I've been reading a few articles recently with predictably dire warnings about the economic impact of the Corona shutdown.
Now, of course, I'm not making light of the situation; businesses will fail, people will lose jobs and government and personal debt will soar. There will be a lot of short-term pain.
However, where this differs from, for example, the financial crisis of 2008 which was precipitated by the Sub-prime Mortgage situation and the collateralisation of risk - which turned out to be nothing of the kind - is that this is not an intrinsic economic failure. The 2008 financial crisis was caused by failures in the financial system; abuse, ignorance, greed and incompetence. Cleaning up that mess was long and protracted; for a long time, most of the banks viewed others' assets as near worthless which, in turn, meant that all the CDOs were, by implication, also near worthless. Governments had to act to shore up the Financial System itself.
The Corona-precipitated financial crisis is severe but it's also external. What it highlights is the speed with which value can dissipate. What's a jet airliner worth when you can't fly it ? What's a hotel worth when no guests are allowed to check in ? Clearly, a lot less that before. However, once you can fly them and welcome back guests ... much of the value returns very quickly. The issue with the 2008 financial crisis was that we were forced, quite suddenly, to realise that the underlying assets were worthless and the value was never going to return. And this, I think, is reason to conclude that whilst there will be a severe impact from Covid-19 in the short-term the world's economy will return a lot faster than the doom-mongers predict. We'll see in due course ...
Now, of course, I'm not making light of the situation; businesses will fail, people will lose jobs and government and personal debt will soar. There will be a lot of short-term pain.
However, where this differs from, for example, the financial crisis of 2008 which was precipitated by the Sub-prime Mortgage situation and the collateralisation of risk - which turned out to be nothing of the kind - is that this is not an intrinsic economic failure. The 2008 financial crisis was caused by failures in the financial system; abuse, ignorance, greed and incompetence. Cleaning up that mess was long and protracted; for a long time, most of the banks viewed others' assets as near worthless which, in turn, meant that all the CDOs were, by implication, also near worthless. Governments had to act to shore up the Financial System itself.
The Corona-precipitated financial crisis is severe but it's also external. What it highlights is the speed with which value can dissipate. What's a jet airliner worth when you can't fly it ? What's a hotel worth when no guests are allowed to check in ? Clearly, a lot less that before. However, once you can fly them and welcome back guests ... much of the value returns very quickly. The issue with the 2008 financial crisis was that we were forced, quite suddenly, to realise that the underlying assets were worthless and the value was never going to return. And this, I think, is reason to conclude that whilst there will be a severe impact from Covid-19 in the short-term the world's economy will return a lot faster than the doom-mongers predict. We'll see in due course ...
