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
- 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
- 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.
- 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