Ignore the markets

We’re not in a financial crisis, which means we don’t need the full arsenal of weaponry a financial crisis requires.

  • Humanity needs to fight a virus,not a credit crunch. Our success or failure on the epidemiological front lines will ultimately determine the medium-term path of the U.S. and global economies.
  • Markets are not part of the problem.Insofar as they’re reacting to the coronavirus, they simply reflect investors” fears and expectations about the economic damage that the virus will cause. Goosing the stock market does nothing to address the much bigger underlying issue.

The big picture: With stocks whipsawing wildly and yields on Treasury bonds hitting new all-time lows, it’s easy for policymakers to find themselves fighting the last war — to react to the current emergency in much the same way as they did to the financial crisis.

  • Those responses will help, at the margin.If economic activity slows down as a result of the coronavirus, then lower interest rates will make it easier for individuals and businesses to borrow money to cover short-term losses.
  • Fiscal stimulus,similarly, will always cause some kind of extra economic activity, and will therefore help to counteract a virus-related slowdown. But as former White House economic adviser Jason Furman told New York Magazine’s Josh Barro, «This is definitely not TARP. I think this is a nice to have

Why it matters: Political capital is finite, and fighting the virus directly has to be the top priority of any government. If and when the virus can be brought under control, then there’s a good chance of a V-shaped recovery in which markets will take care of themselves.

  • China provides a good exampleThe macroeconomic response will come, but first the government had to get to the point at which the rate of new infections was going down rather than up.

IMF chief Kristalina Georgieva has laid out the priorities facing any government fighting coronavirus. First is to «protect people’s wellbeing, take care of the sick, and slow the spread of the virus.» Second is fiscal policy, targeted at the hardest-hit sectors and households.

  • Monetary policy comes last — but so far it’s the only area where the U.S. has taken decisive action, with the Fed’s emergency rate cutthis week.

The bottom line: Broken markets were a large part of the cause of the financial crisis, and fixing those broken markets was a large part of the necessary policy response. Neither of those things is true this time around.

 
The big economic danger

global GDP

Here’s how serious coronavirus is: With the exception of the global financial crisis, the last time that the world saw a quarter of negative GDP growth was in 1982.

  • Back then, China accounted for only about 1% of global GDP. Today, that number is 15%.

By the numbers: Thanks in large part to a massive slowdown in China, the OECD sees global GDP shrinking at a 0.5% pace this quarter.

  • The forecastthen shows a healthy bump back up to a 3.7% growth rate in the second quarter and an even higher 5.5% rate in the third, as the world starts to recover from the coronavirus shock.

Yes, but: All of these forecasts have much higher error bars than usual. There’s a very good chance that the OECD’s forecast will turn out to have been far too optimistic or pessimistic. We just have no idea which one it will be.

Πηγή: axios.com

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