The Economic Tsunami That Has Begun And The Drive For Cash

With swarms of locusts in Africa and the Middle East and a particularly virulent virus spreading around the globe, the coming crisis may feel like the end of days. An economic tsunami has been unleashed. A consensus appears to be emerging among economists of the largest contraction in global GDP in a generation. Separately, but partly related as well, oil prices have cratered to nearly $20 a barrel last week, the lowest in 18 years. Central banks are trying to head-off or mitigate the financial shock waves.

To be sure, the responses by governments and central banks have been evolving as the magnitude of the challenge has become clearer. Rate cuts and asset purchases have been widely announced; though notably, countries with negative rates have not opted to cut them deeper. Many of those that were above the zero-bound, like the US, UK, Australia, New Zealand, Canada, and Norway moved aggressively.

Liquidity injections were made, and asset purchase programs were re-launched or, as in the ECB's case, dramatically extended. In two emergency moves, i.e., between meetings, the Fed went from stating the economy and policy were in a "good place" to a 125 bp rate cut, $700 billion long-term asset purchases, and new facilities to support commercial paper issuers, money market funds, and primary dealer lending.

Fiscal policy, too, has been brought into action. Increasingly, global leaders, including in the US, are going to war-footing. In this emergency, self-imposed constraints are being reconsidered. On top of a trillion dollars a year deficits before the health crisis, the US is putting together a package of around $1.2 trillion.

Two significant components stand out: direct payments to individuals (which ultimately could be means-tested), and aid to impacted industries. There may also be a payroll savings tax cut, but this faces bipartisan opposition (it is regressive, shifts problem to under-funding social security, and there are arguably more effective ways to boost consumption). Another package that includes direct assistance to state and local governments is likely to be required at some point.  

When everything is said and done, officials are responding relatively quickly to the emerging economic and financial fallout. The benefit of the 2008-2009 experience and response is helping in many respects.Many non-conventional tools had been developed and are being dusted off. Yet the magnitude of the problem is greater than in past crises, and some measures of volatility have already outstripped the high seen a decade ago.

A significant part of the economy is shutting down. Consider that the hospitality industry, broadly defined to include air and ground travel, hotels, restaurants and bars, casinos, sporting events, performing arts, is about 14% of the US GDP. Auto production is coming to a standstill in the US and Europe. It is around 3.5% of US GDP.

There may be some substitution that takes place; grocery and liquor sales rise. Still, as a ballpark effort to think about the coming economic downturn, at least 20% of the economy may be zeroed out for a bit. Hospitals and the medical industry may be one of the only sectors that grow, and health care is about 18% of the US economy.

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Read more by Marc on his site Marc to Market.

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Gary Anderson 3 months ago Contributor's comment

Great article Marc. Capitalism has beaten up on labor but financialization still made money. But now workers are devastated, and it puts collateral and leverage in danger.