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The global economy is in the grips of an economic crisis of unknown depth and duration. The coronavirus has laid bare the unintended consequences of globalization — the vulnerability of just-in-time global supply chains lacking suitable redundancies and the pauperacy of conventional monetary and fiscal policies.
As COVID-19 extended the New Year holiday for Chinese manufacturing and the virus spread to the industrialized north of Italy, production was selectively disrupted by shortages of components made by only one supplier or in one region.
As the virus spread to America and businesses dialed down or shut altogether, investors panicked and stocks slid into bear-market territory, because they could not gauge the arch of the pandemic, how effectively the president, governors and leaders elsewhere could address it, and how long the economy would operate at reduced speed.
Federal Reserve interest-rate cuts could do nothing to ensure imports from China and other places resumed or halt the spread of COVID-19 in America.
With many restaurants, schools, factories and retailers closed and heathy folks working from home and not traveling, what began as a supply-side crisis — a shortage of parts and components from China, Italy and other sources — morphed into a Keynesian recession — consumers are not spending. Not necessarily because they don’t want to spend but often because they can’t.
While some businesses are experiencing surges — medical supply manufacturers and Walmart WMT, +0.70% from panic buying for household supplies — many more are laying off workers.
Unite Here represents 300,000 employees in hospitality, restaurants, airports and other industries. It estimates 80% to 90% of those will be laid off. State unemployment offices have seen overwhelming surges in new claims.
Businesses facing declining sales and losses became desperate to fortify cash balances and ran down lines of credit. They sold Treasuries and other securities usually held for liquidity. That cratered stocks SPX, -1.51%, bond TMUBMUSD10Y, 0.656% and commodity markets CL00, -3.70% — and pressured lending limits of banks and threatened money-market funds, which also provide short-term credit to businesses.
The Fed and Treasury moved quickly to shore up banks and money-market funds, and support markets for state and municipal bonds and consumer credit. And the Fed rolled out new tools to create facilities that will offer loans directly to corporations and small businesses with new capital supplied by Treasury.
Fed and Treasury credits cannot replace lost sales to business, and whatever loans they extend will add to debt burdens in thin-margin industries. Massive fiscal stimulus is needed to save the real economy.
With the arch of the pandemic uncertain, economists are challenged to estimate the impact on the economy. Morgan Stanley expects unemployment to jump to 13% in the second quarter and the St. Louis Federal Reserve estimates 30%. Coupled with lost productivity from reduced hours and awkward work at home situations, a jump in unemployment to 20% by this summer could cost $4 trillion to $5 trillion.
Seen in this context, the recently passed $2 trillion stimulus package — including direct payments to individuals, enhanced unemployment benefits, and assistance to small businesses and heavily impacted industries like airlines — may prove hardly enough. If the virus does not peak by May, the economic contraction will deepen to levels not seen since the Great Depression.
Loans that become grants if businesses maintain employment near pre-crisis levels are helpful but as the virus subsides and stores reopen, consumer habits will have changed. And it is impossible to target aid in the amounts needed and to those who need it in sufficient amounts to avert bankruptcies and millions of permanently lost jobs.
Treasury foresees mailing out checks to individuals starting late in April. That will challenge the IRS and be much delayed, because Congress is scaling payments according to family incomes and size. Much of the aid to businesses is subject to time-consuming, uncertain and unrealistic conditions to maintain employment and cap salaries.
Expanded unemployment benefits, though attractive on equity grounds, will be paid out over several months but will not give the economy the large, quick jolt that loading all the aid to individuals into quicker direct payments could provide.
Congress should consider another round of stimulus — checks for $1,200 to virtually every American every month through September. Otherwise, another Great Depression is in the offing because of the lack of a large enough immediate action.
