Nobody knows the extent and duration of the economic damage from the COVID-19 crisis. 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.