COVID AND THE ECONOMY

On the 3^rd of June, Hans Hoogervorst, Chair of the IASB delivered his farewell speech at the IFRS Foundation Virtual Conference 2021 titled: “Final Observations of an Accidental Accountant”. He reflected on his 10-year tenure; how IFRS Standards have evolved during that time; and on the importance of independent standard-setting. He also reflected on developments in the economy during his time as Chair as well as through COVID -19. Here is an excerpt from that speech. This is the first of a three-part installment. 

Introduction 

I am delighted to be with you, for the final time, at this year’s IFRS Foundation annual conference. I had hoped this event would provide a final opportunity to meet personally with all the colleagues and friends from around the world who have made my time as Chair such a hugely rewarding and enjoyable experience. However, that was not to be. So here I am—delivering a farewell speech from my spare room, surrounded by piles of washing. Living the dream. 

I came into this job as an Accidental Accountant. I am not an accountant by training and many were surprised when I became chair of the International Accounting Standards Board (IASB). The Great Financial Crisis of 2008 had impressed on me the vital interest of solid international economic standards. 

Back to stagflation? 

The belief in free trade and free markets has taken a severe hit. Criticism of globalisation, once primarily dominant in left-wing circles, has widened its intellectual appeal to the populist right. The excesses of deregulation in the financial sector before 2008 have undermined the belief in free markets more generally. 

Balanced budgets are nowhere to be seen. That is not surprising in these testing times, but the size of deficits and debts are truly staggering. On average, budget deficits of the advanced economies are now in double digits. The worldwide total level of debt in the public and private sector is now at an unprecedented 335% of GDP and rising. We have mortgaged our global house more than three-and-a-half times. Monetary conventions have also been put aside. Investors have to pay for the privilege of buying debt from heavily indebted countries. Central banks buy up government bonds on a massive scale, quietly monetising public debtⁱ. 

Policymakers could not stand, of course, stand aside as the Covid crisis threatened to paralyse the entire global economy. 

However, as former IMF Managing Director Jacques de Larosière has remarked, the problem is that the massive stimulus hit an economic territory that had already been heavily mined by unconventional policiesⁱⁱ. He has described how, even in the decades before 2008, monetary policies in the industrialised world had become more and more accommodating. He -and many others- saw the resulting excesses in liquidity and debt as one of the main causes of the Great Financial Crisis of 2008.ⁱⁱⁱ 

Yet, fearing that the recession could turn into a depression, the world reacted to that crisis by doubling down on monetary accommodation. Determined to stave off a depression, central banks were determined to drive up inflation and pulled out all the stops after 2008. 

In his memoirs Paul Volcker expressed considerable scepticism with these policies. He did not agree with the inflation target of 2%, or just below 2%, that almost all central banks have adopted. He drily commented that an annual inflation of 2% will halve the value of a currency in little more than a generation. He was also doubtful that the rate of inflation could be micromanaged. He warned that once you reach inflation of 2%, it can easily slip to 3% or more.^iv Volcker’s warnings seem particularly apt today with inflation climbing above 3-4% in some parts of the industrialised world. 

Meanwhile, the natural laws of economic gravity seem to have been suspended indefinitely. While we are still digesting the biggest economic contraction in decades, housing prices are going through the roof, stock markets set record after record, and bankruptcies are at historical lows. One could of course see these counter-intuitive developments as a triumph of economic interventionism. Yet there are also reasons to see them as expressions of excess.^v While debt overhang and widespread zombification of the economy will likely depress economic activity in the future, a return of stagflation might very well be in the cards. Even if this does not happen, the unprecedented accumulation of debt represents a severe risk for financial stability. 

Incessant stimulus also has a pernicious influence on economic behaviour. A generation of investors has grown up expecting authorities to step in whenever markets throw a tantrum. Excessively leveraged business models get bailed out time and again. And I think back to my time as Minister of Finance. My story about not having a money tree might no longer be so convincing when central banks are buying up 50% or more of debt issues. Even in the frugal Netherlands, budget discipline is now under severe pressure. 

Policymakers are aware of all these risks, but they are understandably fearsome of what might happen once interest rates go up again. Yet the longer we go on like this, the more debt will accumulate and the more difficult it will become to raise interest rates and restore prudence. It is clear that the road back to normality will be extraordinarily painful and policymakers will need all the courage they can muster. But we cannot go on adding risk to a global economy that is already way too risky. 

Covid

Source: ifrs.org

To view our related Courses – IFRS Training material on the standards discussed above, follow the links before: 

> COVID-19 & IFRS | COVID Impact on Financial Statements | IFRS Training 

> IFRS Masterclass Updated | 2020 | 2021 | IFRS Training 

> IFRS Fundamental Concepts Updated 2020 2021 IFRS Training