Should we be Preparing for a Depression? The Economic Toll of COVID-19

economic depression
Reading Time: 6 minutes

The jobs report for the month of march was released by the united states labor department today, and the news is bleak: 701,000 jobs were lost in March. That brings the unemployment rate to 4.4%. unfortunately, that number does not always paint an accurate picture, not accounting for the under employed or those individuals’ part of the gig economy who are also being affected by the coronavirus’ economic impact. Within a two-week time period 6.6 million Americans applied for unemployment; the number of people is now over 10 million and likely to keep growing. The stock market is currently down over $4 trillion in the U.S and $6 trillion globally.

According to a recent survey done by Goldman Sachs, 51% of small businesses will not make it through June, and 96% of small businesses have already been impacted in some way by the virus. To put all of this in perspective: 99.7% of all U.S jobs come from small businesses. Small businesses also make up roughly half of the U.S GDP, and health professionals are saying that we may not see a return to some form of normal until at least July. Take these facts and put them against the back drop of no cure being ready for at least a year, China bracing themselves for a “second wave” of the virus, and a projected 200,000-300,000 people to die from this virus in America alone – we are in for some turbulent times. The fact of the matter is, we are experiencing a recession; the question is, how long before it becomes a depression, and what can be done now to keep that from happening?

History is a Great Teacher

The United States has experienced 17 significant recessions including the great depression. What that tells us is two things: There is always an economic downturn (historically every four to five years), and we always bounce back. What makes what we are currently experiencing unique is the cause of this economic downturn and the potential ramifications thereof. What we are experiencing is a global economic downturn, of no fault of our own. Because of the coronavirus people are being required to stay home and self-quarantine. As of right now until we can get a treatment, that is the only sure-fire way to prevent the spread. The insidious nature of coronavirus has put every industry within its crosshairs.

Individuals can go asymptomatic for up to two weeks, and nearly 40% of patients testing positive for the virus are between the ages of 20 to 54. This is detrimental because not only is that the highest percentage of those infected, that demographic makes up a large majority of the workforce; Not to mention that a good portion of that demographic also interacts with individuals 60+, who are within the danger zone of this virus being fatal. With a major portion of our workforce quarantined (less than half of whom have the ability to work from home), and a very small percent if any people at all spending their money leisurely, there is an inadequate cash flow. This being the case, what can we learn from previous economic contractions, specifically the great depression and recession?

The great depression happened after the first world war, when the U.S economy was experiencing an unprecedented boom known as the roaring 20s. More people were employed than ever before, new industries were being developed, and people were buying, a lot. Whether it be cars, vacuums, or at home washing machines (all of which were hot commodities), or investing in the stock market, people had money, were spending money, and were happy to do so.

Eventually the boom started to slow down, fears and concerns about the market began to fester, and ultimately the markets crashed. On October 29 1929, also known as Black Tuesday, investors sold 16.4 million shares. The Dow dropped 12% and $14 billion dissipated in a day. This caused credit to freeze, banks went under, businesses could not afford to pay their employees, and individuals were left with useless stocks and unbearable debts.

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    At the peak of the depression, American unemployment was at 24% and government intervention proved to be ineffective. During this time people were homeless, and hungry, and civil unrest was rampant. The great depression also had global consequences, impeding trade and placing heavy economic pressures on various countries including France, Germany, and Britain. It was not until World War II that America was able to rebound and find some economic relief.

    In 2008, America experienced a mortgage crisis that led to what is now referred to as the great recession. Unlike the great depression, of which economist still debate the cause, the great recession was largely the fault of predatory lending practices by banks. To sure up mortgage backed securities, banks began to give out subprime mortgages which eventually led to inflation in the housing market and created the housing bubble.

    As mortgages increased, overtime people could not afford their payments and began to sell their homes or default on their loans. As this trend continued, the value of homes began to drop leaving people with homes that were worth far less than what they were paying. Eventually, investors stopped buying mortgage loan debt from banks, as there was no money to be made in mortgage backed securities anymore.

    Banks were left with bad debt that they could not pay off and valueless properties, and individuals were left either unemployed, homeless, with insurmountable debt, or a combination of the three. 8.7 million people lost their job during the recession. Thankfully, the federal government was able to stabilize the economy with a $250 billion bank bailout, an $800 billion stimulus package, and DODD-Frank, a law that reformed and placed strict regulations on banks and wall street. Even still, it took several years before the work force was replenished.

    So, what can we learn from these two examples and how are they applicable to what we are experiencing today? What the great recession and depression tell us is that economic contractions have specific characteristics: some type of overlooked underlying grumbling, (farmers going out of business and people buying less, or a “housing bubble”), Impregnable debt, a stock market crash, and mass unemployment.

    Thus far, we have experienced an overlooked underlying grumbling, in the form of the Coronavirus being first identified in China back in November of 2019, but not addressed by the U.S until late January 2020. The unyielding debt that Americans face today include: Student loan debt ($1.5 trillion) and personal debt (credit cards & loans ($13.86 trillion)). And as I already mentioned, markets are crashing, and mass unemployment is already taking place.

    What is Being Done and Will it be Enough?

    What we still do not know about what is taking place is, how bad is it going to get? Severity and duration will make a world of difference on whether or not this devolves into a depression. The Federal Reserve has utilized all the powers in its arsenal to steady the stock market decline. They reduced interest rates to zero giving banks and subsequently individuals access to more credit, they have expanded their repo market, reinstituted quantitative easing, and have provided $50 billion in loans to banks within the last week (the highest since the great recession).

    President Trump along with a bipartisan congress passed a $2.6 trillion stimulus package including a universal basic income payment of $1200 with more to come, as well as access to low interest loans to small businesses. President Trump has also enacted the wartime law, the Defense Production Act, requiring American businesses to dedicate their business to manufacturing resources including masks and ventilators. The federal government has also extended its stay at home guidelines through April 30th.  

    Only time will tell if the measures that are being taken will be enough to flatten the curve and ease the economic unrest. There are currently over one million known cases and nearly 60,000 deaths worldwide. In America there are over 270,000 cases and over 7,000 deaths. New York city, the epicenter for the virus, is starting to hit its apex as the city just experienced its largest single day jump in cases at 10,000 new cases, and its highest 24-hour death toll at 562 new deaths, and as professionals keep saying, it is only going to get worse.

    I highly doubt we make it to April 30th with the country “opened up and raring to go”. It is obvious that as people gear up for a tempestuous April, that covid-19 could care less that rent, car, student loan, and insurance payments are due, however, if something is not done to stop the attack and financial impact of this invisible enemy, we may end up facing a fate far worse than this pandemic.

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