show that the underpinnings of democracy are breaking down with the nationalist right seemingly the biggest beneficiary. As happened in Germany in the 1920s and 1930s, and as seen on numerous other occasions, successive economic shocks can contribute to a change in the political order.

Before trying to identify policies that might contribute to economic and political stability, it will be necessary to adopt a new analytical framework based on the reality of interacting complex, adaptive systems. Within systems, this implies focussing on the longer-run effects of suggested policies. Between systems, it implies avoiding spillover effects that might support stability in one system while undermining it in another.

Restructuring debt levels in an orderly way would contribute to economic stability while reducing tensions between creditors and debtors. Recognizing the joint reality of lower economic potential and the need for greater investment underlines the need to moderate consumption over time. It would serve both economic and political ends if those more capable of exercising such moderation could be induced to do so. Direct measures to reduce inequality should also be contemplated. Private sector initiatives, like greater attention to stakeholder Interests, should be encouraged. Similarly, government measures to alter tax incentives (e.g., interest rate deductibility and other tax expenditures) and to improve educational and health outcomes would also be welcome.

None of the above recommendations will be easy to sell politically. Citizens and voters will instinctively react negatively to the suggestion that future consumption might have to be constrained, even in the interest of species survival. The intellectual and business elites will resist giving up power in the interests of greater equality. Political leaders will have to put the common good ahead of their immediate chances of re-election. Overcoming these incentive problems is a necessary first, if not sufficient, step toward resolving the prospective economic and political problems facing our democracies.

Print Friendly, PDF & Email


  1. KD

    MMT might get more traction if it argued for industrial policy, as in using government deficits to mobilize resources and direct them toward building long term capacity, and give priority to things like infrastructure, education, and basic research.

    Amen Sister!

    1. Terry Flynn

      I agree too – the thing that has always interested me is the issue of how best to actually CONDUCT such policy in practice? During the 30 odd years post WW2, the UK was commonly held up as the main example of how NOT to do it (epithets like “stop go policy” thrown at successive governments etc).

      Yet whilst I’m perfectly open to the criticism that UK governments were “less effective in industrial policy than others due to things like not initially benefiting from Marshall Plan funds and thus inability to start with a clean slate”, there are some pretty amazing things the Brits did in industrial policy themselves.

      Early work on the atomic bomb was British and we gave it all to the USA because we couldn’t afford to develop it ourselves. British Rail was far from the archetypal example of state incompetence it was made out to be – just look up things like “who got barcodes up to massive levels of accuracy first?”. Not to mention the now well known example of how Thatcher sabotaged the tilting train…. We ended up practically giving it to Italy then paying a fortune to Branson for him to buy it back, then implement it 20 years later than BR could have done. And I laugh hollowly that so many of us get our energy from EDF – the majority STATE run French company.

    2. 10 to 1

      MMT theory should be used to lower the costs for both individuals and industry. Currently the US government outsources essential functions like, health insurance and care, housing and utilities to private individuals and industry who are rent seekers looking to maximize profits. The result is cost for industry and individuals increases and they demand more and produce less. If costs for health, housing and energy are less, labor and industry can do more because they don’t need as much to pay for essential services.

  2. spud

    i agree with you Yves 100%, MMT’ers that say cheap foreign imports have been good for americans, is a amazingly stupid statement.

    how can that be, free trade has undercut production, R&d, taken away valuable skills of americans, deeply indebted us, and the foolishness of it is beyond idiotic, just look at what a real industrial power looks like, russia.

    the signs of worrisome stress were quite apparent in 1914, and 1929. but under Gatt which allowed protectionism, worrisome signs were not apparent at all.

    so even some MMT’ers think money is wealth, when in fact, money is but a medium of exchange, production is wealth.

    we cannot get out of this mess till this is recognized. then the real work begins unraveling what bill clinton did, not so sure it can be done.

    1. GramSci

      MMT is a theory only in the sense that Newton’s Theory of Gravity is a “theory”. MMT describes how money works–especially since paper currencies (“bank notes”) became popular in the late Middle Ages.

      So it happens that an “MMTer” is someone who “says the quiet part out loud”: “money” is not gold or silver that must be borrowed from precious private bank hoards in order to fund government.

      The people who say “cheap foreign imports have been good for Americans” are mostly the people who seek to “privatize everything” and “drown the government in a bathtub”, even as they use the levers of leveraged fiat money to do their dirty work. These people do not self-identify as “MMTers” because widespread understanding of MMT would expose their game.

      So I doubt your assertion of “MMT’ers that say cheap foreign imports have been good for americans”. I know no self-identified MMTer who says this.

      1. Wukchumni

        Relatively few European countries issued banknotes and it really only began in the later 19th century, and most importantly there were no instances of hyperinflation in the era and before it aside from the Assignats issued in France during the French Revolution, which pretty much all started in the aftermath of WW1 with Austria, Hungary and then Germany going through bouts of hyperinflation when they printed money until the cows came home.

        There have been probably around 100-150 instances since where that countries essentially declared financial bankruptcy in this fashion, a number of them repeat offenders.

        It couldn’t have been done without fiat money backed by nothing.

        1. GramSci

          Agreed that *countries* didn’t issue bank notes until then, but *banks* issued bank notes since banks were invented to fund mercantile voyages…if not to fund ‘crusades’.

          It was a brave thing that countries declared bankruptcy, although it was often a desperate act that didn’t end better than the alternative, debt peonage.

          1. Wukchumni

            A loan is a completely different thing than a banknote, the Jackson i’m holding in my hand says nothing about it being a a loan. Its a debt instrument and says that in the printing on the banknote.

            All of South America went through hyperinflationary periods in the 1970’s to present, with Venezuela being the champion as they’ve been at it for 40 years now since Black Friday.

            I wouldn’t be calling their misery, brave.

            1. GramSci

              But isnt a “debt instrument” just the other side of a loan’s ledger? Fractional reserve banking issues inflated currency every time it writes a mortgage. This isnt a problem unless the loan isnt repaid. As Dr Hudson likes to say. “Debts that cant be repaid wont be repaid.”

      2. 10 to 1

        Well said and I absolutely agree. I’ll also add I think it’s been China’s successful use of the MMT theory which has fueled its own success. Money is created by the Chiense government and used to pay for programs and policies which lower the costs for its industries so they can produce more for less and export their excesses.

        The money the US government creates has done the opposite. US industry, and individuals are paying more for services which have been outsourced by the US government to private individuals and companies who rent seek. The result is costs are higher and production is lower as the money creation goes to the rent seekers, not to lowering costs for industry and individuals.

        Examples are the costs both individuals and industry have to pay for health insurance and care. The other is housing and utilities, which keep rising as the rent seekers profit, while industry and individuals go further into debt.

  3. David in Santa Cruz

    Covid and the “Ukraine” civil war are but minor shocks. The Big One is coming: the migration by 2050 of an estimated 2 billion people to more temperate climates that will be the unavoidable result of our anthropogenically induced 2-degrees Celsius global warming.

    Throw-out all of these quaint economic and political theories. There will be plenty of workers but their participation in “democratic” institutions will look like Qatar post-World Cup.

    Fasten your seatbelts, it’s going to be a bumpy night…

  4. Jeremy Grimm

    I think the guy who wrote this post lives in a strange dream world. Some of his concerns are a little behind the times and delusional: “the next global economic crisis could threaten the future of our democratic political systems”. What democratic political systems is he talking about? The current regimes do seem threatened — or at least they have been behaving as if they feel threatened, but ‘democratic’ is something of a stretch. To delusion he adds a gift for hyperbole: “many financial markets have been showing signs of malfunctioning” — and “incentive problems” — really! And he is very forgiving of some of the little mistakes “macroeconomic authorities” made: “macroeconomic authorities in advanced economies initially underestimated the magnitude of the inflationary effects and then erred in assuming they would be only of short duration”.

    I believe his readings of the concerns of “ordinary citizens” fail to understand where many of us really are. I am not happy about the rise of inequality but that concern is dwarfed by my concern about the income, wealth, and opportunity I see on offer to my children. His grasp of the nature of Humankind in the world outside his dream world is sad. “Citizens and voters will instinctively react negatively to the suggestion that future consumption might have to be constrained, even in the interest of species survival.” The current consumption of citizens and voters has been constrained and has been further constrained year-by-year. I think negative reactions to the suggestion of future constraints on consumption are instinctive reactions to the gross injustice and mendacity those suggestions by our Elite imply in the real world. Humankind through its long prehistory and history has willingly shared sacrifices for the Common Good. It is a remarkable quality of our species. The need for constraints on future consumption asserted by our ‘democratic’ governments, appear as ever greater demands that more of the shrinking economic pie should accrue to the profits of the growing Corporate Cartels and the unimaginably wealthy — all unfettered in their predations. I believe most of Humankind is all too aware that future consumption will be constrained even more than present consumption.

    The surreal statement “Political leaders will have to put the common good ahead of their immediate chances of re-election” at the close of this post nicely ends this dreamtalk. This statement harkens back to the suggestion that we have democratic political systems. I believe political leaders who actively promote the common good have almost no chance of being nominated, absolutely no chance of being elected, and certainly no possibility of being re-elected.

    1. Rubicon

      We are in total agreement with Jeremy Grimm. The top 10%, 5%, 1% wealthiest in the US has, for decades, destroyed the well-being of most US citizens: no jobs; part-time work; incredible costs of medical, auto, home insurance & bills, big tech costs, huge rises in inflation – have left multiple millions of common citizens with a staggering $10 billion in debt.

      And now, the Elites in the Financial/Military Hegemon see their only chance of survival is to turn their sights on UK, EU citizens who certainly live a higher lifestyle than in the US. IE: “financial colonizing” of said countries with plenty of Financial Aristocrats, politicians in those nations very willing to help destroy those people.
      There’s an urgency here what with more & more Non-Western countries turning away from using the US$ System that has caused intense poverty in these non-sovereign status.
      The US/UK/EU Elites see their coming demise and have turned against Russia, China and other Bric Nations. Currently, the US is hammering Peru, Brazil, parts of the Middle East, Indochina in the frantic drive to maintain the US $$$ System.
      If you read how ALL Western Hegemons die, they all used the same system: an Oligarchic Class driven by greed, but were always unable to stop the ping, pinging of Other nations who outsmarted them: The Genoese, Dutch Republics, the British Empire and assuredly the Roman Empire. Now China, Russia, Saudi Arabia, and some Latin American/Asian nations are all pivoting away from the US’s IMF, World Bank, and the egregious nature of the US$ that has kept them in iron chains for all too many decades.

  5. Susan the other

    My sense of the zeitgeist is that we are coming together, not falling apart. I’m not sure I speak the same language as White because I think there is nowhere to go but forward toward achieving democracy. I do not think we have yet achieved it. What we have achieved is a degree of abundance and well being for some at the expense of the natural environment and widespread human inequality. Even Dorman,s sentiments yesterday about protecting the natural environment from being capitalized because it is not a fungible commodity and when it is gone it is gone so best to leave it more or less unaudited falls short of saving us. Unless we protect it at gunpoint. That seems to be White’s concern about reducing our consumption by reducing our production. Both guys are kinda skipping across the delicate surface of “productivity” being scaled down. When we do finally admit we need a new industrial policy it will be also a recognition of the fact that we need a new social contract as well which spells out what our democracy has evolved into. If it becomes a social-ecology (best term so far) the environment could even be given primary rights because all prosperity comes from nature. And human democracy could be based on actual economic democracy. There is no reason to think the sky is falling when we have an opportunity to actually get it right. The economy really doesn’t have to be restricted beyond ending extraction for profit to service debt and reinvest in more profiteering even while the planet burns and people starve. So yes indeed. Let us have a new democracy and get on with it.

  6. Jeremy Grimm

    I worry that the present East-West conflicts are little more than noise — as the Earth transitions to a new Climate regime, less hospitable and far less predictable than that of the Holocene. The u.s. Empire is withering and thrashes out like the dying creature it has become. But the competing Empires are also built on the same sand, though perhaps not so deep or quick, as the sand engulfing the u.s. Empire. The critiques as presented/intimated by this post are at best unhelpful.

    Petroleum crack includes products like the precursors to too too many drugs, pesticides, plastics, and other products [many more than I could list]. I believe the primary product of petroleum cracking is diesel, so that all the other cracking products are nice to have, including gasoline, but entirely secondary. This means, I am far less exercised by the drugs, pesticides, and plasics, and other products of petroleum, than I am by the continued extraction and processing of petroleum, and the complete lack of planning or adaptation to a world where Humankind cannot so heavily depend on petroleum and fossil fuel resources.

  7. podcastkid

    “Post Covid Onset” is preferable.

    …as in using government deficits to mobilize resources and direct them toward building long term capacity, and give priority to things like infrastructure, education, and basic research.

    The “direct”ing will be delicate, already is. Which is why I think it’s imperative the 99% sort things out and come to some kind of agreement amidst itself (amidst ourselves). To me, “basic” research should move away from things like: space, AI, and stress on too many workers struggling to produce ever smaller chips…Jitterbug phones (+ even municipal YFI everywhere) for all who want them/it would remain stress enough on environment and assemblers. Nevermind digitalized gov and its Orwellian stress on humans. Face the facts.

    If yall knew me, you might call me a non violent luddite. The more I write what I believe I spose the more readers will conceive the writer thusly…NVL. The reality is I am only that in a relative sense.

    Disagree with Alfred W. McCoy on Putin, but on this I think he sees the future very clearly…

    By 2050, as the seas submerge some of its major cities and heat begins to ravage its agricultural heartland, China will have no choice but to abandon whatever sort of global system it might have constructed. And so, as we peer dimly into the potentially catastrophic decades beyond 2050, the international community will have good reason to forge a new kind of world order unlike any that has come before.

    We’re already feeling 2050, and there’s Covid to boot. I don’t think the US’ll attain bullet trains, and I think the world will have a thousand more hassles with fusion than it had with fission [hassles, not deaths & cancer]…IOW won’t get there. Challenge enough for the US to schedule enough buses to arrive at train stops. OK, do enough Keynesian jobs so folks won’t get mugged at the stops. We’re getting squeezed between 2050 and the chaos karma of prior exploitative systems; and to me MMTers don’t always talk/write like they understand it.

    Pretty much how I feel is that, if you want to know what to do next, ask Vandana Shiva.

    Incredible as it may seem…between Yves and the comments this may be a place where the new world paradigm McCoy talks about gets at least some preliminary shaping…among the biggest number of folks I can think of anyway. The democratic concept I think is viable. Why? For example, a lot of folks need to go through a lot of info in order that they agree on mitigating Covid…and follow through with plan.

    1. podcastkid

      Agree on how to mitigate Covid; but however many approaches have been suggested by however many individuals that have functioning brains…the group must trust the most rational have been sorted through. And pretty much understand how they were sorted through. IMO.

Comments are closed.