Updated: Apr 28, 2020
The effects of the pandemic will be massive. So are the governmental responses. Let's have some hope in human resilience, ingenuity and tenacity – and of course some good luck
We here at Country Acuity Advisors don’t like to throw around the “H” word lightly, but US $8 trillion deserves it: that is an absolutely HUGE monetary injection. In fact, this is one of the largest outlays in recent times both in terms of absolute dollar and relative to global GDP.
For context, China spent almost US $600 billion on a post-crash stimulus package in 2008: that was roughly 12.5% of their GDP, and about 0.8% of global GDP. By comparison, the US $2 trillion package is roughly 10% of US GDP and 2.3% of global GDP. This is the first-ever stimulus in the modern era to reach the trillion-dollar range.
And let's not forget the injections of cash that are coming from Germany, Japan, Britain, Singapore and many other countries around the world. By some accounts the total rescue packages globally amount to about US $8 trillion. Let that sink in. Eight trillion. That's 10% of global GDP and counting. More is on the way.
Such outlays will account for something despite the steep and precipitous drop in economic activity we are currently witnessing. Yes, some of it will be earmarked purely for coronavirus medical support, and other funds will line the pockets of various vested interests. But, still, we’re talking US $8 trillion! Just like the once in a 100 years pandemic, the response is also once in a lifetime.
Shovel-ready projects will be hard to come by due to social distancing and the inability to mobilize large amounts of construction workers, but that day will come, sooner rather than later. Great leaders will find ways to innovate and to turn obstacles into advantages. Economics will kick in, as will creative solutions: workers with hazmat suits will work construction if need be, even if it’s inefficient at first. To that end, the definition of efficiency will shift, at least in the near term, as anyone who is working from home with kids pulling at their legs (as cute as those images are) can tell you. I know first-hand what that’s like.
Longer term - what does this mean?
This crisis will put a hard end to the dogma surrounding “free markets” and skewed interpretations of the “invisible hand.”
To start with, our systems - none of them - were pure free markets. Despite what any die-hard libertarians might say, governments, regulations and taxes are needed. Small or big, governments exist and need to exist.
But the extraordinary central bank and government intervention in the economies of the world will leave its mark. If price discovery was distorted by the post GFC QE and QEEs of the world, 2020 will eviscerate price discovery and the “normal” functioning of debt and capital markets even further.
Two major shocks in less than 12 years is a lot. The response to this crisis, if individuals and SMEs are once again pushed to the sidelines, risks further concentrating capital market wealth to the ultra-rich. This will have major socio-political repercussions. Right now the focus is stopping the train wreck, but a time will come to worry, and worry we will about the political, social and economic impacts of the 2020 coronavirus and policy responses.
As we watch what unfolds in the next 6-9 months in capital markets, organizational leaders and ordinary investors alike should harbor no illusions: we’re in this mess together, and governments will be crucial allies in helping to make things better.