Tooze has done it again. This was an amazing book that I found really challenging in a good way like few other books I read. Tooze may be limited in scope by the timing of when he wrote the book, but Shutdown is full of absolutely foundational knowledge about the governmental responses to the financial crises caused by the pandemic. Tooze is at his best when telling the story of the central bankers, and I think this book will be read by many for years to come.
China was of course the first hit by Coronavirus, and while its initial response was bad, it is hard to criticize considering how bad the response was everywhere else. But unforgivable is the discipline and attempted silencing of Dr. Li Wenliang, who first identified the virus and was killed by it. When Li died on February 7, 2020, the hashtag "The Wuhan government owes Li Wenliang an apology" was viewed 180 million times before being blocked by censors. On February 7, the CCP's power was most seriously challenged, but it was a turning point as the Party unleashed tough repression, both against the disease and against free speech. President Xi Jinping addressed 170,000 cadres of the CCP on February 25, declaring that the two-and-a-half weeks of isolation and shutdown had largely worked and that it was time to ease restrictions to restart the economy. But the delays and lack of action in China in January had already done too much damage. By delaying on implementing a quarantine when it was still possible in January (which the WHO condoned at the time), the February quarantine failed to contain the virus.
In February 2020, President Trump was completely uninterested in the virus except as it related to his attempt to get a trade deal with China. Secretary of State Pompeo announced a shipment of eighteen tons of medical equipment to China on February 7. While US bureaucracy moved quickly to help China, it moved slowly within its own borders. The first set of CDC tests were shipped to a hundred labs on February 4, but they turned out to be faulty and it was weeks before a new test could be developed. Aggravating the problem, the FDA refused to authorize alternative tests! Regulators argued that the crisis would be exploited for profiteering, an obviously stupid argument since the profit motive would have been the number one motivator of new test development. The FDA said they didn't want the "Wild West." For comparison, South Korea increased test capacity from 3,000 tests per day on February 7 to 20,000 at the end of the month. By February 20, South Korea was testing all people with symptoms regardless of travel history and the country shut down schools on February 23. Despite the pandemic beginning much later in South Korea, their cases peaked on February 29, days after that of China.
Price fluctuations hit oil prices hard in March 2020 (which we know would later rebound in the winter of 2021-22). Faced with dropping demand, Saudi Arabia wanted to stabilize prices by cutting production, but Russia preferred to engage in a price war to squeeze other producers. The result of the price war was that both countries flooded the market starting on March 6, and within five weeks oil futures contracts would briefly go negative.
On March 11, President Trump closed the United States to travelers from continental Europe. Shutdowns followed travel bans, and Western governments were often the last to act, especially in the United States. On March 18, GM, Ford, and Fiat Chrysler shut down American operations under pressure from the United Auto Workers, while Elon Musk held out for one day longer. Tooze notes that while Musk had followed official instructions in China without question, he took a stand based on his own personal judgment in California (before folding). Tooze doesn't mention it in the book, but on March 19, Musk predicted close to zero new cases by the end of April. Trump vacillated, and less than a week after announcing that large restrictions would come, he said the country wasn't built to be shut down on March 23, and announced he wanted America back to work by Easter, April 12. But he changed his tune again on March 29 after some convincing by Dr. Fauci and Dr. Birx and seeing images of overwhelmed hospitals in Queens, New York. Trump announced the extension of the lockdown through April.
Markets responded to Coronavirus quicker than most governments and central banks responded quicker than their legislative counterparts in charge of fiscal policy. In early March, before the UK declared its lockdown, household discretionary spending in the country plunged from 300 pounds per week to just 180. The same movement happened in the United States before we implemented our lockdowns. Across the world, where governments lagged in coordinating, people began to react to news of the virus. The IMF compiled data about a reduction in mobility using cell phone data; in rich countries, self-motivated social distancing had a much larger effect than lockdown orders. Of the average 19% reduction in mobility during the ninety days after first recorded infection, just a third (so like 6% mobility reduction) was attributable to mandatory government action.
The pandemic hit the poorest people the hardest. Whereas 75% of Americans making $200,000 or more were able to telework, just 11% of those making under $25,000 could do the same. This created huge demand for the "essential workers" who had to do the hard work of keeping society running during a pandemic and Amazon hires 427,300 new employees between January and October 2020, hiring 2,800 new employees a week at the peak. The recession that came with the shutdown hit women harder than men. Women outnumbered men in paid employment in the United States for the first time at the end of 2019, and then outnumbered men in job losses by the end of spring of 2020, just after they'd gotten ahead. On March 26, the Department of Labor had tallied 3.3 unemployment insurance applications, a number so large that it made charts unreadable. The previous record during the 2008 financial crisis was just 665,000.
In India, the shutdown created one of the world's two biggest labor market shocks, comparing only to China's Covid-related shutdown. With a workforce of 471 million, only 19 percent of Indian workers are covered by social security and two-thirds have no formal employment contract. 100 million are migrant workers. This created a "lockdown and scatter" effect, as Indian workers retreated to the villages from the cities and approximately 122 million people lost their jobs in the country. By May 3, estimates of Indian unemployment reached 27%.
Extremely concerning to observers of financial markets was the run for safety on March 9, when investors sold everything, including Treasury bills that are usually considered safer than safe. The trillion-dollar Treasury market is the foundation of all trading because it is the safest asset, and what had been traded in volumes of hundreds of millions had plummeted to just $12 million by March 13. Tooze writes that if the panic had been allowed to develop, it would have been worse than 2008. Luckily, it wasn't, and the banks were in a better position than in 2008 thanks to regulations mandating stronger balance sheets as well as the banks' own efforts at self-preservation.
Tooze is effusive regarding the response of the Federal Reserve led by Jerome Powell. On Sunday, March 15, Powell called a press conference and announced that the Fed was cutting interest rates to zero to jump start the economy and that the Fed would but at least $500 billion in Treasuries and $200 billion in mortgage-backed securities. This gave investors real cash in exchange for largely safe investments that were dropping in value due to the crisis. This created liquidity for investors and stabilized Treasuries to recover trust in markets. By buying these, the Fed was pushing out dollars for the world to use, and the Fed resumed the role it had in the 2008 crisis by easing the terms on liquidity swap lines, a familiar story to me from Crashed, another book of Tooze's. While 2008 was all about getting liquidity to Europe's banks, this time the Federal Reserve did it for Asian financial institutions.
Eight days later, on March 23, in its role as lender of last resort, the Fed revived the Term Asset-Backed Securities Loan Facility (TALF), which loaned money to banks with asset-based securities as collateral in case the banks couldn't pay up. I think this is how the federal government ended up with all the student loan debt after 2008. In addition, Powell announced on the 23rd that there would be two new facilities to support credit to large employers: the Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit Facility (SMCCF). These would buy corporate debt or loans directly from corporations or from the books of other investors, respectively. The proposed volume was $750 billion for the funds. This was a much bigger risk for the Fed to buy corporate bonds. Somehow they were able to get away with this by only earmarking $30 billion to cover losses. I had no idea it could be done with so little. The Fed had been unusual in never buying corporate debt previously, as the Bank of England and the European Central Bank already did so as well as the Bank of Japan, among others. Japan even bought shares, gaining equity ownership- The Bank of Japan built up a $434 billion holding between 2010 and 2020 in its country's equity market. Finally, the Fed also threw its weight behind public debt for municipalities in the United States, easing the flow of credit to local governments through the Money Market Mutual Fund Liquidity Facility (MMFLF) and the Commercial Paper Funding Facility (CPFF). The fed notionally earmarked $500 billion to support the short-term notes issued by large cities and counties and states. In the Spring of 2020, the Fed ended up buying bonds at a rate of a million dollars per second and in weeks accumulated 5% of the 20 trillion-dollar market in US public debt. That way, since you could always sell T-bills to the Fed, the T-bills were safe again and the Fed could lower the interest rates to zero to stimulate growth and inflation.
Tooze tells us that March 23 was the turning point that began the US recovery. By mid-August the S&P 500 had regained all its losses and was back setting records for new highs. The Fed's actions were absolutely necessary to save the economy, but it also managed to restore wealth to the richest elites of the world, contributing to the fact that the wealth of billionaires worldwide rose $1.9 trillion in 2020, with $560 billion going to America's wealthiest, while the world's poorest got nothing. Tooze finishes chapter six of the book, titled "Whatever It Takes," by asking whether central banking will ever go back to normal. In the early 2010s, the goal was normalization, but by 2020, the hesitancy around central bank interventions was gone.
The US managed a strong fiscal response to Coronavirus as well as its monetary response. Unlike in 2008, the Republicans were able to muster votes for a response. We passed the CARES Act on March 25, which ended up spending $2.7 trillion, over 10% of US GDP. It is pretty amazing to think about the political changes in America from when Obama passed a $900 billion stimulus out of fear of the one trillion-dollar sticker shock to passing a $2 trillion dollar stimulus twelve years later. At the peak in May, the US federal government was pumping $200 billion into the economy per week. We were the biggest fiscal spenders in the worldwide effort that spent $14 trillion by January 2021. The big spending would later cause at least some of the inflation that we are dealing with now. Savings rates shot up as the middle-class and above had nothing to spend their stimulus checks on. In the United States, the average savings rate shot up from 8% to 32% and in Europe it went from 13% to 24%. The stimulus tended to benefit large online retailers rather than local businesses since people were ordering online. This had a huge impact on global demand generally since Americans were buying goods from abroad with our strong currency.
The global fiscal response exacerbated global inequalities, as the highest income economies passed the biggest stimuluses. The average advanced economy was able to pass a stimulus that was 8.5% of GDP, while middle-income countries averaged 4% and low-income countries did just 2%. Europe learned its lessons from 2008 and became more interventionist, whereas China actually intervened less than in 2008, especially low considering inflation and how much China's economy had grown over those twelve years.
For the poorest of countries, the Trump administration agreed to suspend debt payments in the Debt Service Suspension Initiative, but that only amounted to $12 billion for the poorest of the world's poor countries, less than two percent of all debt service owed by the poor and middle-income countries of the world (excluding China, Mexico, and Russia). Argentina, Ecuador, and Lebanon all defaulted on their debts in the summer of 2020, but the governments of Korea, Colombia, Chile, South Africa, Poland, Romania, Hungary, Croatia, the Philippines, Mexico, Thailand, Turkey, India, and Indonesia all began bond purchase programs to have their central banks buy their treasuries' bond like the US was now doing. Tooze calls it a major change in the "toolkit" of economic policies that may usher in huge and permanent changes to the financial systems of the world. The EU also changed its "toolkit" by issuing Eurobonds for the first time, and the EU budget for 2021-2027 of 1 trillion euros would get an additional 750-billion-euro fund, split about half-and-half between grants and loans.
The United States tried to add more fiscal response at the end of 2020 and in the first months of the Biden administration in 2021. While Mitch McConnell opposed what he called a "blue-state bailout," his only plan was a liability shield for employers to avoid liability from their employees who got sick or died from Covid, an absolutely insane response that would've done nothing for the economy except impoverish workers at the hands of their employers. No deal could be reached under the Trump administration, but then Democrats passed several appropriations in Biden's first months. The Fed made the momentous decision at the beginning of 2021 to allow the economy to "run hot," letting the rate of inflation rise. Democrats passed under Biden the $1.9 trillion American Rescue Plan, the $1.8 trillion American Families Plan, and a $2.3 trillion infrastructure program (although this was spread out over ten years). We are now living in the resultingly hot and inflated economy where inflation has reached 8% and presents new challenges...
Conclusion
The pandemic exposed the weaknesses and strengths of the world's major powers like few events can. In the United States, we were exposed for our absolutely deadlocked Congress for most of the pandemic and our profound political divisions that threaten to tear the country apart- first over the summer of 2020 and then on January 6, 2021. Our system cannot work when Republicans have legislative power anymore since they can't bring themselves to support any government action unless there is a Republican president. On the other hand, the pandemic showed the strength of our central bankers to respond in times of crisis to save the economy. This year and next year we will find out how well Jerome Powell can control inflation.
Tooze seems overly bullish on China in this book, partially because of it being written before China reinstituted its zero-Covid policy. He says that China is "walking a tightrope without end," but that "it was in China that 2020 brought a moment of profound national crisis. It was in the United States." I think that it obviously true, but I think it is worth noting that the crisis came to the USA in an election year, and that our system encourages full display of our divisions, where China's system crushes all dissent. I wonder what Tooze would say about China and America's responses compared to each other today.
I came away from this book more optimistic for Europe, as it seems like the Germans have begun to enter the 21st century with regards to the European Central Bank. Europe continues to centralize and unite, which could be a powerful force in the future. Tooze wrote the book before Russia invaded Ukraine, which has further united Europe. That said, the response in Europe was not as strong as the United States, although Europe avoided much of the political chaos that we had. In the end, it is nothing short of amazing how the entire world was able to pull itself out of the chaos of February, March, and April of 2020, but then profoundly disappointing how things continued after that point.
Miscellaneous Facts:
- The oil market is larger than all other commodity markets put together at 35 billion barrels annually.
- In 2019, global GDP was calculated at $87.55 trillion, but had dropped 20% by April 10, 2020.
- 75% of market-making in US Treasuries is done by algorithmic trading, one of the most sophisticated markets in the world.
- When people got US stimulus checks, many of them started investing in the stock market. For those earning $35,000 to $75,000, trading increased by 90%, and for those earning $100-150,000, trading increased by 80%.
- Thanks to Chinese demand for Peruvian copper helped the Peruvian GDP quadruple from 2000 to now.
- During the pandemic, Xi Jinping declared that China would aim to peak its CO2 emissions in 2030 and be carbon neutral by 2060, which South Korea and Japan pledging Carbon neutrality by 2050 a few weeks later.
- In purchasing-power parity terms, China's economy became bigger than the US's in 2013. In overall dollar terms, China was not expected to surpass the US until the mid-2030s, but by the end of 2020 China was expected to pass the US in 2028 or 2029. I am not sure if this will be revised because of the zero-covid strategy, but Tooze says that by the 2030s, China's economy would be larger than that of Japan and the United States put together.
- While in 2008, fossil fuel corporations made up 16% of the S&P 500, in 2020, they were just 2.5%.
- In 2000, George W. Bush won 2,417 counties that generated 45% of US GDP, while Al Gore won 666 mainly urban counties that generated the other 55%. In 2020, the disparity was much more dramatic, as Biden won just 509 counties with 60% of the population and 71% of economic output while Trump won 2,547 counties.
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