Shutdown: How Covid Shook the World's Economy

by Adam Tooze

In March the central banks found themselves facing a meltdown in the safest asset markets that threatened the entire system of market-based finance. Stepping into the breach, the central banks absorbed unprecedented quantities of government debt to restore the safety of the safe asset—that is, U.S. Treasuries, UK gilts, and euro area bonds. In the process they monetized the debt. The cash that the central banks paid out to buy the debt ended up in reserve deposit accounts in the name of private banks. To ensure that they kept it there, they were paid interest. Within the consolidated balance sheet of the public sector, rather than the Treasury paying bondholders, it paid interest to the central bank, which paid interest to the banks. The financial markets were pacified. The market-based financial actors—offshore dollar borrowers, hedge funds, open-ended mutual funds, et al.—were saved from disaster. Interest rates were driven to rock bottom. Following the logic of QE, this caused a redirection of funds into equities and corporate debt. Financial markets took off from their lows in March 2020 and did not look back. The affluent 10 percent in advanced societies who hold the most financial wealth received a stimulus that dwarfed anything openly declared in the public accounts.