Economic pessimism driven by COVID-19 fears.

in markets •  5 years ago 


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The economic and financial implications of COVID-19 are substantial. Markets are saying the hit to GDP is going to be large indeed.

If we respond by getting many people to stay at home for weeks or months in order to save lives, we risk a positive feedback loop of:

i) Businesses going backrupt or not being able to pay loans/bills due to lack of customers.
ii) Workers losing income or their jobs and not being able to pay for things.
iii) Lenders having solvency problems as loans are not paid back due to the above, etc. So they're less likely to lend to businesses as they themselves have cash-flow issues.
iv) A bunch of other problems along these lines.

If we decide to go full quarantine, we will need a massive monetary stimulus (and perhaps later a fiscal stimulus).

We definitely do not want this temporary shock to dismantle otherwise productive arrangements of people — e.g. it's crazy for your local popular hairdresser to go out of business because they can't make their rent in May because they're shut.

Obviously financial institutions will need to be able to aggressively borrow from central banks, and interest rates will get slashed.

If we need to go further or interest rates are already 0%, distributing newly printed cash to citizens can help them with cashflow, while the resulting inflation will help keep nominal GDP where people expected it to be, making their existing debts more sustainable.

Individually, the landlord for that hypothetical hairdresser may prefer partially foregoing or delaying their rental payment that month over eviction. They're unlikely to quickly find a better tenant during a quarantine situation. Rapid renegotiation of contracts to adapt to the new situation might do a lot of good and benefit both parties.

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3 to 6 months. And after we are going to have a huge boom.

3 to 6 years is also fine.

We will see how bad things hit.

This is wave 1. Usually there will be 3 total. And # 1 will break us.

Not good news...

Supply chain interruption is a major impact to the global economy temporarily.