A few thoughts on the effect and consequences of the coronavirus on the economy

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The spreading of the virus confirms analysts’ downside scenarios as investors digest the impact of the US oil and gas crisis on the global economy and financial markets. Russian oil and the inability to respond effectively and in a coordinated manner to falling energy prices and maintain current production levels. This increased uncertainty has led to volatility in financial markets similar to that experienced during the last global financial crisis. During the financial crisis of 2007-09, much of the panic was triggered by uncertainty. Investors were unsettled by structured products related to subprime mortgages – collateralized securities and assets backed by collateralized debt obligations. Credit risk or the risk of debt default were a major element of the financial crisis, and it remains to be seen what role they will play in the current situation. It is already evident that the coronavirus has triggered an increase in the TED spread, a measure of the risk of debt default, and an increase in interest rates. 

Credit risk has increased in recent years, as measured by TED spreads, although previous Fed actions have helped prevent this increase by measuring the TED spread.In most of the latter countries, monetary authorities such as the US Federal Reserve have taken steps to shore up liquidity in global markets. These steps include support for domestic-debt markets (including the recent expansion of corporate bond markets) and swap lines aimed at global dollar scarcity. In response to the 19 pandemics, policymakers are planning even larger and more radical interventions. In some steps, they may be driven more by a desire for greater control over the global financial system than by fear of global economic collapse. But a glance in 500 years of government power suggests that the state is likely to play a very different role in the economy, not just during a crisis, but long after it. Central banks around the world have cut interest rates by more than 0.5 percentage points since January and launched a huge new program of quantitative easing that creates money to buy bonds. This unprecedented period has resulted in the US Senate passing a $1.2 trillion stimulus package to bolster the American economy. Equity indexes in Latin America have also fallen dramatically since the spread of the coronavirus in the region. This is not an ordinary downturn in financial markets, and the effects of coronaviruses are likely to be felt for many months and possibly years or decades to come. Europe is suffering the same kind of financial crisis as the US and other parts of Asia. Investors are likely to remain cautious and wait until the outbreak is under control before reinvesting in stocks. 

The Federal Reserve and the Bank of Canada have cut interest rates, and two central banks have put 18 months in place. These crisis-era facilities serve to provide liquidity to markets trapped in a feverish rush for safe assets, and to prevent destructive asset sales. A combination of these measures, which has also been introduced in the United States, has begun to stimulate financial markets around the world. The extent of the damage will depend on how quickly the virus is contained, what steps authorities take to contain it, and how much economic support government are willing to provide for the immediate effects and consequences of the epidemic. Both Washington and Ottawa have opened fiscal taps to support efforts to disrupt the transmission chain. A survey of China’s manufacturing and services sectors fell to record lows in February, and car sales fell to a record 80 percent. The impact of the global economic crisis on the world’s second largest economy was worse than originally forecast. China’s exports fell 17.2 percent between January and February, and its exports to the United States, Europe, Japan and the United Kingdom were the worst forecasts in the first three months of this year. The official data confirmed the widespread slowdown in economic activity hinted at by the global economic crisis and the impact of the financial crisis on the world’s second largest economy. If there are a widespread outbreak and rapid transmission, economic activities could be restricted. Therefore, the decisive measures taken to limit the spread of a pandemic will have the greatest impact on the overall well-being of the economy. It is important to remember that the most important step for general well-being will be to take the right economic measures, such as the use of fiscal and monetary policies.

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