For the global economy the shock of Covid-19, have been more rapid and severe than the global financial crisis of 2008 (IFC) and even the Great depression. In those two cases the stock markets fell by 50% (or more), the credit markets were frozen, the mass of bankruptcy, the unemployment rate jumped above 10% and GDP declined by 10% or more. However, it took three years to make it all happen. And in the current crisis are the same horrifying macroeconomic and fiscal developments materialise in the next three weeks.
In early March the U.S. stock market in just 15 days fell into “bear” territory (a decline of 20% relative to the peak level) — this is the fastest collapse in history. Today, the markets fell by 35%, the credit markets began to fail, and credit spreads (e.g., junk bonds) jumped to the level of 2008. Even the leading financial companies, for example, Goldman Sachs, JP Morgan and Morgan Stanley, expect that U.S. GDP will shrink by 6% in the first quarter (annualized) and 24-30% in the second. Treasury Secretary Steven Mnuchin warned that the unemployment rate may rise above 20% (this is twice the maximum level during the 2008 crisis).
in Other words, all the components of aggregate demand — consumption, capital spending, exports — was in a state of unprecedented free fall. Most comforting themselves commentators were expecting a V-shaped recession, when GDP is declining rapidly in a single quarter, and then quickly recovers in the following. By now, it should be clear that the crisis caused by the Covid-19, it is something completely different. What is happening now is the contraction of the economy doesn’t look like V-shaped, U-shaped (slow recovery) or L-shaped (sharp decline beyond whichthe eye should stagnation). It looks like I: a vertical line showing the drop in financial markets and the real economy.
Even during the great depression and the Second world war the major part of economic activities did not stop as literally as it happens today in China, USA and Europe. The best outcome would be a decline, which (from the point of view of reducing cumulative global GDP) will be much more severe than the 2008 crisis, however short-lived, which will return to positive growth by the fourth quarter of this year. In this case, the markets will begin to recover as soon as will appear light at the end of the tunnel.
But a better scenario is possible only under certain conditions. First, the United States, Europe and other seriously affected countries will have to do mass testing and tracking Covid-19, and its treatment; to impose mandatory quarantines all close, as did China. And given that the development and mass production of the vaccine could take 18 months, on a large scale it will be necessary to use antiviral drugs and other medicines.
second, the monetary authorities less than a month have done more than they did in the three years since the IFC should continue to use unconventional measures to combat the crisis. Among these measures are: zero or negative interest rates; expansion of information on future intentions (forward guidance); quantitative easing; credit easing (buying private assets) with the aim to support the banks, nabanco, money market funds (MMF) and even large corporations (through the mechanisms of buying commercial paper and corporate bonds). In addition, the fed already expanding its international line of currency swaps, in order to solve a problem of huge shortage of dollar liquidity on global markets, but today we need more mechanisms to encourage banks to lend to illiquid but still solvent small and medium-sized enterprises.
the Context
Moody’s: the epidemic of the coronavirus terrible world кризисаИноСМИ03.02.2020 Bild: destroy the epidemic North Korea?Bild25.03.Putin 2024 to 2036: coronavirus will help (CSM)The Christian Science Monitor17.03.2020 third, governments need to apply a massive fiscal stimulus, including so-called “money from helicopters” — direct cash payments to households. Judging by the size of the economic shock, the budget deficit in developed countries needs to increase from the current 2-3% of GDP to around 10% or higher. Only Central governments are large enough and strong financial balance, to prevent the collapse of the private sector.
However all these interventions, carried out by increasing the budget deficit should be fully monetizirovat. If they will be implemented with standard debt, then interest rates will increase dramatically, and the economic recovery will be strangled in the cradle. In current circumstances, measures which have long offered left-wing economists belonging to the school of Modern monetary theory, including the distribution of “money helicopter”, become the mainstream.
However, the best scenario is bad that the actions of the health care system in the developed countries is still very far from what is needed for containment of a pandemic, and discuss the current budgetary measures are neither large enough nor fast enough to provide conditiia for a timely recovery. Therefore the risk of a new great depression (and much deeper than the original, that is Even More than the great depression) is increasing every day.
If the pandemic is not stopped, the economy and worldwide markets will continue to free fall. However, even in the case that a pandemic will be able to more or less restrain the economy, however, may not start to grow until the end of 2024. The fact is that by the end of the year, it is likely viral the beginning of a new season with new mutations, and therapy, which today many expect, it may be less effective than expected. As a result, the economy will again start to shrink, and markets will collapse again.
Meanwhile, the budget measures can be rendered useless if the monetization of the huge deficit will cause inflation, especially in a situation when a series of virus related negative shocks on the supply side will reduce the potential growth of the economy. In addition, many countries simply will not be able to carry out such borrowing in its own currency. Who is going to save governments, corporations, banks and households in developing countries?
In any case, even if the pandemic and its economic consequences will be able to control, in the global economy will still remain a number of unlikely risks (so called “white swans”). In the U.S. approaching presidential election, and therefore, the change of the crisis Covid-19 comes renewed conflict between the West and (at least) four revisionist powers like China, Russia, Iran and North Korea. They are already using asymmetric cyber-warfare to weaken US from within. Inevitable cyber attacks on the electoral process in the United States can lead to the fact that the election results will be challenged, you will start to sound like accusations of “falleficacia”, maybe even the beginning of blatant violence and civil unrest.
And, as I wrote earlier, the markets are completely underestimating the threat of war between the US and Iran already this year, and the deterioration of Sino-us relations has increased markedly, as both sides blame each other that the pandemic Covid-19 has acquired such a scale. The current crisis is likely to accelerate the start of the Balkanization and the collapse of the world economy in the coming months and years.
These three groups of risks (the failure to contain the pandemic, failure of the arsenals of economic policy, geopolitical white swans) will be enough to topple the world economy into permanent depression and trigger a rampant decline in the financial markets. After the crash of 2008 strong (albeit delayed) the actions of the authorities helped to pull the global economy out of the abyss. This time we might get lucky less.
the new York times contain estimates of the solely foreign media and do not reflect the views of the editorial Board of the new York times.
