The extent and duration of the economic damage from the COVID-19 crisis are unknowable. A wild guess is that global GDP will be 40% lower for six months. This would imply an income hit of 20% of annual GDP.

Governments are likely to act as insurer of last resort and pick up most of the tab to limit corporate failures and job losses. The speed with which stimulus / support programmes have been announced, and the acceptance that a wartime-scale rise in debt is inevitable, have been striking. There remain many gaps but these will probably be filled as administrative capacity allows.

Similarly, central banks have reinstated within days the full range of support measures developed over months during the GFC (ZIRP, mega-QE, multiple liquidity / credit support programmes). Those measures needed to be large-scale then because of the (stupid) policy of forcing banks to raise capital ratios, which worsened the credit crunch. Now, banks are being supplied with guarantees / cheap funding and encouraged / forced to lend to all-comers.

Dislocated markets will be unable to absorb the huge rise in government debt issuance as deficits blow out, implying that most of it will end up on the balance sheet of the banking system – mainly central banks – with a corresponding large boost to broad money. Japanese-style yield curve control may go global. The helicopters have arrived.

The above considerations suggest that global money growth will explode to much higher levels than reached during / after the GFC.

The new role of government as income-insurer and the fusion of fiscal and monetary policy set precedents and are likely to be popular in the short term. The era of independent inflation-targeting central banks is over.

Global (i.e. G7 plus E7) annual narrow money growth is estimated to have risen to about 7.5% in February, the fastest since April 2018 and similar to the level in November 2008 after Lehman’s September collapse. It subsequently rose to 10% in March 2009, when equity markets bottomed, peaking at nearly 14% in August. An early increase to 10% is possible and would be a positive signal.

The medium-term investment message is clear: consider buying inflation hedges, many of which have cheapened dramatically in recent dysfunctional markets.

Major countries are now adopting radical social distancing policies, which may or may not be as effective as the lockdown in China’s Hubei province in late January. If they are, the Chinese experience suggests that global ex China daily new infections will peak in about 11 days, though at a significantly higher level than currently. Italy locked down earlier and could be a leading indicator.

Caveat: the following observations are made by an economist with no expertise in epidemiology.

The Wuhan lockdown was announced on 23 January and extended to other cities in Hubei province the following day. It is assumed here that the lockdown was effective from 25 January. Chinese daily new infections peaked 11 days later on 5 February (excluding a spike on 17 February due to a reclassification of existing cases), embarking on a trend decline thereafter. New infections rose by 730% between the start of the lockdown and the peak – see first chart.

The restrictions on travel and commercial / social interactions imposed in Italy and now being rolled out across Europe and in major US cities could be more or less effective in halting virus spread than the Chinese lockdown. The disease may have had greater momentum in China because of increased travel and social interaction ahead of and during the Lunar New Year holiday.

If an effective global lockdown began today (16 March), a repeat of the Chinese pattern would imply a peak in daily new infections on 27 March. A 730% rise from the current level would suggest peak infections of about 90,000.

The Italian lockdown was announced on 9 March. Assuming that it became effective the following day, peak daily infections might be reached around 21 March – second chart. The Italian numbers will be key for assessing the extent to which global experience is mirroring the Chinese pattern.

The Chinese peak on 5 February occurred just after a stock market low on 3 February. Several daily activity indicators (e.g. coal consumption at power plants, passenger traffic, property sales) bottomed out over the following two weeks.