AFTER COVID-19 THREATENS A GLOBAL DEPRESSION

AFTER COVID-19 THREATENS A GLOBAL DEPRESSION

The great depression, which lasted for 10 years (1929 to 1939), was the worst economic downturn in the history of the industrialized world, according to the A&E Television Networks,2009.

The depression was as a result of a stock market crush that wiped out millions of investors, and later resulted in a drop in consumer spending, sharp decline in output and hikes in unemployment rates as companies laid off workers.

The outbreak of the COVID-19 has brought back memories of the Great depression, and the International Monetary Fund (IMF) indicated that the current recession is the worst since the great depression and even more severe than the global financial crises in 2009 which shrunk the global economy by 0.1%. 

The Fund’s projections indicate that the global economy will slum by 3% in 2020 as a result of the outbreak of the coronavirus.  

The current pandemic manifest itself in the destruction of the economy by decreasing supply which latter culminated into weak demand.

The economic impacts of the virus mostly stem from the measures put in place by various countries such as partial lockdowns, stay-at-home orders, ban on social gathering, social distancing and a cancellation of international flights in some instances.

Situation could be worse

According to the Chief Economics Commentator for Forbes Asia, Yuwa Hedrick-Wong, the current assertion by the IMF of a recession in the global economy could even become worse as there is even a darker threat of a global depression mostly characterized by a declined in real GDP for more than 10% in two or more major economies lasting for more than a year.

Governments, being aware of the looming depression, are making efforts to avert this major economic threat.

More resources are being deployed in Europe and the US in order to prevent a further deterioration in their economies. As to whether they will succeed is another major question that begs for answers.

An NYU Professor and Former white house senior economist under US President Bill Clinton, Nouriel Roubini, who predicted the last financial crises still believes that there is the potential for a deep slump and a greater depression happening later in the decade where the price of the pandemic will be paid. According to him, there is little governments can do between now and then to save the situation.   As he said;

“The train has already left the station and is a slow motion one, is not going to happen this year but we have fundamental forces like the debt and deficit both probably going to lead to insolvency. Initially there will be deflation where debt is going to increase and make people more insolvent, then debasing currency, quantity easing of large fiscal deficit that eventually with negative supply shock is going to lead to inflation by the middle of the decade”.

On the components that can take us from a recession to a depression;

Nouriel Roubini believes, there are forces that are going to lead to a depression. Essentially, it’s a global shock and both households and corporate will have to spend less and save more. Savings is going to go higher; income is going to be lower and then there will be less capital spending by both the corporate sector and the household sector. For households, capital spending is the purchase of your homes, so you spend less, you save more, you do less car parks. There will be global investment slum, a global savings glut, that’s a recipe for a very anaemic recovery of the global economy.

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Disruption in China

Also, the disruption of economic activities from China through to North America will mean the substitution of labour with capital and firms are going to cut costs to save more and spend less and that’s going to imply more automation and more robotics.

According to Roubini, we are in a process of deglobalization, we have seen democracy backlashes, people are becoming scared, people are becoming populist and authoritarian populist governments coming to power all over the world. All these will affect economic activities.

Another factor he cites, is the recent geopolitics and strategic rivalry between the US and China.  He believes the cold war between US and China is going to get ugly where digital rivalry and cyber warfare is going to get worst over the next few years. Opponents of the West (China, Russia, Iran, North Korea) will fight the US and the West using conventual weapons, asymmetric warfare and cyber warfare that will interfere with the US elections.

There is also what we call deadly man-made disasters; pandemics and global climate change and not natural disasters. Even pandemics come from poor health conditions, destruction of ecosystems and so on. All these forces are fundamental forces that existed even before the crises and each one of them is exacerbated and accelerated and made worse by this crisis. And therefore, we will end up in a greater depression.

According to him, the depression is going to happen within this decade and policy cannot do much about it. Policies of more stimulus are actually going to worsen the debt balances and the debasements of currency, and with negative supply shocks coming from deglobalization, populist protection and economic nationalist, that is going to increase the discourse speculation; recession and inflation underlined. Today, there is deflation but in a couple of years there is risk of inflation as seen in the negative supply of oil shocks in the 1970s.

He further states that the option to explore now is Credit spread in the product sector for those that are highly indebted be it households, corporate, financial institutions, banks and non-banks, and shadow financial institutions.

He however warns that, Credit spread could blow up, resulting in have debt crises. So now in motion is a deadly combination of rising debt levels that are going to explode in addition to credit spread much higher than before.  Major institutions; both large and small are going to go bankrupt, there will be debt deflation where prices will fall in the short run and wages will also fall and only few people will be able to settle their debts. All these will lead to a debt crisis that is going to be explosive.

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