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
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
