Author: Law Linc

Past crises no comparison

We ended Part 2 – GVC, Global Virus Crisis – Recovery on analysts drawing comparisons to past crashes. There is a lot to learn from the COVID Crisis, as the global economy was ground to a halt and unemployment jumped exponentially in an already fragile economic system.

Many analysts compare this collapse to the previous financial collapses the global economy experienced, however in this article I articulate what makes this collapse different and explore what options are available on the road to recovery.

Notable past crashes; there was the great depression in 1929, The 2001’s 9/11 attack caused market sentiments to plummet in the airline industry which in turn damaged the economy. Then the famous subprime mortgage crisis in the U.S that led to the great recession from which some countries still haven’t recovered.

It’s important to realise that even though history provides us with a lot of insights from past market crashes, even ones that experienced huge economic shocks and job losses, our current scenario is completely unique.

Speed of this crash

The current financial crisis hasn’t been created by a financial system that’s stretched to the limit. It’s caused by a pandemic which has occurred in a hyper-connected world, one that is much smaller than what our predecessors lived in. This combination of swiftness and magnitude of shock to the global economy is unprecedented.

In my view, the narrative being pushed by the media and a lot of analysts calling this a ‘financial crisis’, is just wrong. The globe is facing a health crisis and asking economists and financial analysts to fix the economy is going about it the wrong way.

The curve vs economy

The economy is, however, linked to the spread of the coronavirus. If proactive measures are not taken by the authorities to control the spread of the virus, the human costs will be severe and the ripple effect of this experience will have a negative impact on the economy due to loss of capability and efficiency. 

Many countries around the world have come to understand this and there is a lot of focus on flattening the curve. This is how the crisis transformed from health into a financial crisis. 

As countries around the world introduced lockdowns and enforced social distancing it has brought up an interesting conundrum. 

Research has shown conclusively that the more aggressively governments around the world try to flatten the curve the deeper the worse the economic impact. 

As the world continues to be in various stages of lock down, it is a foregone conclusion that we will experience an economic contraction. 

However, to use the terms of recession and depression is not the most accurate. Right now the focus is on protecting people’s health, especially those most vulnerable and doing everything possible to ensure the health system doesn’t fold.

What cannot be denied is that the economic impact this causes around the globe is going to be painful and we do not need to look any further than people in the hospitality, tourism and travel industry. Overheads still remain and banks continue to charge interest on loan balances.

An eye on India and China

India is the best example of looking at the effects of COVID19. Their population of more than 1.2 billion is currently under lockdown. From this 1.2 billion, almost 500 million are unskilled workers who live mostly on a daily wage. 

The ability of these people to keep their jobs hinges directly on the duration and extent of the lockdown. Essentially determining if they are able to put a meal on the table or not.

In the current times of instant gratification, it is critical to observe how the pandemic caused the supply and demand market continues to experience a tsunami of chaos. Supply has been derailed as borders, business and factories closed down which then affected demand as industries don’t need raw materials when they are not producing any finished goods.

There is not enough research on the global impact that the 25% decline in production from China will have on the global economy. 

Prior to the pandemic, China was heading to a -1% projection on its GDP (Gross domestic product). This also does not take into account health care equilibrium. China exited theirs, only to find out the U.S. and Europe are knee-deep in theirs.

One country battling this health crisis successfully does not mean that international trade will return to normal. The supply and demand shock experienced globally can be witnessed by the chaotic rise and fall in global sharemarket indices.

Next steps

How do we come out of this crisis? 

It’s simple! We first deal with the pandemic. 

In the meantime, it is the responsibility of the government and central banks to keep the ship afloat and plug the holes.

Central banks around the world need to ensure that there is a steady supply of money flowing through the global financial systems. This is to ensure credit is available for individuals and businesses without cash or savings to bounce back.

Governments need to be smart and not deploy a parachute which only favours a few, like the last financial bailout. They need to invest money into a trickle-up economy, where the money is provided to those with lost earnings so they can maintain basic needs like rent/mortgage, utilities and meals. 

Plan B

Leaders around the world need to have a discussion on a Plan B if the fiscal stimulus package does not have the desired outcome. 

This is to ensure that countries that do not have the cash don’t inadvertently cause a domino effect which will drag the globe into depression instead of a recession.

Recession – An economic contraction when GDP declines for two consecutive quarters.

Depression – A severe recession with a 10% or more decline in GDP.

The United Nation has stated that the developing countries have lost more than $220 billion dollars and these economies will have the toughest time navigating this crisis. The gap between the poor and rich nations will increase which will lead to an exodus of financial refugees.

Even though the short term looks dire, the opportunities that have arisen from this crisis is massive. The first conclusion is countries need to invest more towards their health care system. If every country were to invest 3% of their defence budget towards their health care system, we can easily navigate another pandemic. A second wave or a future mutation, or a new virus.

Businesses are now thinking about the sustainability of the current financial system. How do we make it more resilient? 

Wealth cannot buy health, and that’s why a truly resilient economy needs to have a resilient health system. 

Health is directly related to our food production, what systems can be put in place to ensure our food production will not get hit.

The economic system that will emerge from the current crisis will be able to ensure that it can continue to go on feeding people and keep people healthy. 

Health and wealth go hand in hand and hoarders never get far. 

Be it toilet paper or wealth 🙂

Following on from Part 1 – GVC, Global Virus Crisis – Current Situation, it’s apparent to us that there are a lot of encouraging signs from most governments globally.

Government response

Unlike the last series of bailouts, especially here in Australia, where the governments are attaching strings to the money, they are providing businesses. 

They want businesses to not eliminate their capacity and keep their employees on board for the next 6 – 12 months. 

The Australian government has actually learned from the actions taken by the US and Europe in the last crisis. They understand it is very important that the money they provide the private sector goes into safeguarding individual incomes in the form of jobs.

In Australia and the West where we’re generally well off, the banking sector is facing the unpleasant future of a credit crunch. The factor that really interests me is how the poorer nations and developing countries’ banking sectors are going to come out of this pandemic.

Debt & Banks

Many of these countries already have large foreign debt and the question that we need to ask objectively is; what can the governments of these countries do in order to help the banks, plus keep the economy alive. 

The World Bank, IMF and the West need to take the appropriate actions to help affected countries with loans and not attach strings to the lent money, in order to stabilize the financial sector and economy to stave off hyperinflation.

This is extremely important because the last thing we want to see on the horizon in the next 6-12 months, due to stringent conditions placed on poor countries who take out loans, is a wave of sovereign bankruptcies which could otherwise have been avoided. 

Pandemic’s real impact

As countries around the world are trying to come to terms with the pandemic and grapple with infection rates, we are witnessing the fastest levels of job losses since the great depression.

Analysts are forecasting that despite trillions of dollars being pumped into the global economy, more than 15 million jobs will be lost and cause unemployment numbers to spike to unprecedented highs.

The hardest-hit sectors from the pandemic are the Airlines, Tourism, Travel and Entertainment and the Hotel industry. The number of casual workers employed in these industries is extremely high. In the U.S. alone the pandemic could result in the loss of 14 million jobs and that the economy would contract by more than 15%. However, governments in countries like the US and Australia are doing what they can to help their constituents out of a need to ensure re-election.

Overseas

What about Countries like India, Sri Lanka, Pakistan and other low-income countries? More than 1.6 billion people stand to lose their jobs and half that number have already lost jobs due to stringent lockdown measures put in place.

According to the International Labour Organisation (ILO), 81% of the global workforce live in countries with mandatory or recommended closures out of which 37.5% are employed in sectors that have experienced large disruption. ILO also made a prediction that there would be close to 25 million job losses by the end of this year globally. 

Will history repeat itself?

It’s grossly inaccurate when many analysts compare the current crisis to past crises. It’s difficult to predict an outcome. The GDP is contracting at an unprecedented rate and employment globally is being buffeted by the economic shocks caused by the lockdowns. The effects of this shock are immediate, large, and fast.

The ILO also made a very critical observation. It is not enough to look at the employment numbers as these figures can be misrepresented. Of those who are still employed, ILO stated that a lot of the workers who are still working have had their working hours cut short dramatically, are on unpaid leave or temporarily stood down, technically employed.

Even though we are entering unprecedented times and no one can predict the future, I can safely say, as a society, we are not going to be floored by this pandemic in the long run. This is a once in a generation cataclysmic event our generations have to endure gracefully. 

Everything with force in nature has an opposite force and reaction and with this contraction of the global GDP, there will be a time when we return to business as usual and see the GDP grow beyond previous levels.

Want to find out how we recover from this and next steps? Head to Part 3 – GVC, Global Virus Crisis – Next steps

In this article, we are going to critically analyse the financial and banking industry to see if it has what it takes to avoid a financial meltdown due to the COVID Pandemic.

A little over a decade the globe experienced a financial crisis. Over the last few months, the level of unemployment across the globe dwarfs unemployment during that entire global financial crisis. These unemployment numbers are only going to increase.

Lockdown

More than 2 billion people in the world have gone into a self-imposed or government-mandated lockdown. At the time of writing this article, the world population clock states the globe’s population at 7.8 billion. 

55% of the world’s population is urban and 85% of the world’s job market can be found in urban centres.

This effectively means half of the world’s urban force are in essence unemployed (barring a percentage that can work from home).

The banks print money

As reserve banks around the globe are printing trillions in their respective currencies to make sure that banks are able to maintain the flow of cash. Banks around the world are employing different strategies but the most common seem to be offering consumers loan repayment holidays. Many Bank’s employing this strategy in Europe still haven’t fully recovered from the 2008 North Atlantic Financial crisis, where Central Banks deployed the same printing strategy to prop up liquidity.

America at crossroads

The US is also at a crossroad. The current administration reduced the amount of cash banks need to keep in reserve to cover losses before the pandemic drop kicked the globe in the face. Wall Street Had Cut 68,000 Jobs and received trillions in emergency loans prior to COVID-19 anywhere in the world.

The economic cost of this pandemic for the U.S. alone has cost the taxpayers $22.8 trillion. 

Rest of the world

Meanwhile, in Europe, taxpayers were told by their politicians that they would no longer be paying to bail out banks. However, in contrast to what was said, before the pandemic in Dec 2019, Germany bailed out Nord Lb bank for the tune of $4 billion.

Countries around the world are abandoning fiscal policies of running a balanced budget and borrowing vast sums of money to protect businesses and industries.

As the health care systems around the world are being pushed to the limit and people are losing their lives the need for critical resources keeps increasing. This places extreme strain on governments as they face growing demands for cash. As a result, many governments are borrowing unprecedented amounts of money to fight the pandemic.

Here in Australia

According to ASIC in 2018, small businesses make a significant contribution to the Australian economy, making up 20% of GDP and employing about half the workforce. Of the 2.4 million Australian companies registered with ASIC, about 96% are small businesses with fewer than 20 employees.

Small businesses in Australia and around the world are under an unprecedented attack due to the COVID 19. The overheads and fixed costs these businesses need to maintain does not stop and are not able to generate any income.

Therefore, every single day, they operate at a loss. The Australian government has stepped in by allowing businesses to access money as part of the stimulus package. The real question that needs to be answered is “is that enough?”

The common problem

The most common problem facing individuals and business at the moment is access to funding. Reports of a lot of server crashes have been an ongoing issue due to a multitude of businesses and individuals accessing the same government websites at the same time.

This pandemic also has a lot of unforeseen effects on Australian companies that depend on seasonal workers such as the food industry in Australia. This sees a lot of Australians residents and temporary working holiday visa holders crossing state borders for harvest. That is very restricted now in the current climate. Also, the current international climate reduces demand and increases competition.

Many firms and small businesses in Australia and around the world need to be able to reopen in a timely manner before it kills their business.

What the banks aren’t telling us

Even though Australia has very robust banking regulations, the banking sectors around the globe, unfortunately, are not prepared for the fall out from the pandemic. Credit has to be given beyond levels compared to 2008, as banking sectors around the globe are in much better shape than before.

The exposure banks have in regards to loans on their balance sheets needs to be played out. Loans from corporates to corporates and if even one of them default on their short term loans the stress on the banking sector would be immense.

Also, the global fall in GDP and the standstill of economic activity has now gone on for a very long period. So how are the banking sector’s non-performing loans faring? They are accumulating and the banks capital and liquidity reserve are not sufficient to deal with this crisis.

My critics would say that banks around the world have learned from the last financial crisis. However, I would like to point out that when planning for a crisis, we planned for a similar 2008 crisis that originated from the financial sector. No bank’s risk models would have been able to determine or predict the current impact the COVID 19 pandemic has on the global economy would have on their capital reserves. This could lead banks facing solvency issues and major companies asking for a bailout. 

Bailouts

One needs to look no further than our flight industry with perennial blue chips Qantas being bailed out and Virgin threatening to enter voluntary administration at the time of writing.

Let’s not forget with the bailouts in 2008, very little of the money provided to the banks and other large firms actually went into the everyday economy. They went into dividends, bonuses and share buybacks. This was a very serious breach of taxpayers trust.

However, with the current bailouts and stimulus being churned out globally, I hope the money goes into the real economy to jump-start the fallen GDP. 

Governments worldwide need to focus more on bailing out households. This is because households will have a source of income, which leads to them being able to meet their financial commitments.

Financial commitments in the form of day to day bills, mortgage/rent, credit card or personal loans. By bailing out the household, you’re bailing out the financial system and reverse engineering liquidity being pumped into the market.

Road to recovery

We look at the way out in Part 2 – GVC, Global Virus Crisis – Road to Recovery?