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   Tracing the legacy of Covid-19
Relief from governments and central banks has been swift and immense. What happens now?
by Mark Burgess
      Frances Donald
Global chief economist, Manulife Investment Management, Toronto
Bruce Mizrach
Economics professor, Rutgers University, New Jersey
As economies shuttered and financial markets reeled
in March, governments and central banks responded on a massive scale.
The U.S. Treasury plans to borrow almost US$3 trillion in the second quarter — more than five times the previous quarterly borrowing record set at the height of the 2008–09 financial crisis — to pay for government programs sup- porting businesses and unemployed workers. The Federal Reserve has vastly expanded its asset purchases.
The Canadian government had announced measures total- ling $151.7 billion in late May, and the Bank of Canada is buy- ing at least $5 billion in federal government bonds every week from the secondary market. The parliamentary budget officer expects the federal deficit to hit $252.1 billion in 2020–21 — the largest on record measured as a share of GDP.
The post-crisis economy will look significantly different from forecasts at the start of this year.
We asked two economists about the biggest risks and potential legacies of the Covid-19 crisis.
What element of government or central bank intervention poses
the most significant risk to financial markets down the road?
Frances Donald
One of the biggest questions economists and market participants are grappling with is how to unwind the incredible amounts of monetary and fiscal stimulus that have been added to this economy.
The post-financial crisis environment showed us how difficult it was for the Federal Reserve to normalize its balance sheet and raise interest rates. It created tremen- dous market volatility, and there are arguments to be made that the Federal Reserve had already over- tightened before we entered into Covid-19.
When we think about how central banks are going to behave over the next decade or so, there will be tre- mendous pressure on them to try to not just taper their purchases, but reduce the size of their balance sheets. Markets will have to grapple with that.
When it comes to government spending, there will come a period where governments recognize that their elevated levels of debt are probably not sustainable over the long run. There will have to be a reckoning.
That may come in various forms. It may turn out that we need to experience — like Europe did in 2011 — a period
of austerity: spend less, tax more. It may be that we have a moment where we’re discussing modern monetary theory a bit more, and central banks have to purchase more govern- ment debt in order to ensure some demand over time.
But either way, while few economists will tell you there was too much monetary policy or too much fiscal spending during Covid-19, the ability to unwind it will likely be difficult and take, in my view, several decades.
Bruce Mizrach
The biggest risk the central bank has taken during the Covid crisis is that it has committed to purchase assets, including corporate bonds, and to provide credit to risky lenders.
JUNE 2020

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