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“In the end there are no winners, only losers”

November 5, 2020

reading time: 8 minutes

by editorial team MAG/NET


The world is in crisis mode: can history help us to better understand how far-reaching the consequences of the pandemic could be for the economy, politics and financial markets? Economic historian Tobias Straumann discusses this matter with MAG/NET.

Professor Straumann, the world as we knew it until last February is going down in an unprecedented crash. Many prominent, powerful and wealthy individuals are now talking about a radical change, an epochal watershed moment, the beginning of a new world. Do you share this assessment?
No. The upheaval is greatly overestimated. Most people, companies and banks want to return to the “old” world. That is why the first phase of the economic recovery - as was to be expected - has been very swift. The forecast made by many that people would have less desire to consume has not materialized at all. On the contrary, consumption has in some areas been higher than last year.

Does this mean that being in crisis mode clouds human judgment? What can history teach us about how well people in crisis are able to recognize the radical changes it triggers in the economy, society and politics?
Yes. The definition of a crisis is that people’s view of the future narrows dramatically. All that remains is the present. This kind of environment is fertile ground for theories that predict an epochal change. The expectation that everything will be different lies at the core of a crisis. When the oil crisis broke out in 1973, many thought the oil age was over. But exactly the opposite happened: consumption increased steadily.

The governments and central banks of wealthy countries are spending trillions to cushion the immediate consequences of the crisis, to support the masses of people who are unemployed through no fault of their own and to keep companies going. Will increased state influence on the economy become permanent?
It had already increased significantly before Covid-19, due to the major financial crisis that hit in 2008. It was then that the idea that market forces automatically ensure optimal discipline in the banking sector turned out to be an illusion. There appeared to be a need for stronger regulation aimed at increasing the banks’ capital and liquidity reserves. This has been achieved through new legislation, which has resulted in the fact that the financial system is more robust today than it was immediately prior to the financial crisis.

Investors focus on the economy, the business cycle. They assume that the political infrastructure and economic order will remain unchanged. Are investors in for some surprises, will the belief that some “certainties” exist turn out to be misguided?Surprises will always happen, that is part of life. It is important that an investor is positioned in such a way that he or she can deal with surprises.

It is impossible to fully foresee a surprise, but perhaps risks can be gauged? Where do you see dangers, which developments should be on investors’ radars?
Political surprises such as Brexit or Donald Trump’s election in 2016 can always occur. Italy, for example, remains unpredictable. Another war in Eastern Europe or the Middle East, in which European countries could be directly or indirectly involved, is quite conceivable. The energy supply could suddenly come to a standstill because it is interrupted or because we have too little electricity in the winter. And then there are the surprises that were on the list but were never taken seriously.

For example?
Covid-19 is a prime example.

Political surprises such as Brexit can always occur.

Pricing on capital markets has been undermined: central banks are keeping interest rates artificially very low through ultra-expansionary monetary policy and unprecedented bond-buying programs to facilitate the financing of soaring government debt. Economists are using the term financial repression. Which longer-term consequences will this have?The longer-term consequences are that private and public debt will rise continuously and that it will be very difficult for the central banks to raise interest rates in the future, because this would mean that a large wave of bankruptcies would immediately be on the horizon.

Is a collapse imminent?
The game that we are currently playing can be continued for some time, but in the end, there will be no winners, only losers.

How can investors protect themselves?
Investors should also buy real assets, preferably shares in well-diversified, global companies.

On 9 April 2020, the Financial Times ran the headline: “Bank of England to directly finance UK government’s additional spending”, making the UK the first country to use monetary financing as an instrument to directly cover, at least temporarily, the massive additional demand for government money by printing money. This move is reminiscent of wartime economic measures. Is the situation really so serious as to justify it?
No. The UK could have easily borrowed money on the capital market. When central banks start to directly finance national budgets, this is a cause for concern. Such measures have in fact only been carried out in times of war and have always led to inflation because the reversal of monetary financing came too late. I hope the Bank of England has not forgotten this lesson.

Do crises accelerate things? In other words, do they accelerate developments in the economy, society and politics that were already gaining momentum before they became widespread? If so, what does this mean for climate change, one of the major challenges we face?
Yes, crises can accelerate things, but not always. New problems that were not previously on the radar also emerge.

For example ...
... We must fundamentally rethink our medical disaster relief. When it comes to climate change, I do not think Covid-19 will be a catalyst. We have been discussing the negative impact of the greenhouse effect for thirty years. This is a topic that we will be dealing with for a long time to come.

Tobias Straumann: an economic perspective on history
Tobias Straumann: an economic perspective on history

What is not being addressed in the discussion?
I am not seeing a serious discussion about government debt. I am in favor of expansive financial policy during crises to prevent a major economic slump. But during upswings, we need surpluses. This issue is not taken seriously enough in the US or the eurozone. Fortunately, Switzerland is in a very good position, but it will be directly affected if large nations do not do their homework.

The Covid-19 pandemic and the economic policy responses are calling capitalism into question: should taxpayers rescue companies that in the past have paid high dividends to their shareholders while paying almost no taxes? And: who should bear the burden of this unprecedented government debt?
Yes, taxpayers should rescue these companies, provided they are systemically relevant, and they should impose strict conditions to ensure that the taxpayers’ money is returned. This worked very well when UBS was stabilized. The state even made a profit.

 Pictures: Portrait: CH Media, Alex Spichale; lecturing: Ruedi Keller, Zurich

The economic historian

One of the leading analysts of his generation: Tobias Straumann is a Swiss economic historian with a particular interest in financial topics. Professor Straumann teaches at the University of Zurich and is known for his interdisciplinary analyses.

Tobias Straumann’s work has also attracted considerable international attention. In a Financial Times article about Straumann’s latest book, “1931 – Debt, Crisis and the Rise of Hitler”, economic historian Adam Tooze wrote: “The story of the end of Weimar Germany should be required reading for policymakers today.”


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