After the pandemic recedes

As we struggle with the crisis of the spread of Coronavirus and the measures necessary to contain both it and the damage it has induced in the economy and elsewhere, it maybe worth thinking about how the world will look once it has receded.  Of one thing I am quite sure - that a very different world will emerge at the end of it.

Given that the Coronavirus originated in China and caused great damage there, it may sound sound counter-intuitive, but I believe that China will come out of the pandemic with its power and position in the world enhanced.

When the epidemic arose in Wuhan and quickly spread through Hubei province and threatened other parts of the country things looked very bad for China.  Lunar New Year celebrations were put on hold and much of the country was put on lockdown.  Factories and businesses closed and supply chains were interrupted, resulting no doubt in a big drop in first quarter output.  

Things didn’t look too good for the Communist Party leadership either, when it was revealed how Party officials in Wuhan had tried to cover up the outbreak and had punished the doctor who had first spoken out about it.  There were even reports of public unhappiness with the leadership Chairman Xi.   Coupled with the concurrent unrest in Hong Kong, the virus epidemic looked as if it might cause the ground to shift a bit under the feet of the autocratic leadership.

But now as we near the end of March, things look quite different.  China seems to have gotten on top of the virus with no new cases of community spread reported in Wuhan for several days.  Furthermore it is sending medical equipment and advice to various other hard-hit countries including Iran and Italy.  And it is Western countries that are struggling to control the virus and whose economies seem to be going into a tailspin.

Apart from the propaganda success, there is another way in which China is gaining.  The US and other Western countries have announced massive spending programs, at first in an attempt to prevent the collapse of the stock market and ensuing financial mayhem, and subsequently to help protect workers who cannot earn a paycheck through businesses going under or through enforced self isolation.  The deficits will be enormous - certainly involving many trillions of dollars.  And the governments incurring these massive deficits are, for the most part, already up to their eyes in debt, much of it incurred following the 2008 financial crisis, when banks and financial institutions were bailed out.  And the worst borrower by far has been the US Government, which has continued to fight wars around the world and dramatically increase its military budget, while at the same time, cutting taxes at home.  

I am not entirely confident that I understand how government deficit financing operates, but I think it is mostly through the selling of Treasury bills.  And who has the reserves to buy such bonds (i.e. to lend such gargantuan sums of money)?  I think the answer is China.  So when it all shakes down, the US (and other Western nations) will be massively in debt to China.

Perhaps the US Treasury can simply create money with a few keystrokes on computer? But history teaches that artificially creating money out of thin air, as was tried by the Ancien Regime before the French Revolution and by Weimar Germany, can lead to hyper-inflation and social and political dislocation.

So however these massive debts are financed, it looks to me as if the long-term winner will be China. The way China is bringing the epidemic under control with fewer deaths even than Italy, and a medical disaster emerging in the US, will all combine to make the authoritarian Chinese system seem attractive to many non-Western countries.  Coupled with a debt-ridden capitalist West, with its liberal democracy tainted by extreme inequality, and an electoral system that can result in the election of a narcissistic reality TV huckster, who didn’t even obtain a plurality of votes, the moral supremacy of the West looks definitely shaky.  

It could turn out that the Coronavirus will be seen as the catalyst which led to China  replacing the USA as the world’s number one power, just as World War II saw Britain being replaced by the US.  I can’t say I want it to happen, but in many ways the US, with the rest of the West tagging along, will have brought this unattractive outcome on itself.