Inflation is #VALUE!

What is the inflation rate during and after lockdowns?

Inflation is already hard to measure in normal times, as I discussed in Bankers are people, too (page 126-129).

But the corona crisis adds further complications. Some services are unavailable due to the corona lockdown, for example restaurant visits and air travel. To discourage hoarding, supermarkets stopped offering discounts.

The abrupt shock causes headaches for statisticians.

For more, you should read Claire Jones’ Alphaville post on the fuzzy inflation figures.

Is the Corona Crisis the beginning of the Dumb Depression?

Will millions of businesses fail due to the corona crisis? Are we doomed to years of high unemployment?


But let’s be very clear. A depression is a political choice.

Governments can solve the crisis in the blink of an eye. Transfer money to households and businesses that suddenly lost their income.

Problem solved.

Thinking past the sale of your financial panacea

There are plenty of financial proposals for dealing with the corona crisis.

More government debt! Eurobonds! Helicopter money! Eliminate sovereign debt held by the ECB! Create a European investment fund!

One thing that greatly annoys me is that people don’t go into the details.

So if you want to convince me of your financial panacea, show me what it means in practice. Who are the winners and losers? What are the consequences of your plan for households, companies, banks, government finances, inflation, employment?

Make me think past the sale, and I might buy your proposal!

Why I’m bullish

The coronavirus has led to a lot of economic pessimism.

I’m more bullish than most commentators. Why?

  • Stock prices have bounced back from their mid-March lows
  • Shops, schools and factories can open again thanks to workarounds
  • Government transfers have stabilized incomes
  • The corona shock has sped up the digital transformation
  • Masks and testing will bring the virus under control without lockdowns or a vaccine

The future looks bright!*

*Unless premature austerity kills the recovery.

Economists failed us yet again

Two stories dominated popular economics over the past years. Both of them turn out to be useless in the current corona crisis.

Story 1: “Robots will take our jobs!”

Fact check: people lost their jobs due to shutdowns. But no robot is taking those jobs. Partly because of the nature of the crisis. We don’t want to go to crowded restaurants right now, not even if they have robot waiters. But also because robots aren’t ready. We still rely on (badly paid) people to pick fruit and to slaughter animals.

Story 2: “Crypto will replace fiat money and banks!”

Fact check: firms need cash. They don’t want bitcoin, but dollars and euros. Central banks and governments backstop the economy. This would be impossible with a cryptocurrency with a fixed supply, as I already pointed out in Bankers are people, too.

So instead of educating voters and policy makers about money, economic influencers have wasted years of popular discourse on these two sideshows.

Thanks for nothing, economists!

Plague or famine? How Covid-19 threatens food security

The amount of household income spent on food varies greatly by country. In countries like the U.S., Singapore and Australia, less than 10% of consumers’ income goes to food. Households spend more than 40% of their income on food in countries like Nigeria, Kazakhstan and Algeria.

Of course, these are average numbers. Even in rich countries, the poorest households spend a much larger percentage of their income on food than the wealthiest.

How does the coronavirus affect food affordability? Affordability is a function of incomes and food prices.


White collar workers can work from home during lockdowns. In countries with a strong social safety net, the government pays unemployment benefits to people who lose their jobs. The income loss of households due to lockdowns is modest.

On the other hand, lockdowns are devastating if they stop the informal economy and the state doesn’t support people’s incomes. Families who depend on remittances are in trouble if their relatives can’t earn and send money.

The corona crisis has hit certain sectors especially hard. Nations that depend on tourism or on the export of oil or garments face a severe dollar income shock.

Food prices

The coronavirus has raised retail food prices in multiple ways.

Several countries have limited or banned food exports. Travel restrictions prevent migrant farm workers from harvesting crops. Milk and vegetables go to waste at farms because of supply chain disruptions. Farmers are denied access to markets in cities. Lockdowns make food exports difficult.

Food prices are skyrocketing from West Africa to the Middle East.

Schematic effect of (the reaction to) the coronavirus on food affordability. Note that there are huge inequalities within countries.

WEIRD economists should take into account inequality before advocating lockdowns.

If you want to learn more about the impact of Covid-19 on food security, you should follow the Food Pandemic Twitter account of R. Zurayk, N. Amhaz, A.Yehya. They share a lot of news from Africa and the Arab World.

Economists’ stance on lockdowns is WEIRD

Most economists argue that there is no ‘health versus economics’ dichotomy. A widely shared article by Sergio Correia, Stephan Luck, and Emil Verner on the 1918 Spanish flu “suggest[s] that pandemics can have substantial economic costs, and NPIs [non-pharmaceutical interventions] can lead to both better economic outcomes and lower mortality rates”. Sam Bowman and Martin Eichenbaum, Sergio Rebelo and Mathias Trabandt believe that shutdowns are worth the lives saved, despite the costs.


On the other hand, Michael Burry and Toby Young think that governments are overreacting. Lockdowns cause disproportionate damage to people’s lives.

All of these commentators base their recommendations on the U.S. or Western Europe. But the best response to Covid-19 might be very different in the rest of the world. Not just food affordability, but also demographics and the effectiveness of measures to contain the virus differ greatly between countries. Economists are WEIRD.

Pent up demand after corona lockdown will be very limited

Will consumer spending exceed its pre-corona level to make up for the lockdown? I doubt it.

Lockdowns force households to save. However, consumers won’t be able to spend money at crowded spaces1 as easily as they did before the virus.

Furthermore, a lot of consumption is lost forever and cannot be replaced. Just think about things like haircuts, restaurant visits, massages, and housecleaning.

I still think a swoosh-shaped recovery is possible2. Yet I don’t expect the economy will bounce back above its pre-corona level thanks to pent up demand.


Where are the acronyms of the corona crisis?

During the Global Financial Crisis, we learned about CDO, CDS, Fannie Mae, Freddie Mac, MBS, NINJA

Today? Nothing.

Why? Because the crisis didn’t originate in the financial system, but in the sudden shutdown of whole industries.

If you like acronyms to describe what’s going on, I want to coin NICO: no income, cash out.

Comments on ‘Macroeconomic implications of Covid-19: can negative supply shocks cause demand shortages?’

This paper by Guerrieri, Lorenzoni, Straub and Werning (GLSW) looks at the macroeconomic effects of Covid-19.

The authors argue that

  • the economic shocks associated to Covid-191 can cause a fall in aggregate demand that exceeds the original shock
  • fiscal stimulus is less effective than usual because some sectors are shut down
  • monetary policy can prevent firm exits and is more effective
  • the best policy is to close contact-intensive sectors and to provide insurance payments to affected workers

My summary of the GLSW model (their paper is 37 pages long, so obviously I’m oversimplifying and probably missing important things!):

Continue reading “Comments on ‘Macroeconomic implications of Covid-19: can negative supply shocks cause demand shortages?’”