Covid-19, and the Long-Term Impact on Globalization

With the 10-year Treasury yield breaking 1% last week and more than $14 trillion of negative-yielding sovereign debt worldwide, it seems almost axiomatic that the least held view among market participants is the potential for a return of inflation.  There is a certain irony in this given the fact that the world’s central banks have so eagerly attempted to create it since the Global Financial Crisis.  The never-ending cycle of creative destruction is the main reason why deflation rather than inflation is the natural order of things over the long arc of history.  Good deflation, rather than inflation, is the rule rather than the exception.  Our sad experiences with persistent and rapid increases in the aggregate prices of goods and services generally tend to evidence themselves only after periods of extraordinary monetary and fiscal profligacy.  Weimar Germany’s money printing after World War I and America’s guns and butter policies of the ‘60s and ‘70s stand as examples, although far different in degree.

One wonders whether the outbreak of the coronavirus will change the world’s perception of the global economic system as much as 9/11 changed the world’s geopolitical landscape.  In the final analysis, our collective experience during 9/11 appeared to be a sad coda to the heady, relatively carefree speculative days of the 1990s.  The tragedy was sufficiently horrific, shocking, and visible that it permanently changed the way people thought about their own security in the West after nearly six decades of peace from hostile actors, at least on home soil.  Time will tell whether the outbreak of the coronavirus will serve as a similar historical marker with regard to the generally accepted principal that globalization is always and everywhere good and that sophisticated mathematical models can make just-in-time inventory systems forever reliable.  At any rate, it is undeniable that globalization has been a major contributor to the decline in inflation over time, accelerating markedly when China joined the WTO in 2001.  It is also undeniable that the status quo ante of China’s relationship with the rest of the world has been inalterably changed since President Trump was elected.  While it seems clear that the coronavirus is deflationary in the short-term, investors should now wonder whether a slowing in the pace of globalization will correspond to a concomitant increase in inflation over the long-term.