Coronavirus pandemic has delivered the fastest, deepest economic shock in history - MW

The shock to the global economy from Covid-19 was faster and more severe than the global financial crisis of 2008 and even the Great Depression. In the previous two episodes, the stock market collapsed 50% or more, credit market froze, bankruptcy massively, the unemployment rate soared over 10% and GDP contracted every year from 10% or more. up. But all this took about three years to play. In the current crisis, similar terrible macroeconomic and financial results have occurred for three weeks.

Earlier this month, it took only 15 days for the US stock market to plunge into bear territory (down 20% from the peak) - the fastest decline ever. Now, the market is down 35%, the credit market has gone up and the credit gap (like junk bonds) has skyrocketed to 2008. Even mainstream financial companies like Goldman Sachs, JP Morgan and Morgan Stanley expects US GDP to fall at an annual rate of 6% in the first quarter and from 24% to 30% in the second. US Treasury Secretary Steve Mnuchin has warned that the unemployment rate could skyrocket above 20% (double the highest level in the financial crisis).

In other words, all components of aggregate demand - consumption, capital expenditure, exports - are in unprecedented freedom. While most self-service commentators have predicted a V-shaped decline - with production dropping sharply in a quarter and then recovering rapidly afterwards - it's clear that the Covid-19 crisis absolutely different. The ongoing contraction does not appear to be V-shaped or L-shaped (a sharp decline followed by stagnation). Instead, it looks like an I: a vertical line representing real financial markets and plummeting economies.

Even during the Great Depression and World War II, most economic activities were literally closed, as in China, the US and Europe today. The best case scenario would be a more severe recession than the financial crisis (in terms of cumulative global output declining) but a shorter duration, allowing a return to positive growth in the fourth quarter of this year. . In that case, the market will begin to recover when the light at the end of the tunnel appears.

But the best case assumes a number of conditions. First, the United States, Europe and other hard-hit economies will need to implement extensive Covid-19 testing, tracing and disposal measures, enforcing quarantine and locking all types of China has done. And, because it can take 18 months for a vaccine to be developed and produced on a scale, antiviral drugs and other treatments will need to be deployed on a large scale.

Second, monetary policy makers - those who have done less than a month, what they have spent three years doing after the financial crisis - must continue to throw into the kitchen unique measures. in a crisis. That means the interest rate is either 0 or negative; strengthen transition guidelines; quantitative easing; and easing credit (buying private assets) to support banks, non-banks, money market funds, and even large corporations (commercial paper and corporate bond facilities). The US Federal Reserve has expanded cross-border exchanges to address the large dollar liquidity shortage in the global market, but now we need more facilities to encourage banks. Lending to small and medium enterprises with low liquidity.

Third, governments need to implement massive fiscal stimulus, including through Google helicopters, reducing the amount of money disbursed directly to households. Given the size of the economic shock, fiscal deficits in advanced economies will need to increase from 2-3% of GDP to about 10% or more. Only the central government has a balance sheet big enough and strong enough to prevent the collapse of the private sector.

But these deficit-funded interventions must be fully monetized. If they are financed through standard government debt, the interest rate will rise sharply and the recovery will be smashed in its cradle. Given the circumstances, long-term interventions proposed by the leftists of the Modern Monetary Theory, including the release of helicopters, have become a trend.

Unfortunately for the best of cases, the public health response in advanced economies has gone far beyond what is needed to prevent pandemics and the currently-debated fiscal policy package is not large enough. nor fast enough to facilitate timely recovery. Thus, the risk of a new Great Depression, worse than the original - a Great Depression - is increasing day by day.

Unless the pandemic ends, the world's economies and markets will continue to fall free. But even if the pandemic is more or less suppressed, the overall growth may not come back by the end of 2020. After all, another season of the virus is likely to start with new mutations; The treatment interventions that many people are calculating may become less effective than expected. Therefore, the economy will contract again and the market will collapse again.

Moreover, the fiscal response may hit the wall if making money from the large deficit begins to produce high inflation, especially if a series of negative supply-related shocks of the virus reduce the potential for growth. And many countries simply cannot make such a loan with their own money. Who will sponsor governments, corporations, banks and households in emerging markets?

In any case, even when a pandemic and economic collapse are under control, the global economy may still be exposed to some whale tail risks. As the US presidential election draws near, the Covid-19 crisis will make way for new conflicts between the West and at least four revisionist powers: China, Russia, Iran and North Korea, all both are using asymmetric cyber warfare to sabotage America from within. Inevitable cyber attacks on the electoral process in the United States can lead to a controversial end result, with accusations of fraud, and the possibility of complete violence and civil disturbance.

MW