Coronavirus and the economy II

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  • Tue, Mar 31, 2020 - 01:43pm

    #1
    westcoastdog

    westcoastdog

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    Coronavirus and the economy II

The most important question about the coronavirus pandemic is the effect on the economy. This is an unprecedented situation, an economic tsunami that has shut down or crippled numerous industries from oil to tourism. Services, such as restaurants and retail stores, have suffered a nuclear war.

Be aware that the mass media and government officials will minimize the situation. The government and mass media are not evil. Their responsibility is to prevent panic.

Two variables will determine the economic damage, the length of the lockdown and the pace of recovery, which will be different for each industry, and the longer the lockdown, the more challenging the recovery. For example, many restaurants and cafes will never reopen and will not be replaced. Because this is a unique economic situation, much more severe than the 1918 flu pandemic, one can only make estimates based on the available financial and disease reports.

Current estimates to normalcy are three to six months. It is not hard to imagine the consequences of a six-month lockdown—bankruptcies, bank failures, perhaps a worldwide economic collapse. Even a three-month lockdown will be a financial catastrophe for most small businesses.

Lombardy, Italy ordered a lockdown on February 21, 2020. As of March 31, 2020, 11 weeks later, new cases were still increasing at the rate of 4%. It appears more than three to six additional weeks will be required for the infection rate to decrease to zero.

Wuhan China was locked down on January 23, 2020. Officials now want to end it on April 8, 2020,  after 11 weeks of closure. Italy was unable to control the outbreak because of three significant and deadly mistakes. First, it intermingled patients at the hospitals rather than segregating them. Second, it allowed patients with minor symptoms to return home and to self-isolate, while in China, everyone testing positive were removed from their homes and put in quarantine. Third, the government required everyone venturing outside to wear masks and enforced the order by patrolling the streets with police, soldiers, and drones, which had speakers. Today, the World Health Organization is still recommending for people not to wear masks, and the CDC is reconsidering the proposal. The chief virus scientists in China and South Korea both insist it is mandatory for everyone to wear masks to control the Covid-19 pandemic.

The current US policy is making the same Italian mistake by allowing persons with mild cases to return home and infect others. Also, the US has not required facemasks for everyone, although the issue is under reconsideration. Therefore, under current procedures, the evidence suggests that the rate of infection in the US will not be reduced to zero in two months. Furthermore, the US  is testing only the patients and not the immediate family and neighbors, which is the practice of the advanced Asian nations. The US government is making decisions based on incomplete information.

Capitalism needs credit to survive and grow, and all companies are indebted to various degrees to banks and to bondholders. You will know that the world economy is in a severe crisis when banks begin to fail. The Federal Reserve and Central Banks are pumping trillions of dollars into the financial markets to maintain liquidity. But remember that in 2008-2009, the financial assistance could not save all the banks and hundreds failed.

The $2 trillion CARES Act has steadied the stock market and will provide short-term relief, but it will not reopen restaurants and stores. There are hundreds of thousands of small businesses in the US, and the implementation of the loan program will be a bureaucratic morass. There is no government agency large enough that can administer the loan program, which will have to be performed by banks. To give you an idea of the monumental scale of the small business relief assistance, the Small Business Administration makes only about 70,000 loans annually. However, the anticipation of the flood of money will postpone a severe contraction of the economy.

In a previous discussion, I mentioned “The Wealth Effect” and consumption. Stock markets around the world are down 20-30% and even more in some countries.  Once comfortable and secure, the middle class and the affluent now feel anxious about their future. The level of consumption will decrease, especially luxury items and expensive purchases like cars. Consumption drives production, and with smaller sales, companies will not need more employees, and unemployment will double and may approach 10% if the virus cannot be controlled in a few months.

According to the government, approximately 30 million people are employed in sales and food industries, which is where lockdowns have had a severe impact. The food industry specifically has a high concentration of small business owners and most of them are paying rent.   The lockdown has been their armageddon.

As I stated in the beginning, the authorities and media will minimize the coronavirus impact to avoid a financial panic. However, the US Treasury bond market is the financial thermometer that gives the truth. Interest rates are the lowest ever, lower than the 1930s! Big money is running scared, really scared, and we should assume that the economy will struggle for the next six months to a year and plan accordingly.

While my focus has been on the US, other countries ‘ economies will suffer more, especially Italy and Spain, both experiencing long lockdowns. Poorer countries will import less, reducing the incomes of exporting nations. The reduction of tourism will have a severe impact on nations relying on visitors.  The tourist industry contributes 10% of the national income of Thailand and France and employs millions of workers. As I write this, two-fifths of the world population is in lockdown! The Covid-19 virus has cracked the foundations of the world economy, which will remain weak and vulnerable for many months.

Pay attention to the Chinese economy, whose performance will provide an indication of our future.

  • Wed, Apr 01, 2020 - 07:12am

    #2
    westcoastdog

    westcoastdog

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    Joined: Feb 04 2020

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    Coronavirus and the economy II

Bank shares are tumbling this morning after the British Prudential Regulation Authority wrote to lenders asking them to halt dividend payments. HSBC, Standard Chartered Plc, Royal Bank of Scotland Group Plc, Barclays Plc and Lloyds Banking Group Plc all canceled outstanding payments and said there would be no dividends in 2020. Regulators in Europe are also pushing back against bonus payments to to senior staff.  April 1, 2020

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