Coronavirus will reverse low demand policies of the 2010s
LIKE all major periods of economic weakness, the 2008 financial crisis and slow recovery led to a spell of soul searching in the economics profession. One early conclusion was that emergencies are the wrong time to worry about moral hazard. Another was that banks need more capital in normal times. By the end of the 2010s, a general agreement began to form that central banks could not propel demand alone; fiscal policy had to play a larger role in responding to recessions. This consensus was crystallising as the pandemic hit and has influenced the macroeconomic policy actions taken in response. Crises change the economic consensus, altering policy reactions. Major upsets can set long-term economic trends on a new path. This report argues that the pandemic is such a crisis, and a new world economy will emerge with higher inflation, higher interest rates and the risk of fiscal dominance: a situation where large state debts and deficits hinder the ability of central banks to meet policy targets.