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Avoiding The Economic Abyss

Updated: May 18, 2020

It has now been three months since a deadly virus infiltrated the world.

Amongst many others, one lingering geopolitical effect of the coronavirus pandemic is that countries may be a little more skeptical about globalist platitudes and a little keener to take care of themselves. Continually, history has shown us that universal responses to pandemics are short-sighted, chaotic and uneducated. Sure, a prevailing school of thought dictates pandemics are computed as economic externalities and should not have an effect on the Gross Domestic Product of a country but the reality is that GDP solely measures the output of an economy and not overall welfare. Yet, governments seem to be playing marionettes and puppetry on the world to believe everything is normal. Markets are underestimating and underplaying the potential fallout of the coronavirus outbreak.

Macroeconomic and financial outcomes of the coronavirus have materialized in just three weeks, in comparison to the three years it took during the 2008 financial crisis. Markets are down 35%, credit markets have seized up, and credit spread has spiked to levels similar to that 12 years ago. And to that part of the population heedless of global news or the even smaller part that has not watched the Academy Award-winning film “The Big Short” (which I suggest you do), the 2008 financial crisis or the global financial crisis (GFC) was a grievous worldwide economic crisis which is considered the most serious economic crisis after the Great Depression. Both these events had a drastic impact on not just the financial health of a country, but also the day to day wellbeing and welfare of its people. The shock to the global economy from COVID-19, however, has been faster and more severe than both of these economic calamities. To put that into perspective, as a result of the Global Financial Crisis, America alone had an increase in unemployment by 2.6 million. In the last week, 5.2 million Americans filed unemployment claims bringing the total to 22 million in just four weeks. If these numbers are not alarming enough, there is also the looming fact that just four weeks have wiped out a decade of job gains in the most developed economy in the world. All this in addition to knowing that the COVID-19 virus has only shown patterns of continual retrogress.

“The question is whether this crisis of capitalism is different from the many that have come before,” said Cornell’s Glickman. “Will the legitimacy of the system be challenged in a thoroughgoing way, as it was not in 2008-2009? Will political solutions, such as Medicare for All, that seemed extreme a few weeks ago gain political purchase? Will we change how we value labor, now that we see that restaurant, retail, postal, health care workers and journalists (among many others) are doing essential labor that is massively underpaid? Will unionism take off, in the wake of the labor actions by Instacart and Amazon workers?”

As an outcome of these circumstances, aggregate demand consumption, capital spending, exports – is in unprecedented free fall. Economists and trend experts that were once predicting a V-Shaped recovery ( involving a sharp decline in these metrics followed by a sharp rise back to its previous peak) have now realized the COVID-19 pandemic will not resemble any previous recovery trends and will not be V-shaped, L-shaped or U-shaped. Rather, with the ceaseless dipping of growth and the end of the longest-running S&P 500 bull market, The World Economic Forum predicts an I-shaped vertical line which represents a perpetual decline in both the financial markets and the real economy.

(via : World Economic Forum)

By now you’re probably thinking - “Obviously a pandemic will have a negative effect on the global economy but, it’ll all be better once this is over.” While the optimist in me would love to affirm with that statement, economic facts precede cherry conclusions. Even if the pandemic stops or is somehow contained, stabilization of employment or increasing growth rates will not emerge until the start of next year. Following any other virus or global pandemic, the quarter will start with new product mutations and inventions that are predicted to be inefficient. And so the perpetual cycle of failing businesses and rapidly declining economies will start even before the after-effect ends.

Against those trends the advocates of global capitalism will have to find fresh ways to justify a rebirth of the international system and turn globalization into something more than what it has been, which is mainly a profit machine built on complex supply chains and cheap labor.

Succeeding the 2008 financial market crash, a powerful and shrewd response accommodating the trifecta of risks - extreme market fluctuations, insufficient economic-policy arsenals, and geopolitical grey swans, pulled the economy upwards and safe from an abyss. However, we may not be that lucky this time. But, here's hoping.

Author : Shamona Koshy

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