The dreaded ‘D’ word
BIZLINKS - Rey Gamboa (The Philippine Star) - March 31, 2020 - 12:00am

There’s niggling talk now about the dreaded “D” word among global economy watchers in the midst of all the uncertainty that is associated with the coronavirus crisis. This comes with fears that the world’s biggest economy, the United States, is tanking.

“D,” which stands for depression (e.g., the Great Depression of 1929 in America), is being considered as a worst-case scenario if containment measures going into effect all over the world will continue for an extended time, thus further deepening what is already seen as a world recession.

Over the weekend, IMF managing director Kristalina Georgieva said the global economy has now entered a recession that could be as bad or worse than the 2009 financial crisis. She added that a recovery could be expected in 2021, but only if the coronavirus spread can be contained and economic damage limited.

Her statement complements what Federal Reserve chairman Jerome Powell said after the US Senate approved last week a $2.2-trillion disaster funding package to cope with the expected economic displacement, i.e., that the US might well be on its way towards a recession.

The definition of a recession is two successive quarters of negative growth, but this economic jargon is almost incoherent in the face of all the uncertainties that the health crisis has brought.

This is not about credit markets being frozen, as what happened in 2009; rather this is about millions of jobs being taken away, production lines on forced standstill, and households running out of money to pay for basic necessities. This is about economic activity grinding to a full stop.

Unknown territory

So, why is there fear that the recession will progress to a depression?

The biggest factor that comes into the current equation is the uncertainty of how the coronavirus itself behaves. No one yet has been able to comfortably answer the question of when the world will be able to end its self-imposed containment measures.

Economists say that the recession could be turned around quickly if quarantines will end in a couple of months. However, health experts are warning of a second wave which could drag the need for extreme social distancing measures until the end of the year, and possibly towards the middle of next year, or until a cure for the virus will have been found.

We can expect a prolonged economic stoppage where hundreds of millions of people will have lost jobs not temporarily, but permanently. Because there won’t be any jobs to return to as companies turn belly-up and file bankruptcies.

The worse that can happen would be a total collapse of the financial system, where one bank after another would be shuttered as spooked depositors withdraw their life savings. When one bank is unable to disburse cash, the runs will start, dragging with it all other banks.

This is force majeure, much like a war, where the economy is at a standstill. Traditional financial measures, like when central banks lower interest rates, are powerless to deal with this kind of crisis.

Extremely costly measures

For this kind of war, where the enemy resides in our midst, but is unseen by the naked eye, governments must resort to measures unthinkable in modern day governance. Such measure which may be extremely costly even for the world’s most affluent economies.

A number of think tanks have urged drastic responses to compensate for lost incomes of those forced to stop working because of the lockdowns. These include zero-interest loans payable in prolonged periods and dole-outs to households, and a moratorium on rent or mortgage payments. 

The same policy must be made available to businesses, small and big. Already, the airline industry being among the first affected by the lockdowns, is already asking for government support. With no passengers flying, cargo delivery costs by air has significantly risen.

The losses by airline companies are forcing many to bankruptcy, and the industry is seeing majority of those currently operating to be out of business by May. The airlines industry is just the start.

The IMF, the World Bank, and other international lending institutions must arrive at a consensus to save the world from a depression, and this must be done soonest.

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