In an article earlier this year, the Financial Times’ Martin Wolf reflected on the consensus thinking about the correct fiscal and monetary response to the coronavirus crisis. He said: “The focus must be on today, not on the high public debt and other burdens of the future. [Taking no thought for the morrow...] sufficient unto the day is the evil thereof”. Hence “abandon outworn shibboleths” against Modern Monetary Theory (MMT), unlimited fiscal deficits, helicopter money, and monetary finance. 
Investors, though, do have to think about “the morrow”.
Where will we be once the virus has been defeated? That partly depends on the duration of restrictions and the shape of the recovery. Yet it is clear that some pre-existing trends have been accelerated.
British Land believes that online retailers will double their market share to 40 per cent; some estimate that 30 per cent of now-closed shops and restaurants will never re-open. On the other hand, the evidence from China is that manufacturing can snap back quickly. Travel may be constrained for much longer and is at risk from border controls; tough on tourist-dependent countries in southern Europe. But it will recover with time.
Deeper structural changes are more important. Globalisation, already under pressure from trade wars, will roll back as its weaknesses emerge. The model of just-in-time, single-sourced but complex international supply chains may be replaced by more emphasis on higher inventories with a greater number of, and more local, suppliers. That would reverse a potent source of deflation over the last 30 years.
Most important of all, attitudes towards debt might finally change. In both the 1920s and in recent decades, debt was allowed to rise to unsustainable levels. However, the policy response to the debt-induced recessions of 1929 and 2009 was quite different. In 1929 tightening monetary policy helped to create a deflationary depression. In 2009, emergency policy easing staved off a depression, but created the environment for an explosion of corporate debt. It seems unlikely that such a model can be the source of growth over the next 10 years.
With desired personal savings rates also likely to rise after the coronavirus trauma, the deficit in demand can be made up only by governments. Monetary finance will be a sustained feature.
Under MMT that would not be an issue so long as inflation is not at problematic levels. The definition of what constitutes problematic levels is rising all the time, as a matter of consensus in academic, political, media and central banking circles. Even before the crisis, concepts such as “catch up” and “running the economy hot” were prevalent. Current targets will not be a meaningful guide. The extent of policy support this year has been astonishing. The US Committee for a Responsible Budget (CFRB) estimates that the fiscal deficit will quadruple to 18.7 per cent of GDP. In 2021 it is likely unemployment will still be elevated and Trump’s ambition for a substantial infrastructure programme will still be in place, suggesting a second year of double-digit deficits.
Central bankers have already spent over $5trn on public and private assets and are a long way from finished. Indeed, the US Treasury backstopping the credit risk in corporate and junk bonds blurs the distinction between monetary and fiscal policy. Both are now driven by the White House; that alone settles the issue as to whether deflation or inflation finally prevails. In the short term, of course, a dramatic fall in GDP is powerfully deflationary. Wages that were rising nicely will decelerate and the price of energy, hotels, restaurants, clothes etc. will be weak. In the absence of the fiscal and monetary offset, a deflationary depression would have ensued.
With the dramatic policy support, overall activity might with luck return to 2019 levels by 2022. But austerity will not follow; there is no political appetite for it and the debt burdens of governments and companies would be insupportable without powerfully growing nominal GDP. Inflation will permit prolonged financial repression to bring balance sheets General Commentary March 2020 back into equilibrium.
Lower purchasing power for investors and consumers may well be the “evil” that “the morrow” brings.
Peter Spiller is chief investment officer at CG Asset Management. The views expressed above are his own and should not be taken as investment advice.