Just like being in a car accident, the initial economic response to the current global virus crisis was a massive shock. Written out in this article are Some key concepts and themes that will shape the future of the global economy.
From this state, countries had different responses. Those with borrowing capacity left were able to respond more quickly with support for the economy. Those with limited resources spent what they have on fighting the virus crisis itself.
As the initial virus shock wave is wearing off, we can start to get a glimpse into the post-virus world. I hope I am wrong, but picture of what lies ahead for the global economy is not pretty.
It is too early to conduct a quantitative analysis but I want to highlight some of the key concepts and themes that are likely to shape the future of the global economy.
When I was in school, just about all business, finance and economics professors touted globalization as a good thing. Basically, they said instead of every country producing everything, allowing each country to produce what they are good at and trading made the global consumers better off. It made sense.
From the 1960s, globalization was actually one of the biggest economic growth engines.
If it was good when it happened, is it bad when it reverses?
Well, it depends on who you ask. The simple answer is yes but inefficient and un-competitive companies might have received another lifeline.
I’m not sure at this juncture, how and when the de-globalization will take place, but reading the political tea leaves suggests that it is coming. We are singing “one world” but we are acting like “my world only”.
Keep an eye out for the de-globalization to become a major theme in coming years.
BDM (Bankruptcies, Defaults, and Moratorium)
Household, company and country level bankruptcies, defaults and moratorium will become the new normal for a foreseeable future. This is very clear.
Let’s say that you max out on borrowing to make investments assuming certain income stream, market share, or economic growth. And what happens if these key assumptions prove to be wrong.
The initial virus crisis collateral damage shows that unemployment is spiking, businesses are closing at a record pace, and growth expectations are ratcheting down.
At the aggregate level, there is more debt than the current economic growth can service. You can’t service the debt and repay it. The numbers do not add up.
The forced unwinding of the debt pyramid we built will be very messy. When the BDM becomes numerous, the financial system, financial markets, and the banking system will be stress tested.
Concepts like “haircut, credit default swap, restructuring, distress assets, and non-performing assets” will be featured in the mainstream news.
The banking system will bear the burden of dealing with this trend. Recapitalization and re nationalization of the banking system will follow. The reset button on this problem will challenge the financial system order that we know today. It is not the first time in financial history but we never built pyramid this big before.
BIG Government is Back!
The governments will be the eventual cleaner of the tsunami of BDM. Either through a direct equity ownership or through recapitalization of the banking system (thus becoming the owner of the banking system), government’s ability to print and create money will be used to clean up the mess.
It will take relatively a short time to re nationalize the economy but it will take much more time to re-privatize these assets. This is one of the biggest concerns I have.
Recovery will take much longer with the government as the owners of companies. The over borrowing by everyone prior to the virus crisis sowed the seed for this sub-optimal trend. But at this juncture, we do not have much choice.
Low Signal to Noise Ratio
There is so much fake news floating around in every language these days. It is so easy to spend all our mental resources on reading and following what has happened rather than what will happen. It is very clear that demand collapse, unemployment, and default path is what lies ahead for many economies around the world. I do not think any country is insulated from this.
Where differences can be made is how each economy prepares and allocates resources strategically.
If you are sick and have limited amount of money, how much do you want to spend on pain-killer for today versus getting an operation to fix the illness for the future.
We all will face this question in the near future. We can choose to get buried by the noise of today or rise above it so we can plan and act strategically for the future.
This will determine the new post crisis world order.
Related article: Market Pundits Gone Mad
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