COVID-19: Possibility of Biggest Depression

INTERNATIONAL/ECONOMY

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

2. 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.

3. Massive Fiscal Stimulus

• Direct cash disbursements to households
• Monetizing the increased fiscal deficits – so that interest rates are kept low

Challenges

• 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

Conclusion

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