Contributed by Joe Montero

The talked about economic recovery form Covid-19 is being exaggerated for political reasons and has little to do with the real situation. There must be some increase in activity after coming out of a lockdown. Comparison from such a low base is almost meaningless. Measuring the difference between now and before Covid-19 would be more useful.

This is not an exhaustive examination of the global economy. Just an observation that nations that fudge this are not on the best course for a healthy recovery. If we want to find the solution, the truth is important.

Everyone knows that the only major economy bouncing back in a substantial way is China. The United States, Europe, and Japan are still not finding their feet, and They’re still going through the ravages of the pandemic or entering a new wave.

This will impact on them and the global economy.

The graphic below shows the trends among the major economies. They began well before Covid-19 hit.

Another problem, and a far more damaging one in the longer run, is the excess money supply in the hands of financial institutions.

This is a problem now admitted by the International Monetary Fund (IMF). The money is there. investment is insufficient. The IMF has warned that the resulting pressure is elevating asset prices, and this is increasing the separation between finance and the real economy.

A financial system with too much money, a stagnant real economy short on with investment, and bloated asset prices, create a recipe for instability. Concern over this is growing among many economists, and they fear that it will only take one more shock to push it all over the edge.

Some politicians are pinning hope on the quick development of a vaccine and its widespread application. The rationalisation is that this will get people back to work and enterprises running again. It will take months, if not years to be effective.

Even if the transition is quick, this is the best best that can be hoped for, and it will only alleviate symptoms of a deeper sickness.

Fear is driving Europe to get the European Central Bank to ease monetary policy to keep interest rate low. In the United States, the Federal Reserve is buying up bonds for the same end. The hope is that this increase in the money supply circulating through a low interest rate will encourage investors to borrow.

“There is a glut of savings and a shortage of investment,” said former Chair Janet Yellen. She is now appointed Treasury Secretary in the incoming Joe Biden administration.

The problem investors have is not the cost of borrowing. It is that the economy is not performing and they don’t want to back a losing horse.

According to Bloomberg Economics, their data suggests the best case scenario is a 2020 contraction of global output by 4.1 and growth of 4.9 percent form this point in 2021, that is, assuming that the vaccine quickly kicks in and works as a major driver.

The International Monetary Fund and the Group of 20 have warned of the risk to recovery

There is almost universal agreement that more stimulus spending is needed. Little is happening. Politicians are proving to be better focused on point scoring against their rivals than they are on getting on with the job.

Then there is the question over what kind of stimulus.

To date, stimulus packages in most major economies and many other ones as well, have focused on aid to major corporations. This has been supposed to encourage investment in growth and create jobs.  

The investment has not materialised and there is little sign that it is about to. Job creation has mainly been the creation of more insecure work at the expense of fulltime jobs. More of this is unlikely to turn this around.

An alternative is to not rely on private investors as the driving force. This means national governments at home and all governments pulling together globally, to transfer funds to all citizens.

this can be achieved through special projects aimed at nurturing key industries and providing infrastructure, and it means, instituting ways to encourage local initiatives, where communities get space and the means to build their own social economies.

This is beginning to be applied in a range of countries, in their own way, and at different levels. Necessity is driving this.

Time will tell what works and what doesn’t. everyone can learn from it. The one certain thing is a new approach is necessary.