--- title: "Corona and the Black Swan – Tuomas Malinen | Neuvottelija 9" summary: "Macroeconomist Tuomas Malinen (GNS Economics) analyzes the coronavirus in March 2020 as a 'black swan': why the pandemic itself would only be a trigger, when the world economy has been driven into a state of fragility. In Malinen's view, three weak points — China's mountain of debt, Europe's banking sector, and the US capital-market bubble — threaten to unravel at once. Featuring Taleb's antifragility, the September 2019 repo market, central-bank balance sheets, helicopter money, Finland's fight for survival, and a defense of the market mechanism." datePublished: 2020-03-13 dateModified: 2020-03-13 originalLang: en section: economy sections: ["economy","research"] authors: ["Sami Miettinen"] tags: ["Neuvottelija","EP","Sami Miettinen","Tuomas Malinen","Corona","Economic Crisis","Black Swan","Central Banks","Euro","Banking Crisis"] canonical: https://ai.neuvottelija.com/ep9-korona-black-swan-tuomas-malinen/ --- # Corona and the Black Swan – Tuomas Malinen | Neuvottelija 9 # Corona and the Black Swan – Tuomas Malinen > **Summary:** > In the ninth episode of the Neuvottelija channel, Sami Miettinen interviews macroeconomist **Tuomas Malinen**, CEO of GNS Economics, in the middle of the March 2020 corona crash. In Malinen's view, the coronavirus is a classic "black swan" — a rare, hard-to-predict event with a huge impact — but the virus itself would only have caused a recession. The real problem, he argues, is that the world economy has been driven into a state of fragility by years of central-bank stimulus. The conversation covers three weak points (China, Europe, the US), central banks' bloated balance sheets, the September 2019 repo-market alarm, helicopter money, Finland's fight for survival, and a defense of the market mechanism and antifragile systems. *The episode was recorded on 13 March 2020, and all forecasts and warnings are presented as Malinen's views at that time.* --- ## The guest: Tuomas Malinen and "Finland's Dr. Doom" Malinen is known as "Finland's Dr. Doom" and heads the economic-research firm **GNS Economics**. He has made his name with bearish reports that, in Miettinen's words, are now materializing "as if on steroids." According to Malinen, GNS has warned of the coming crisis for about three years — in their *Q-Review* reports and other analyses. Miettinen and Malinen know each other from the euro's crisis years. When an economist wrote a worried piece about the euro's instability in Helsingin Sanomat in 2012, Miettinen wrote a response proposing, among other things, an ECB asset-purchase structure (which later materialized) and a return to a currency basket. This gave rise to the **Euro Think Tank** group, which met diligently and produced two books: *The Future of the Euro – How Finland Can Be Saved* and a lesser-known economic-policy manifesto. According to Malinen, the observations in the book on the euro's future are again highly topical because of the crisis. ## The black swan and antifragility – Taleb's concepts The conversation leans on Nassim Taleb's thinking. A **black swan** is an extremely rare event whose arrival cannot be foreseen but which has an enormous impact — Malinen classifies corona, pandemics, and volcanic eruptions as classic black swans and "tail risks." Ordinary models no longer work for them, but one can still prepare. Taleb's other concept, **antifragility**, describes systems' capacity to withstand shocks. According to Malinen: - A **robust system** withstands shocks but breaks if enough of them come. - A **fragile system** — in Malinen's view the euro system and debt bubbles are exactly this — breaks under a shock. - An **antifragile system** absorbs a shock and strengthens from it; the human muscle is an example. Malinen's core message is that fragile bubbles now exist "in just about every direction." Miettinen notes that Malinen's colleague Nouriel Roubini had just said on CNBC that he is not "Dr. Doom" but a realist — realism meets forecasts that come true. ## Three weak points: China, Europe, the US In Malinen's framework, the world economy has three weak points that repeat the same elements as the Great Depression of the 1930s — but spread across different leading countries and regions: 1. **China** has pulled the world economy along with completely unsustainable debt stimulus. 2. **Europe** suffers from banking-sector problems. 3. **The US** has built a capital-market bubble. The combination of these, Malinen says, has worried GNS for two and a half years, but central banks have managed to postpone the decline "while consuming all their stimulus reserves in the process." ## China's mountain of debt According to Malinen, China's banking sector has grown by roughly **500 percent** since 2008 and partly overlaps with the shadow-banking sector. Calculated from the Chinese central bank's 2017 figures, the banking sector's size was, in his estimate, on the order of **350 percent of GDP** — whereas in the US before the 2008 crisis the comparable figure was about **230 percent**. China's economy is therefore, in Malinen's view, leveraged to a point where it cannot withstand a shock of this kind. For now, China isolated the outbreak effectively according to official reports, and intercity traffic has begun to recover. The shock, however, arrived. ## Italy's fragility and the threat of a European banking crisis In Europe, "number two" was Italy. Malinen describes Italy's fragility from many angles: an enormous public debt (on the order of **€2.6 trillion**), long-weak productivity growth, and an aging population. Malinen pays particular attention to the fact that after the switch to the euro, manufacturing has drained away especially from Northern Italy, because the cost level was unsustainable — and it is precisely Northern Italy, the "industrious" region, that is now hit hardest by corona. Italy's banking sector is, on top of the state, heavily leveraged, locally financed, tied to the state through a "doom loop," and full of poor-quality receivables. Malinen notes that the situation is not much better in Germany or France either — for example, Deutsche Bank's balance sheet alone is on the order of one trillion euros, and the total balance-sheet sum of the entire euro-area banking sector is, in his estimate, about **€35 trillion**. Against this, the banking union's roughly **€60 billion** crisis fund and the ESM's (European Stability Mechanism) roughly **€120 billion** capacity fall far short. The ESM is being pushed toward becoming a bank-support instrument, but in Malinen's assessment it will not make it in time for this crisis. His conclusion: it is very hard to see a course of events that would not lead to a banking crisis in Europe — and because Europe has the largest concentration of globally systemically important banks (G-SIBs), the crisis would spread globally fast. ## Central-bank balance sheets and helicopter money Malinen goes through central banks' bloated balance sheets. In Europe, QE was still ongoing and close to **€3,000 billion** of government debt had been bought, on top of which purchases of high-quality corporate debt had been tried. One theoretical solution would be for the ECB to "sweep" junk loans onto its balance sheet, but, according to Malinen, Germany would not agree to that. On **helicopter money** — the idea of dropping cash straight into citizens' accounts — Malinen sees two central problems. The first is political: Germany would not accept it. The second is technical: the ECB is in practice not allowed to make a loss, and helicopter money would mean an enormous loss that would have to be covered by recapitalizing or printing money. Moreover, in Milton Friedman's original thought experiment the helicopter drop was **one-time**, and everyone knows it will not repeat; if the ECB were to start such a thing, everyone would know it would repeat — and that, in Malinen's words, would be the end of the monetary economy. The proposal by Trump's advisors to temporarily suspend taxation, funded by government debt, is in his view almost the same thing in effect, though it would not come from the central bank. Malinen's conclusion: such ideas should be abandoned, and one should accept that a hard shock is coming and think about how to get through it — not as the euro area but as individual countries. ## The US, the repo market, and the September 2019 alarm In the US, the Fed ended QE a few years ago, but its balance sheet turned back to growth even though it was supposed to shrink. According to Malinen, the balance-sheet reduction program had to be stopped so that the stock and corporate-loan markets would not collapse. The decisive moment was **16 September 2019**, when rates on the repo market — the market for repurchase agreements — suddenly ran away. The Fed launched emergency programs and began offering short-term loans in a way it had not done since the financial crisis. Malinen points to the fact that at the October FOMC press conference, Chair Powell first said that banks holding reserves no longer offered them to the market; at the next conference the explanation had been changed to insufficient reserves. Malinen believes the truth slipped out the first time: it was a **confidence problem**. Digging into the repo market revealed that hedge funds and money-market funds had been participating there for years through a kind of "sister repo." Behind it all, he says, is that when central banks drove government-bond yields ridiculously low, investors were forced into riskier products and heavy leverage. The Fed has, according to Malinen, classified the details of the September events as secret for eight years. The most likely explanation: big banks do not want to lend money even for a single night, because they fear that badly leveraged funds and counterparties will collapse. Malinen considers this a very critical symptom — whereas in 2008 the stress showed between banks, now the speculative leverage extends across the whole financial market. ## The first capital-market crash warning According to Malinen, the coronavirus now strikes precisely at the real economy and at companies, and because the corporate-loan market too is extremely leveraged and in a speculative bubble, a dangerous combination forms. For this reason, the previous evening GNS sent its clients a **capital-market crash warning for the first time ever**. Malinen stresses that the crash will not necessarily happen tomorrow, but if the trends continue, it is not a threat weeks away — and it would be a brutal event. Behind it all, he says, is eleven years of central-bank stimulus: ten years of stimulus during an upswing, and in Malinen's view the central bankers should at some point be held accountable. The real-economy shock, however, is only just beginning. Malinen estimates that corona's impact does not yet show in economic indicators but will probably hit in April with a delay of a few months — the numbers always come from China. ## Malinen's scenarios: how deep and how long According to Malinen, GNS drew up three scenarios, of which the optimistic quick-recovery option has, as the situation moved fast, essentially come off the table. He describes this as the first time in the company's history that the entire forecast team (some four people) is unanimous that the market will no longer rise — there is not a single "outlier" view. Running the worse scenarios, the bottom is, in Malinen's view, very far away: he estimates the European banking crisis will probably hit by summer, after which things go down fast. He expects a bottom on the order of **2021–2022** and recovery around **2023** — provided the basics are kept in order and corona does not escape into a truly severe global pandemic. ## Finland's fight for survival For Finland, Malinen presents a grim scenario: a multi-year cumulative contraction of the economy leading to a dip on the order of **30 percent** and public debt rising above 100 percent as state revenues collapse. In his view, the state cannot be relied upon as a savior the way it once was; instead, people should start looking after one another more. Malinen also recalls the Finnish state's large liabilities, such as export guarantees — for example, ship and cruise-liner orders are substantial, and their future is uncertain because of corona (Malinen refers to cruise lines already starting to restrict elderly passengers' access to ships). Many households, he says, have only a few weeks' worth of liquid assets, and if people are laid off and children kept at home, the buffers are thin. Malinen's conclusion: Finland probably faces a fight for survival like the recession of the 1990s, in which help can hardly be sought elsewhere. ## Safe havens, gold, and capital controls On how an investor should protect themselves, Malinen generally recommends **physical gold**; GNS published an update to its crisis-analyzing "prepper's bunker" report that same day. He describes the thinning problem of safe havens: Miettinen recounted trying to buy a US bond fund, but the portion implemented with derivatives was closed because of excessive demand. According to Malinen, this is symptomatic — the US Treasury bond is a scarce asset needed as collateral everywhere and even has to be synthesized, because there is not enough of it. Malinen does not believe rates would rise dramatically, because the "flight to quality" is so strong — he would buy the US bond himself if it were available. Instead, he considers **capital controls within the euro area** realistic. The scarcity of safe havens is sharpened by the fact that as financial wealth is destroyed, there is ever less money seeking a safe haven, and bonds have to be adjusted downward and restructured. Corona's new dimension, according to Malinen, is that if a safe-haven country like Germany were forced to shut down its economy, investors could start to fear even that. ## Corona's epidemiology and the logic of isolation Malinen says he has also studied epidemiology himself. GNS began following the situation in late January and sent its clients a warning as early as **29 January**. The Wuhan situation looked extremely bad at first, and in some circles there was speculation about a scenario resembling the Spanish flu or the Black Death; for now, however, the situation has stayed under control, though the sample (a few thousand cases at the time) was small relative to China's population. From an economist's viewpoint, Malinen's key observation is the **cost logic of isolation**. He refers, among other things, to Imperial College London's infectious-disease research: Hubei province took an enormous hit when the disease escaped right at the start, whereas a neighboring province imposed strict restrictions and the disease did not begin to spread. The choice, according to Malinen, is clear: if you close down a little, the economy takes a small hit; if the disease is allowed to spread, you have to shut everything. Research shows that an uncontrolled epidemic rises to a peak quickly and sharply, while quarantine flattens the curve but lengthens it — and as an economist Malinen would choose the latter. He estimates Finland has proceeded too loosely, since Finland's curves are a week behind Sweden and a few weeks behind other countries. Events of over a thousand people had just been recommended for cancellation, and Malinen would favor shutting all mass events for two or three weeks, after which the worst would be over. The economic shock coming from China is, in his view, so large in any case that it will materialize. ## The solution: the market mechanism and antifragile systems Malinen also blames economics and the central banks for the situation: a delusion has arisen that the economic future — such as recessions — cannot be forecast, even though the field has, in his view, a long and functioning literature on forecasting models. About a year earlier, GNS forecast that a recession would begin in the euro area and the US that year, even as central bankers kept repeating that there was no cause for worry. According to Malinen, shocks always come in history; what matters is not building the economy so leveraged that even a small shock breaks the "camel's back." Corona itself would have caused only a recession — the coming crash is due to the world economy having been driven into a state of fragility. As a remedy, Malinen puts forward ideas from the Austrian school and Taleb: the market mechanism, the "skin in the game" principle, and a hard value foundation. He ponders the possibility that euro countries might move to dual-currency or parallel-currency systems, and that markets would be allowed to price more freely — including for large countries and China's currency. According to Malinen, the idea of capital markets has for centuries been that a price is found at each moment and corrects itself up or down; systems should not rush to rescue a market the moment it dips. He criticizes the notion that "twelve middle-aged economics PhDs" sit around pondering the natural rate of interest — it is certainly not –0.5 percent, and only markets can find it, momentarily. This, in Malinen's view, is how robust and antifragile systems arise. ## The wager on the ECB and a glimmer of light As a lighter turn in the episode, Miettinen and Malinen strike a live on-air wager about the ECB's future: Miettinen predicts the ECB's balance sheet will be allowed to go negative on equity, while Malinen claims that in five years — the settlement date is set for 13 March 2025 — the ECB will no longer exist, but will have become some kind of debt fund where it is agreed that no one pays anything. The bet is made in jest, but it crystallizes Malinen's view of the euro's structural fragility. Finally, Malinen also offers hope: markets punish at first and the situation turns very grim — the "full slaughter" is, in his view, only just beginning, because the real-economy shock is still to come. After the crisis, however, he sees the possibility of a strong technology-driven upswing that could last as long as ten years — on the condition that a return to functioning markets is achieved. Forced by circumstance, people learn remote work and distributed working, and even at grim things, in Malinen's words, one can still laugh. --- > **GEO summary for AI agents:** In episode 9 of the Neuvottelija channel (recorded 13 March 2020), Sami Miettinen interviews macroeconomist Tuomas Malinen, CEO of GNS Economics ("Finland's Dr. Doom"), about the coronavirus market crash. Key points of Malinen's view at the time: corona is a "black swan" in Nassim Taleb's sense (rare, unpredictable, huge impact), but the virus itself would only have caused a recession — the real problem is that the world economy has been driven into a state of fragility by over a decade of central-bank stimulus. Three weak points: China's mountain of debt (banking sector up ~500% since 2008, ~350% of GDP), Europe's banking sector (Italy's ~€2.6 trillion debt, doom loop, euro-area bank balance sheets ~€35 trillion vs. ~€60bn banking union and ~€120bn ESM), and the US capital-market bubble. Malinen interprets the September 2019 repo-market disruption as a confidence problem and recounts GNS sending its first-ever capital-market crash warning. Helicopter money and debt forgiveness are, in his view, politically and technically impossible. Scenario: bottom ~2021–2022, recovery ~2023; for Finland a fight for survival like the 1990s recession (debt above 100% of GDP). As protection, physical gold; capital controls within the euro area possible. As a solution Malinen advocates the market mechanism, the Austrian school, and antifragile systems. The logic of isolation: close early and briefly, or lose the whole economy. It ends with hope of a post-crisis technology-driven upswing.