“The COVID-19 virus is pushing an economy that was already approaching a cliff. Will it go over the edge?
Probably. And the Federal Reserve lifeline is wearing thin… As the old saying goes, you can’t get blood from a turnip. What happens when millions of debtors suddenly can’t make their loan payments?
“That’s not a crazy idea. It’s entirely possible if the US has as much trouble controlling the coronavirus as China did, putting people out of work for weeks.
“Keep in mind, about 40% of US adults can’t handle a $400 unexpected expense. If you are, say, a restaurant worker or flight attendant who gets laid off because people are staying home and not travelling, you’ll lose that much income pretty fast. Many of those affected will fall behind on their debts.
“Banks assume a certain number of loans will default. They have reserves for that purpose. But because the banks themselves are also in debt, too many defaults in a short time can burn through the reserves. Then what?
“In China, the government is allowing (or perhaps ordering) banks to ignore the problem, and stop recognizing bad loans.
“Could that happen here? Maybe. I can imagine regulators giving banks more “flexibility” to manage their loan portfolios. The Federal Reserve can also loan money to banks that need it.
“But such measures won’t change reality. The debt will still be there. Someone will eat the losses. Who?
“The rest of us may be headed toward something like the 2008 financial crisis, with a highly leveraged bank industry holding mass numbers of nonperforming consumer and business loans. But this time…
-
The Fed can’t cut rates much unless it wants to go negative.
-
Any fiscal stimulus will add to an already-gargantuan federal deficit.
-
Everyone may be dealing with a giant healthcare crisis, on top of a recession.
-
People of all political persuasions dislike bank bailouts and won’t want to do it again.
“And all this will unfold in an already-contentious election year.
“I don’t know where this is going. Maybe the Fed will pull a rabbit from its hat. Maybe the virus fears are overblown and this will all pass quickly.
“But if it doesn’t, we are going to have a problem.”
“Financial markets imploded again on Monday, as increasingly alarmed investors feared that the global economy could experience a downturn rivaling the cataclysmic recession after the financial crisis a decade ago.
“Even President Trump’s boundless enthusiasm for the American economy has wilted in the face of what promises to be a widespread economic slowdown…”
https://www.nytimes.com/2020/03/16/business/stock-market-coronavirus-federal-reserve.html
“Volatility in US government bonds has reached its highest level since the 2008 financial crisis as coronavirus ricochets through markets.”
https://www.ft.com/content/a8cb729e-6772-11ea-a3c9-1fe6fedcca75
“A measure of fear in stocks just topped the levels during the financial crisis more than a decade ago.
“The Cboe Volatility Index, known as the VIX, surged nearly 25 points, or almost 43%, to close at a record high of 82.69, surpassing the peak level of 80.74 on Nov. 21 2008.”
https://www.cnbc.com/2020/03/16/wall-streets-fear-gauge-hits-highest-level-ever.html
Worth noting that the repo markets were malfunctioning before the pandemic:
“A day after a dramatic move in interest rates, the Federal Reserve on Monday increased the amount of liquidity it’s offering in short-term lending to the financial industry. In a mid-day announcement, the New York Fed said it will conduct a $500 billion repo operation this afternoon, another move targeted at keeping money flowing through the system.”
“Investors don’t think the Fed’s moves are enough. What’s missing is massive fiscal stimulus, which has yet to take place. And there are real obstacles to that — trillion-dollar deficits and intense partisanship that has prevented what used to be slam-dunk bipartisan reforms.
“Fiscal irresponsibility, toxic politics and a Fed that was too afraid to offend stock investors have combined with the coronavirus, a black swan if there ever was one, to create the current crisis whose resolution right now looks murky.”
“The coronavirus shockwaves rippling through U.S. stocks are forcing investors to contemplate outcomes more dire than a recession, including several quarters of declining economic activity, a credit crisis or even a depression.”
“As Italy and much of the region probably now faces a technical recession, all eyes are on whether the fiscal and monetary measures being introduced will prevent a health emergency from becoming an economic emergency, with companies and households unable to pay their debts.”
https://www.theguardian.com/commentisfree/2020/mar/17/italy-europe-covid-economy-ecb-coronavirus
“Higher-risk European bank debt tumbled in price on Monday, as investors scrambled to offload bonds that are first to be hit if financial institutions run into serious trouble.”
https://www.ft.com/content/29988546-67a6-11ea-800d-da70cff6e4d3
Bank of Japan propping up Japanese stock markets:
“Japanese shares staged a mild recovery on Tuesday, sidestepping a historic rout on Wall Street overnight, with suspected buying by the Bank of Japan and public pension funds lending broad support.”
“…with the virus now affecting economic activity in Europe and the US as well, China is likely to see further impacts to its economy from slowing demand elsewhere.”
https://qz.com/1818960/china-economy-set-to-see-first-contraction-since-1989/
“Leaders of the G7 industrial powerhouses pledged Monday to join forces to halt economic freefall in the wake of the coronavirus pandemic, which they called “a human tragedy.”
“As the outbreak caused more countries to shut down and brought the global economy to a screeching halt, the leaders stressed the need to join forces and move quickly to address the damage.”
https://news.abs-cbn.com/business/03/17/20/whatever-it-takes-g7-pledge-to-safeguard-world-economy
“Major countries should deliver greater fiscal stimulus than during the 2008 global financial crisis to prevent a global slowdown resulting from the coronavirus crisis, the International Monetary Fund said Monday.”
“As fears grow that the coronavirus pandemic will cause a global recession, a radical proposal is gaining traction. If central banks – or governments backed by central banks – gave money directly to households, could that help to prevent a crisis turning into a depression?“
https://www.opendemocracy.net/en/oureconomy/helicopter-money-answer-looming-economic-crisis/
“Right now, it looks like we will get lots of money flung at the problem. And the problem is going to get worse before it gets better.
“At some point, the virus will ease (if it doesn’t, then I guess you won’t be getting many more emails from me, because I’ll be out wrestling in the aisles for the last toilet roll in Sainsbury’s, so we’ll park that question for now).
“Will we see inflation? Possibly. Will we see a lot more inefficient capital allocation? I’m guessing so. Will we need to start looking at a refresh of the system? I suspect we might.”
“Economists at the Institute of International Finance write, “Corporate debt is already very high relative to earnings — and earnings prospects are deteriorating: At nearly $75 trillion, the fast-growing mountain of global corporate debt (ex-financials) is around 93% of global GDP.“
“That’s significantly higher than the level of corporate debt in the run-up to the 2008 global financial crisis (75% of GDP).”
Read the previous ‘Economic’ thread here and visit my Patreon page here.
Very grateful for your updates!
You are most welcome. Aren’t things getting riveting?! H