Coronavirus – The Perfect Storm in Australian Economic Environment

Posted on March 14, 2020

The spread of the deadly Coronavirus (COVID-19) which was first discovered in Wuhan, China, has quickly become a global pandemic. In addition to the spread of Coronavirus in Australia, more than 100 countries have confirmed cases, with the exact nature of its transmission remaining opaque.

Historically, the aftermath of the Black Death in Europe became the “waning of the Middle Ages”, putting to an end the longstanding universalise culture. Historians think the Coronavirus epidemic could end up with the same far-reaching and highly significant global changes.

Truly, an international pandemic such as COVID-19 is not just momentary tragedies of disease and death. The omnipresence of the massive threats it brings, and the fear and uncertainty that accompany them birth new beliefs and behaviours. People become more credulous and suspicious, as well as sceptical about engaging in anything that looks and sounds strange or foreign.

Declared Global Pandemic

The weakening global economic outlook in the wake of the COVID-19 has caused high speculation that some major central banks in the world could lower interest rates after the Fed’s 50 basis point slash earlier in the week.

Even if the ASX and Wall Street recovers before the financial storm caused by Coronavirus dies away, the global economy won’t be the same. This as side, this new global threat or perfect storm may lead way for optimism and productivity. Nationalism and speculation rarely get a chance to combine forces as they are doing now in the wake of COVID-19.

When Coronavirus leapfrogged from Wuhan all the way to Italy, the ardently warm and welcoming country had to shut its borders and join the rest of Europe in calling for restricted movement across its national borders—a historic demand by nationalists.

In the meantime, financiers speculating on government debts are busy shifting from Italian to German government bonds, looking for the kind of financial safety only offered by the continent’s hegemon during critical times.

Ironically, COVID-19 is delivering the rare freedom and opportunity for money to transcend a border-less financial space while humans stay hedged in as ever.

Wall Street Recovery

In the United States, Mr Trump has combined his unrelenting calls for building taller walls with new instructions asking money-men to “buy the dip” on the Wall Street instead of relying on their imbue to seek redemption in the unattractive but safe bond markets.

If speculators choose to believe the U.S. president, Wall Street could recover faster before the pandemic goes away. The xenophobic financial forces will have won and the country’s progressives will face a tough struggle with every political front.

On the other side of the European Union, the most influential elites will finally breathe a sigh of relief that they were able to forego a fresh depression and go back to managing the recent times of economic stagnation in the best way possible, times that have been marred with heavy doses of added, COVID-19 reinforced xenophobia.

Whether Wall Street will take heed to President Trump’s advice and “buy the dip”, only time will tell. For now, the strong players have two minds. But the existing drop in the stock market doesn’t worry them any bit. Their main concern is the recent bull market that was operating on suspect debts and that Coronavirus could have burst a bubble.

Europe - Worst Case Scenario

In Europe, the worst impending scenario for investors would be well-established corporations relying on free handouts from the European Central Bank, especially at such a time when the domestic demand has stagnated and the Chinese import market is on the verge of collapse.

Borrowing a leaf from the cash crunch situation of the 2008, and the Eurozone crisis of its aftermath, bullish speculators are turning to central banks particularly the Fed and the ECB to once again do “whatever it takes” to salvage their dwindling fortunes. But there are two questions that linger on their minds—will the central banks bow to this pressure? And if they choose to, will the free money be adequate?

It’s easy to answer the first question: governments on both sides of the Atlantic have been rendered impotent. In the U.S., the deficit in the federal budget is shockingly at an all-time high, especially given the prevailing strained labour market, as the Eurozone continues to struggle in its fiscal compact.

Hence, the central banks will be obliged—whether they like it or not, to arise to the occasion. We’ve already heard announcements of interest rate cuts, even for government purchases and private debt of monetary authorities.

But, will it help for the central banks to pump in more funds in the Coronavirus infected capital markets? Will the economy recover if enough liquidity is injected into the system? Or will this be like a slow puncture that expects a pump-priming to remain inflated?

Besides, will the fresh chunk of public money collapse the existing wall of xenophobia? The unfortunate answer to this question is informative of the economic ones as well.

Economic Crisis

There were two reactions to the 2008 economic crisis that rescued capitalism from collapsing totally: the gigantic pumping of liquidity into the sick economy by central banks especially the Fed; as well as China whose government intentionally set up the biggest private credit bubble of all time to replace lost export opportunity by a colossal invest boost.

China and Fed’s intervention successfully re-floated global finance and set stock markets back on track to their greatest growth surge. Thankfully, the world did not revert back to its pre-2008 behaviour.

Prior to the 2008 period, Wall Street played an important role in reprocessing non-US surpluses that were a consequence of American deficits back into the vibrant global investment funding.

In the aftermath of the 2008 economic crash, the refloated Wall Street was unable to execute that task hence channeling much of the abundant liquidity to buying back shares and other asset purchases. The outcome was that the pre-2008 economy featured savings that permanently surpassed the capital goods investment.

Considering that savings refers to the supply of money and its investment the demand, the permanent condition of excess money supply explains the reason for the permanent low or better still, negative interest rates.

Additionally, it explains the prevailing downward pressure exerted on median wages against forces of rocketing asset prices that continue to cause insurmountable inequality thereby churning out the political conquests of xenophobic nationalism.

Of course, the same thing that happened in the aftermath of the 2008 financial crunch, speculators are expected to make a mint out of this crisis brought about by the COVID-19 as the superior nationalist forces milk the resulting disgruntlement out of the sickening situating.