COVID-19: Possibility of Biggest Depression

  • IASbaba
  • March 26, 2020
  • 0
UPSC Articles
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Topic: General Studies 3:

  • Effect of policies and politics of developed and developing countries on India’s interests

COVID-19: Possibility of Biggest Depression

World had witnessed two great depressions- The Great Depression (GD) of 1930s and 2008 global financial crisis (GFC). There is high possibility that COVID-19 could cause the history’s biggest economic depression given the number of people and economies it has affected

What is depression?

  • It is a sustained, long-term downturn in economic activity in one or more economies

Impact of the previous two depressions – GFC & GD of 1930s 

  • Stock markets collapsed by 50% or more
  • Credit markets froze up
  • Massive bankruptcies of firms followed
  • Unemployment rates soared above 10%
  • GDP contracted at an annualized rate of 10% or more

How COVID-19 induced depression can be different from previous depression?

  • The above mentioned macroeconomic and financial outcomes of depression took around three years to play out for 2008-GFC & 1930-GD
  • In the current COVID-19 crisis, similar outcomes have materialized in three weeks- thus exacerbating the possibility of Depression.
  • COVID induced depression is more severe & faster.

Measures needed by countries

  1. Containing the epidemic
  • All countries need to roll out widespread Covid-19 testing, tracing and treatment measures, enforce quarantines, and a full-scale lockdown (China model)
  • Antivirals and other therapeutics need to be deployed on a massive scale as it could take 18 months for a vaccine to be developed and produced at global scale
  1. Easy Monetary Policy by Central Banks
  • Zero or negative interest rates
  • Quantitative easing –large-scale asset purchases by Central Bank to induce liquidity into system
  • Credit easing to banks, non-banks, money market funds, and even large corporations.
  1. Massive Fiscal Stimulus
  • Direct cash disbursements to households
  • Monetizing the increased fiscal deficits – so that interest rates are kept low


  • Monetization of massive deficits starts can lead to high inflation. 
  • Geopolitical white swans that could derail recovery of global economy
    • The crisis can give way to renewed conflicts between the West and at least four revisionist powers: China, Russia, Iran, and North Korea.
    • The possibility of cyber attacks on the US election process may lead to a contested final result which will have a spill over effect on International Institutions (causes disorder & chaos)
    • Risk of a war between the US and Iran


The trifecta of risks—uncontained pandemics, insufficient economic policy arsenals, and geopolitical white swans—will be enough to tip the global economy into persistent depression and a runaway financial-market meltdown. Thus, above measures needs to be taken.

Connecting the dots:

  • Difference between Earlier depression and Depression that can be caused by COVID-19
  • How should world countries work together after COVID-19 to bring back the economy
  • Keynesian Economics

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