With the Covid-19 pandemic still out of control, anyone expects a recession in 2020 to be a little heavier than the 2008 financial crisis. But with the wrong policy responses of Governments so far, the risk for a much worse outcome is increasing day by day.
* Article expressing the views of Dr. Nouriel Roubini in the journal Project Syndicate. A professor of economics at New York University. He was dubbed the “Dr Doom” for regularly making pessimistic forecasts about financial markets as well as the world economy. Also familiar with the crypto community when constantly criticizing Bitcoin anytime anywhere.
The shock to the global economy from COVID-19 is both too fast and more dangerous than the global financial crisis of 2008 (Global Financial Crisis or GFC) and even the Great Depression of 1929-1933. In the previous two times, the stock market collapsed 50% or more, the credit market froze, the company went bankrupt, the unemployment rate soared over 10% and the GDP decline at an annual rate. 10% or more. But all this took about three years. In the current crisis, similar terrible macroeconomic and financial results have occurred in just three weeks.
Professor, Dr. Nouriel Roubini
In early March, 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 the junk bond market) has skyrocketed to 2008. Even mainstream financial companies like Goldman Sachs, JP Morgan and Morgan Stanley also expect US GDP to decline 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 GFC).
In other words, all components of aggregate demand – consumption, capital expenditure, exports – are falling unprecedentedly. While most commentators have predicted a V-shaped decline – with a quarter of a sharp drop and then a subsequent rapid recovery – it's clear that the COVID-19 crisis is completely 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 United States and Europe today. The best case scenario will be a more severe recession than 2008 (in terms of cumulative global output declines) 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 severely affected economies will need to implement COVID-19 testing, tracing and handling measures on a large scale, mandatory quarantine and lockdown of all people people in the house the way China did. 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 rolled out on a large scale.
But Europe and the United States have a politics far different from China, Chinese politics operates vertically from the top, orders from the Central Committee to all localities must be executed consistently. They can also easily mobilize troops, doctors and medical supplies from around the country to gather one place (Wuhan), thereby quickly defeating the virus. But federalist states like the US, each state has its own laws, does not under the presidential direction, even attacks the president without support for his state or favor one state. there. States are also competing to buy medical supplies, pushing prices up. For one simple fact, no governor wants his state to be severely damaged, if that happens, their political money will also dissipate.
In addition, China is free of charge for testing and treating diseases, so people are required to test if they have symptoms. In the United States, however, testing and treatment fees are free (if you don't have insurance you pay up to $ 34,000). So many poor patients will not go for treatment or testing, but at home treat themselves and pray to God for their blessings. Such patients will spread to their relatives without anyone knowing.
China's mask production capacity is the largest in the world, they provide enough masks to provide free to the entire population, now able to export and take away for “mask diplomacy,” while countries The West does not have a habit of wearing masks, subjective or not, even President Donald Trump has to advise doctors to reuse masks.
That is why the effect of Covid-19 on the US and Europe will be much worse than China and the time and cost of stamping out will be heavier.
Second, monetary policy makers – who have done it in less than a month, what it takes them three years to do after the GFC – must continue to throw in the kitchen measures during the crisis. That means the interest rate is either 0 or negative; strengthen transition guidelines; quantitative easing (QE); and easing credit (buying private assets) to support banks, non-banks, money market funds, and even large corporations. The US Federal Reserve (Fed) has expanded cross-border trading lines to address the large dollar liquidity shortage in the global market, but now we need more ground to encourage Banks lend to small and medium enterprises with poor liquidity.
Third, governments need to implement massive fiscal stimulus, including “helicopter money,” reducing the amount of direct disbursement 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 completely transformed. If they are financed through standard government debt, the interest rate will rise sharply and the recovery will be smashed in its cradle. Due to the circumstances, interventions proposed long ago by leftists of the Modern Monetary Theory, including the release of helicopters, have become the main 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 beginning – a Great Depression (Greater Depression) – is increasing by day.
If the pandemic does not end, economies and markets around the world will continue to fall free. But even if the pandemic is more or less suppressed, overall growth may not come back by the end of 2020. After all, another season of the virus is most likely to start with new mutations; The treatment interventions that many people are calculating may become less effective than expected. Therefore, the economy will decline again and the market will collapse again.
And there is no guarantee, after the Corona virus, what virus will appear next. If a variant of Corona with devastating power, where will the economy go ?, indeed, none of us dare to think about.
Moreover, the fiscal response may hit the wall if the transition from a 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 carry out such bailouts in their native currency (for example, Vietnam, we cannot pump too much VND into the economy like the US does with the USD). 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 are using asymmetric cyber warfare to sabotage America from within. The inevitable cyberattacks on the U.S. electoral process could lead to a controversial end result, with accusations of fraud, the possibility of violence and complete civil disorder . No Party can easily accept defeat.
Similarly, as I have argued previously, markets are underestimating the risk of war between the US and Iran this year; the worsening of Sino-US relations is increasing as each party blames the other for the size of the Covid-19 pandemic. The current crisis is likely to accelerate the ongoing balkanization process and shed light on the global economy in the coming months and years.
In this risk – an unpredictable pandemic, insufficient economic policy arsenal and geopolitical white swan – will be enough to push the global economy into a persistent recession and financial crisis. main. After the collapse in 2008, a strong reaction (though delayed) pulled the global economy back from the abyss. We may not be so lucky this time.
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