When the world feels like it is ending, it can be comforting to look to history and see that such global convulsions have happened before and the Earth kept on turning. Carmen Reinhart, co-author of the book “This Time Is Different: Eight Centuries of Financial Folly,” had these thoughts about the coronavirus crisis:
Q: What is your take on what we are seeing so far?
A: You can’t have a standstill in economic activity and not expect serious balance-sheet consequences. My expectation is that we will see a big increase in bankruptcies at the household level, at the corporate level and at the sovereign level.
Q: Many people are looking to the Spanish Flu of 1918 for clues — what can we learn from how that pandemic played out?
A: We don’t really have historical antecedents for a lockdown of this scale. The last major one in 1918 was in World War I, and as is common with wartime economies, the big thing was production. Real GDP growth at the time was 9%, so we can’t really look to that period for lessons in economic effects.
Q: What are you worried about, that others aren’t realizing?
A: I worry a great deal about social unrest. The longer this lasts, the hardest-hit households will have less and less ability to cope. A prolonged scenario when people don’t have jobs, and things are shut down, is worrisome in terms of what it does to the human psyche. We haven’t really had this experience before.
Q: Since you have looked at hundreds of financial crises, any lessons that are helpful now?
A: This pandemic is going to leave countries, corporations and households with a lot of debt. We have to be open to a greater role for the restructuring of public and private debts. That’s the healthy way to go.
Q: How do you see this crisis developing from here?
A: Even in a good scenario, I don’t think we’re going to return to business as usual anytime soon. Think of global trade patterns and global supply chains, with everyone relying so heavily on other countries. And remember in 1918, influenza continued to circle the globe and kill people until 1920. This is going to depress global growth for some time.
Q: Let’s leave on a positive note — anything encouraging you see out of all this?
A: We are seeing broad consensus for distancing and quarantines, which is fundamental to how long this will last. It’s hard to measure that in economic terms, but that’s at the heart of global response, and that’s encouraging.