{"id":2061,"date":"2020-03-26T14:15:48","date_gmt":"2020-03-26T12:15:48","guid":{"rendered":"http:\/\/www.liberalglobe.com\/?p=2061"},"modified":"2020-12-09T18:16:28","modified_gmt":"2020-12-09T16:16:28","slug":"how-the-us-and-the-worlds-countries-will-avoid-the-economic-armageddon-caused-by-the-lockdown-of-coronavirus-pandemic","status":"publish","type":"post","link":"https:\/\/www.liberalglobe.com\/?p=2061","title":{"rendered":"How the US and the World’s Countries will avoid the Economic Armageddon caused by the Lockdown of Coronavirus Pandemic"},"content":{"rendered":"\n

The terrifying economic downturn that the developed economies of the world\nare gradually facing, especially that of the US, due to the Covid-19 (Coronavirus)\npandemic is much worse than the global financial crisis of 2008 caused by the\ncollapse of the US investment bank  Lehman\n Brothers  Holdings  Inc. This is because the current crisis is at the same time hitting demand side and creating insurmountable\nproblems in supply side. <\/p>\n\n\n\n

by Trust Economics <\/strong>https:\/\/trusteconomics.eu <\/p>\n\n\n\n

\u00a9The law of intellectual property is prohibited in any way unlawful use\/appropriation of this article, with heavy civil and criminal penalties for the infringer.<\/em><\/p>\n\n\n\n

The terrifying problems that lead to financial Armageddon<\/strong><\/strong><\/p>\n\n\n\n

The climate of uncertainty and the necessarily imposed restrictions, which in many developed countries of the Western world such as Euro zone member countries, the UK, the US states (New York, California, etc.) reach the point of curfew of citizens-quarantine and lockdown, cause violent changes in citizens’ consumer habits, resulting in drastic ally and\/or disappearing in several cases the demand from entire sectors of the economy, such as tourism, air transport and in many service sectors. <\/p>\n\n\n\n

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On the era of Huge Recession<\/strong>
Photo by the site www.prospect.org<\/figcaption><\/figure><\/div>\n\n\n\n

At the same time very, strong problems are being caused on the supply side\ndue to the strong problem in production. As in China, both in the EU and later\nin the UK and in the US, production in many industries was interrupted due to\nthe protection of their workers while exacerbating serious problems in supply\nchains from abroad and mainly from China.<\/p>\n\n\n\n

The simultaneous collapse of demand and supply side equally is the most\nnightmarhastic scenario for both economists and politicians, due to the\nincredibly bad situations they will be asked to manage.<\/p>\n\n\n\n

The collapse of GDP, the drastic increase in unemployment rates, the\ndramatic increase in business failures, particularly in small and medium-sized\nenterprises, the drastic increase in non-performing loans for real estate and\nbusiness loans, the lack of resources for small and medium-sized enterprises,\nand the social security funds resulting in huge deficits in those that will\ncause next reductions in pensions, the rapid increase in governmental revenue\ndeficits due to a decrease in tax revenues and, more generally, the downturn in\nconsumption due to the Covid-19 pandemic are the peaks of the iceberg.<\/p>\n\n\n\n

Unfortunately, the size of the ‘black hole’ to be created in the annual federal\nand state budgets equally cannot be accurately predicted in advance, because\nmuch will depend on how big the resulting decrease in GDP will be and how long will\nlast the threat of the quarantine-lockdown by the Coronavirus pandemic.<\/p>\n\n\n\n

It all depends on the duration of the crisis and the quarantine in which the major economies of the world are located. If the quarantine crisis is short most of the above-mentioned problems will be corrected. But if the quarantine crisis lasts longer than a year then we are talking that the global economy should restart with a new \u201cNew Deal\u201d and write off debts of governments, businesses and households.<\/p>\n\n\n\n

The misguided fiscal tactics and strategies of governments<\/strong><\/strong><\/p>\n\n\n\n

The actions of governments and central banks of the flooded economies (for more details please read the analysis entitled \u00abGovernments and Central Banks react while the World Economy enters in a Recession coma<\/a>\u00bb,  Trust Economics) in the provision of large and brave fiscal packages and huge amounts of liquidity to economies (misguided this one-sided policy to demand-side according to our opinion) although it seems to be the only weapon they possess but will not be able to make the positive difference if they are not used at the appropriate timing (more details will be mentioned in subsequent sections).<\/p>\n\n\n\n

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President Trump Signs the Families First Coronavirus Response Act<\/strong>
Photo by the White House from Washington DC
licensed Public Domain<\/a><\/figcaption><\/figure><\/div>\n\n\n\n

In addition, the fact\nthat demand and supply to the economy are being hit at the same time, the positive\ndifference that will be caused by the provision of these fiscal packages (announced\nonly on the demand side) will be very small.<\/p>\n\n\n\n

Moreover, the economic policies that tend to be implemented do not take\ninto account the economic quagmire to which emerging economies will sooner or\nlater undergo due to the non-consumption\nand absorption of their exported products from the developed economies and the\nnon exports activity of the developed economies to the developing economies, making\nit even more difficult to recover developed economies and the world economy in\ngeneral.<\/p>\n\n\n\n

Monetary policy in the EU from ECB has reached its limits since 2019, with\nits quantitative easing packages and near-zero interest rates. As a result, there\nis no room for maneuver in the creation of artificial growth in the Eurozone.<\/p>\n\n\n\n

The abolition of the rules of the Stability and Growth Pact that tied the\ngovernments of Euro zone member countries last week by Commission in order to\ncreate ample fiscal space for governments to cope with the coming recession it’s\nnot enough.<\/p>\n\n\n\n

The FED,  for its part, and within a\nweek, has devalued its monetary policy by zeroing in on its key lending rate in\nan effort to provide undivided liquidity but in an economy that will gradually\nbegin to enter in quarantine and  lockdown\nstatus,  creating a climate of\nfrightening uncertainty in the small and medium-sized businesses of the US\nabout what will dawn tomorrow.<\/p>\n\n\n\n

The US Federal Government makes the same mistake as the EU Commission by providing brave fiscal packages by unilaterally supporting demand and causing a huge increase in the government budget deficit and the US government debt in general.<\/p>\n\n\n\n

Businesses gazing into the abyss of bankruptcy<\/strong><\/strong><\/p>\n\n\n\n

The overwhelming proportion of small and medium-sized enterprises worldwide\nand especially in developed economies will experience dramatic situations from\nthe free fall in their sales and the damage to their working capital and since\na large proportion of these companies are heavily indebted, making them\ncandidates for immediate bankruptcy.<\/p>\n\n\n\n

In such a case, unemployment will soar, debts to social security funds and debts to the state\nwill skyrocket without ignoring the damage to any of businesses suppliers.<\/p>\n\n\n\n

In the US the real risk lies in US corporate bonds, which have tripled from\n$2trillion in 2008 to more than $6trillion today. This is because, after the\nfinancial crisis of 2008, a risk-taking incentive was created, resulting in\nmany US companies pumping huge amounts of cheap liquidity by issuing bonds.\nPart of this excess liquidity was used:<\/p>\n\n\n\n

  1. To repurchase their shares, thus contributing to the rise of stock markets.<\/li>
  2. In the over-indebtedness of the businesses.<\/li>
  3. With business leverage ratios presented as the highest in the last twenty\nyears.<\/li><\/ol>\n\n\n\n

    Given the problem in production and the transition to compulsory reduced\nbusiness activity, it is very likely that the tsunami of defaults of heavily\nindebted companies in the US will occur because they will not be able to\nproceed with the re-financing of their debt at a time of high risk-off on the\npart of investors.<\/p>\n\n\n\n

    The huge drop in stock market indexes worldwide reflects the tremor of a\ngeneralized credit crisis (-12% the Dow Jones index at March 16, 2020 with a\nstock market loss of $24trillion in total so far to 2020).<\/p>\n\n\n\n

    Rising yields on government 10-year bonds in emerging markets show that\ninvestors have liquidated and transferred their funds to the safe havens of\nhigher-rated government bonds.<\/p>\n\n\n\n

    The continued appreciation of the $US reflects the financing pressure caused by unthinkable debt size in $US and of zero liquidity. Another reason the US government to support in fiscal terms (wrongly in the view of Trust Economics) unilaterally the demand side of the economy.<\/p>\n\n\n\n

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    Coronavirus (Covid-19)<\/strong>
    <\/figcaption><\/figure><\/div>\n\n\n\n

    The sound fiscal policies that will pull the U.S. economy and other\ndeveloped economies out of the terrifying recession<\/strong><\/strong><\/p>\n\n\n\n

    What is certain is that governmental financial interventions will change\ndepending on the problems that will arise during the lockdown crisis and will\nhave to be adjusted according to what appears threatening each time for the\neconomy.<\/p>\n\n\n\n

    The US economy and, more generally, the economies of the developed\ncountries which are affected by the duration of the quarantine and lockdown crisis\ncaused by the Covid-19 (Coronavirus)) pandemic, will have to take a temporary\nand necessarily different approach, which will increasingly rely on state intervention\nand for the creation of an economic defence whose primary purpose will be to\ncontain at all costs the dramatic fall in GDP and consumption respectively which\nis expected to be caused.<\/p>\n\n\n\n

    In order to better understand the sound fiscal policies to be implemented\nby the Federal Government of the United States and in proportion by the\ngovernments of the other countries affected, we will present them according to\nthe duration of the crisis. More specifically:<\/p>\n\n\n\n