COVID – Another Viewpoint

Markets Are Feeling the Weight of Pandemic History

The collapse of the reflation trade shouldn’t be a surprise given the tendency of plagues to presage lousy returns.


John Authers

July 8, 2021, 11:00 PM CDT

The Ill Effects of Covid-19

Sometimes the answer to the problems that most concern us is lying under our nose. Or dormant in our files. It’s just possible that the answers to the Conundrum of the Disappearing Reflation Trade lie in historical research that we were all anxiously reading more than a year ago.

A reader kindly reminded me of a piece I wrote in April 2020, detailing research by economic historians into the effects of pandemics. You can find it here. The headline asserted (with good evidence) that “labor gets the upper hand” after pandemics pass. There are all kinds of problems with the data; Covid-19 wasn’t as bad as the Spanish Flu or the Black Death, for which we can all be thankful, but its human cost has been far heavier than any other outbreak in the last 100 years. And analysis of a dozen pandemics that claimed at least 100,000 victims produced clear and recurring trends. The research, by a group of academics convened by the San Francisco Fed and updated in February this year, can be found here. This is their listing of the plagues in the research, with the then current estimate of Covid fatalities. Unfortunately, the number has risen by more than 66% since then, and recently topped 4 million:

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These comparisons are as good as we have for Covid-19, and they tell us that we should expect pent-up savings while the natural rate of interest declines. This is exactly what the market seems to be trying to discount in recent weeks. This is what happened to real rates after pandemics compared to what would have been expected without them. (The academics checked for robustness if the two greatest pandemics were excluded, and the results remained similar.)

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Their conclusion was as follows:

the great historical pandemics of the last millennium have typically been associated with subsequent low returns to assets, as far as the limited data allow us to conclude. These responses are huge. Smaller responses are found in real wages, but still statistically significant

If the natural rate of interest tends to fall after a pandemic, then it shouldn’t be surprising if bond markets move to discount such an outcome. That has happened in the last three months, with both nominal and real bond yields tumbling. To continue with their conclusions:

pandemics are followed by sustained periods—over multiple decades—with depressed investment opportunities, possibly due to excess capital per unit of surviving labor, and/or heightened desires to save, possibly due to an increase in precautionary saving or a rebuilding of depleted wealth. 

Much of the argument for higher imminent inflation, albeit not all of it, rests on the huge amounts of money that are currently burning a hole in the pockets of many Americans. The hope, which seems reasonable, is that they will rush to spend it once they have the chance. But that won’t necessarily happen. Dec Mullarkey of Sun Life Capital Management pointed to the fall in real yields, and said:

This is a significant clue to the mind of the market. It’s essentially saying, there is ample capital in the world so no need to overpay to attract it. 

The pandemic drove a surge in global savings with the U.S. at the forefront. Early forecasts assumed consumers would rush to spend it. But they have been cautious and consistent with history, precautionary savings bulge after dislocations and stay elevated for years. This in turn drives a more measured pace of demand rather than a spike. Right now, markets seem to be resetting to this expectation. 

That is good news if you are worried about inflation, but bad news if you are banking on a nice big splurge of growth. Whether consciously or otherwise, then, markets are adjusting rates to levels that will be appropriate if this pandemic proves to have the same effect as history’s others. In terms of monetary economics, the velocity of money might conceivably be so sluggish that the massive increase in supply doesn’t drive higher inflation. One positive point: In post-pandemic conditions, the natural rate of interest is below the rate of growth (“r-g” as economists put it), which means that governments can get away with servicing huge amounts of debt. GDP per capita, after the pandemics the academics could analyze in England, tended to rise. Big fiscal spending, of the kind that the Western world has indulged in over the last year, is more sustainable in post-pandemic conditions. That in turn means less reason for bond vigilantes to worry about default, and therefore more reason for yields to go down:

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There is one snag, if like most Points of Return readers you have a stake in capital, rather than labor. Pandemics tend to strengthen the hand of labor, and real wages rise in their wake. This is very different from the response to wars, largely because there is no destruction of capital that then needs to be rebuilt. Instead, there is a reduction in the supply of labor. Here are the numbers from the study:

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The labor market has been inscrutable over the last few months. In many industries, there doesn’t appear to be a market-clearing wage that employers are prepared to pay and for which workers are prepared to work. This will resolve itself over the coming months. But historical experience suggests that in the longer run, the pandemic should apply upward pressure to wages and therefore to inflation. That would be what schoolboy histories used to call a Good Thing for social harmony, but it would add to the reason to expect miserable returns from capital, as more profits will have to be shared with the workforce, rather than shareholders.

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Further, this pandemic appears to have arrived at an inopportune moment, when demographics were about to shift in favor of labor rather than capital in any case. These charts are from Marko Papic of Clocktower Group, and show headline inflation has a tendency to follow labor force growth, which is linked to the share of workers aged less than 34. That is due to increase:

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In the longer term, the pandemic appears to imply a somewhat better deal for workers, but lousy returns for investors against a backdrop of rising inflation. As we are already seeing, it’s also causing plenty of discontinuities that require intelligent and sensitive management by governments (a big ask). This is the conclusion I wrote to last year’s piece:

Like its predecessors, this panic has probably tipped the balance in favor of labor and against capital. It will intensify distrust in governments while also intensifying the desire for governments to take a more active role in society and in markets. We will be lucky if those conflicts are resolved peacefully.

That still sounds accurate. 

Covid, Democracy, and Liberties: A Rant

Be warned, dear reader, that I am about to go on a rant about civil liberties, the right to privacy, voter ID in elections, and vaccine passports. I care about my civil liberties. I dislike the notion of governments, and private corporations, knowing all there is to know about me as much as anyone else. I deeply dislike the notion of a police state. And I certainly prefer to keep my medical history private. 

All of that said, how exactly would carrying a vaccine passport impinge on my liberty? Sensible libertarians see that flat opposition to vaccine verification is misguided. And if the governments of various American states care passionately about eliminating voter fraud, and want voters to produce identification at the polls, what is wrong with the government doing that job itself and issuing ID to everyone? 

My problem with vaccine passports stems from the latest British rules on international travel. I’m a fully vaccinated British citizen, living in the U.S., which is rated “amber” for its Covid risk by the British authorities. So my spirits rose and then sank when I read the first sentence of the report on the new rules in the Guardian:

Holidaymakers from England travelling to amber list countries will not have to quarantine on return if they are fully vaccinated, but Britons living overseas will not be able to prove their vaccine status if they have been jabbed abroad.

That means I have to go through the full quarantine rigmarole and take a bunch of expensive tests if I want to visit my parents (who are 81 and 84). They could (if they really wanted to put their octogenarian frames through a trans-Atlantic trip) come to New York and go home again, without any quarantine at either end. I can’t do the same starting the same round trip in New York. 

I, like my parents, have been twice injected with the Pfizer-BioNTech vaccine. Unlike them, I even have a nice certificate to prove it, along with the very handy Excelsior app from New York State, meaning that I can get into places like baseball stadiums just by showing them the vaccine certificate on my phone. Like them, I’m a British citizen. I’d be happy to go home, spend some money at struggling U.K. businesses, and then come back to the States. But my freedom to do so is thwarted by my government’s refusal to accept any American proofs of vaccination.

An accepted vaccination passport would liberate me, in a very literal and practical way. It would stimulate the economy. I have no problem with the U.S. and British governments, or indeed anyone else, knowing that I’m vaccinated. Yes, there are many valid libertarian and privacy arguments surrounding vaccine certification. These should affect the way any program is administered. They shouldn’t mean that two friendly governments thwart their own citizens from seeing their family.

While we’re at it: voter ID. Plenty of Republican-controlled states are imposing tighter laws on proving your identity at the polls. This is raising (sensible) allegations that they are being driven by racism and voter suppression, but the basic notion that you should prove your identity before you vote is reasonable enough. As avoiding electoral fraud is so important, shouldn’t the administrators of elections (elected officials) take responsibility for issuing official electoral ID? It costs taxpayers’ money, but it’s fair and it averts fraud. In Mexico, a country riven with electoral fraud for generations, you cannot vote without a card issued by the National Electoral Institute. Since its introduction, it has become the standard form of ID throughout the country. And it has transformed the population’s trust in the results of elections. If voter ID matters, then it’s worth doing properly and it’s worth paying for. That’s what America’s neighbor did to combat a very real historical problem with voter fraud.  

Again there are good libertarian concerns that should guide the design of the ID and the way data are collected and used. These concerns don’t outweigh the huge benefits to everyone of taking part in elections confident in the knowledge that nobody is voting who doesn’t have a right to do so. I’d be happy to carry a voter ID in future. And for the present, I would love to carry a vaccine passport. Who knows, if we all had them, we might even spend a bit more of that stored-up cash I was writing about earlier.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
John Authers at

To contact the editor responsible for this story:
Matthew Brooker at

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