A recession more devastating than the 2008 economic crash, lowest business morale in more than a decade and a record 3.3 million Americans filing for unemployment scream headlines in the business pages as the financial and human devastation of COVID-19 plays out across the world. An estimated US$25 trillion has been wiped from the global stock and bond markets in the last month prompting the biggest financial bailout in history. Airlines have gone to government’s cap in hand asking for handouts as the worldwide travel shutdown bites.
In the US, for the week ending March 21, the advance figure for seasonally adjusted initial claims was 3,283,000 – an increase of 3,001,000 from the previous week’s revised level. This marks the highest level of seasonally adjusted initial claims in the history of the seasonally adjusted series. The previous high was 695,000 in October of 1982.
People aren’t working, businesses are being mothballed, bills aren’t being paid and the death toll from COVID-19 rises. America, which this week had more official active COVD-19 infection than any other nation, has just passed a US$2 trillion stimulus package that it hopes will shore its economy through the devastation of the pandemic.
Medical experts say the death toll in the United States, which is now trending to be the highest in the world, could – in the worst-case scenario – push into the millions if the economy does not shut down.
To alleviate the pressure on people and business, the Senate has, this week, backed plans, the largest ever passed in modern-America history, that will lead to direct payments of US$1,200 to people earning up to US$75,000.
This money would phase out and be capped to those under six figures – with an additional US$500 per child. The plans include an expansion of jobless aid and with 3.3 million people filing for unemployment this week alone, will stretch the treasury to limits never-before seen. There has also been a further US$350 billion in guaranteed loans to small business and a US$500 billion lending program for companies rocked by the virus. And this is just in one country.
The name ‘helicopter money’ was first coined by Milton Friedman in 1969, when he wrote a parable of dropping money from a helicopter to illustrate the effects of monetary expansion. The concept was revived by economists that helicopter money could always be used to prevent deflation.
Global stocks took a historic hammering as the pandemic spreads and governments around the world enforce lockdowns, grinding economies to a halt. Nation states are now just printing money, in the case of the US with no limits. A sign of the historic nature of the crisis and how far markets had collapsed, traders rallied at the news of the looming federal invention, posting single-day gains not witnessed since 1933.
This was before strict rules banning companies from using the money to buy back their stock were confirmed. The situation in Europe and, in particular, Spain and the UK are not too dissimilar. Years of austerity imposed on its peoples have left health and social care institutions in dire straits before the coronavirus outbreak brought unprecedented surges on hospital bed spaces.
Both the British and American governments have gone down the path of ‘helicopter money’ – a term originally coined disparagingly as a reference to chucking aid out of helicopters in a non-targeted disjointed approach.
It was the strategy adopted after the 2008 financial crash, when massive bailouts were given to financial institutions, which then often used them to buy back their own stock or for dividends, keeping share prices inflated.
Was this the right strategy before and is it again, and how far into the future can forecasters actually see anyway?
As recently as January this year, Swedbank was predicting the biggest Nordic economy would expand by 1.4% this year. Less than 2 months later, the contagious disease, which was known about in December, has brought the world to its knees and Sweden is facing a more devastating recession than the 2008 sub-prime crash.
Germany, which has one of the highest numbers of hospital beds per capita in the world, is experiencing one of the lowest COVID-19 mortality rates, yet its economy is not immune to the disease.
The COVID-19 shutdown has led to the Munich based Ifo Institut, which conducts research in economics, to describe the economy as being in a state of shock.
German business morale is said to have suffered its biggest fall since the Berlin Wall came down and its climax index has fallen from 96.0 in February to 86.1 in March, a level not seen since the depths of the financial crisis.
If that was not a clear enough picture of how things are in Germany, an exports heavy economy in the midst of a global lockdown, Carsten Brzeski, Chief Economist at ING Germany said economic data for March and beyond “…will be horrible, and horrible probably even beyond the traditional meaning of horrible,” Zero Hedge reported.
The country’s Finance Minister Olag Scholz wants to tear up constitutional debt limits and borrow €156 billion, half of its annual spending, to combat the threats to modern life and fund social care and debt-hit firms. It also plans more than €750 billion in debt-financed cash to cover loans, guarantees and business aid. Part or complete nationalization of some stricken firms has not been ruled out.
The problem with all this is it appears to be using a shotgun when a sniper rifle is required.
Speaking at the Bundestag while standing in for Chancellor Angela Merkel who, as a sign of just how deep this crisis is, is herself under quarantine, said: “There is no blueprint for countering such a crisis. We are doing that with an enormous amount of money, as precisely as possible.”
Merkel has called it the biggest challenge to Germany since the Second World War.
Speaking to Deutchlandfunk Radio, Labor Minister Huburtus Heil said: “There will certainly be growth measures to get the economy going, but the strong and positive message is that we are well prepared for such situations.” Ominously for those looking across the Atlantic for a silver lining, he added: “We are a strong social stage. We’re not like in America.”
In the UK, the Bank of England has urged businesses to stay the course and pushed the message that the economic impact is temporary and economic activity would rebound once social-distancing measures were lifted.
This has not stopped dire warnings from business leaders fearful the 2020 crash will dwarf the 6% drop in gross domestic product (GDP) during the 2008 crisis that led to the decade-long austerity.
The Guardian reported that data from the main sectors of the economy were “so alarming, it prompted experts to warn of a recession on a scale not seen in modern history” with Samuel Tombs, of Pantheon Macroeconomics, predicting the lockdown could lead to a shortfall in GDP of between 15 and 20%.
In a traditional recession, business reports small incremental declines.
Tombs believed output would shrink by around 1.5% in the first quarter of 2020, but plummet by 13% in the following 3 months.
There are different schools of thought going forward on whether there is a way out of this that does not bring the world’s economies to its collective knees.
The helicopter cash approach has been deployed in the past as a band aid over a financial system that, depending on your viewpoint, either repeatedly fails or drives the world forward.
Others are horrified at the idea of pumping trillions into junk-debt laden organizations and instead think the focus should be on protecting individuals both financially and from a health perspective. The approved bailouts, such as those in America and the UK, could go some way to the former, and the lockdown would help with the latter.
President Donald Trump has his own take and is pushing to lift the shutdown as early as Easter Sunday saying it would be a beautiful day. In his mind, pew upon pew packed with parishioners celebrating Easter would be a great thing. Medical experts, and many faith leaders, feel it would be a health disaster that would only serve to hasten a looming catastrophe and undo the benefits brought about by the lockdown.
Trump has hung his hopes on anything from it miraculously going away to a new cure being discovered. He has sung the praises of malaria drug hydroxychloroquine, after one non-statistically significant test showed positive results. Vice President Mike Pence has also sung the drug’s praises. His Chief Medical Officer says more research needs to be carried out first.
Other equally non-statistically significant studies into the drug have resulted in patients’ health deteriorating.
The wartime-esque clampdown of people’s liberty, something leaders in the West were quick to criticize China for doing when the outbreak was first discovered in Wuhan, looks set to continue for the foreseeable future. Many countries are extending both the reach and breadth of their lockdowns, cutting off supply from the economy. The question is, will governments be forever prepared to keep printing money and how, or will it impact long-term inflation or shrinkation?
Small and medium sized enterprises do not need government freebies to stimulate demand because that is not the problem; lawmakers have shut the economy down because of a health epidemic that was, for a large part, ignored despite warnings.
The red flags were not just the months-long alerts after the first outbreaks were reported in China, but in deep cuts to health systems and, in the case of the United States, getting rid of staff whose job it was to identify global health problems in China and repeated attempts to cut funding for the Center for Disease Control and Prevention (CDC).
Once people are free to return to their normal day-to-day lives, the economy will, in turn, follow suit.
This does, however, miss problems that were already present.
In Europe, there were signs of economic slowdown even before the virus, parts of the UK’s rail network already being back into public ownership before COVID-19 destroyed passenger numbers.
Total free marketeers would argue governments should play an even smaller role in civil life, lowering tax burdens during the crisis for companies, the self-employed and families. In essence, adopt a zero income, zero tax approach.
Proponents argue this would help people during the pandemic while not wrecking future tax receipts and destroy balance sheets in 2021 and beyond.
