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Is COVID-19 really to blame for the upcoming recession?


Howard

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I found this interesting video interesting, suggesting many reasons we are to blame for the upcoming recession and not the virus.

 

First off, government does not make prudent reserves. When I was a treasurer for a non-profit organisation, I was asked to make sure we have enough in the bank to cover 2-3 months expenses before looking into expenditures. Personaly, and I'm sure I'm not the only one, I have a diversied portofolio. Because of my gold investment that I sold as soon as the american stimulus package was announced, as well as regular government help I get for having to attend a therapy, I can hold out until June. Sadly the governement not only does not make such reserves, but in many places were in a deficit spending position before the lockdown started.

 

It is clear to me that if debt is not the cause of the recession, it will definitely worsen it. People not paying their rent produces lanlords who can't pay their mortgages who produces banks that recall loans who produce people that can't come up with their loan money. It's a vicious cycle.

 

Despite regulations on mortgage loans, none were introduced for business loans because they are seen as good debts. Generaly, businesses borrow money to invest in their companies in order to make more money, but it's not uncommon that a business will borrow to cover running expenses, like payroll. That is bad debt. Even with the mortgage regulations, low interest rests fueled debt by making borrowing more appealing. And it's not just businesses the culprits. Many individuals, thanks to debts, live above their means.

 

Though I find the stimilus package necessary to end the vicious cycle that I described above, it will make lending less interesting because of the government borrowing all they can. That is, the government will soak up liquidity at the end of the day. With the same principle, I can foresee investment in general being less attractive than before the corona virus.

 

Last, I would advise not to keep money in the bank without spending it for a cozier lifestyle. Having a diversified portofolio made it so not only I will have food to eat and money to pay the rent but peace of mind. At the same time, when the government orders the printing press to go crazy, it is more likely that an investment, like real estate, will retain its value than with a savings account.

 

What do you think of the video? Are we really to blame for our economic woes? Are you of the opinion that it's all corona virus' fault?

 

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14 minutes ago, Howard said:

Are we really to blame for our economic woes? Are you of the opinion that it's all corona virus' fault?

The root problem is capitalism. As long as it exists, we'll be flying by the seat of our pants.

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Lord Jade Cross
38 minutes ago, Howard said:

 we are to blame for the upcoming recession and not the virus.

This is the answer. We can't realistically think that we will birth, raise and let loose a problem on the world and then hope, by some miracle, that someone else resolves it.

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RoseGoesToYale
47 minutes ago, Howard said:

Are we really to blame for our economic woes? Are you of the opinion that it's all corona virus' fault?

I'll always be the first to say that the capitalist system is unsustainable. But in the current system, which is built on the backs of ordinary citizens always being available to labor, it has certainly heavily exacerbated it.

 

The workers can't work, either because of quarantine or they're sick. So they stay home and don't buy things because nothing is open besides a few essentials. No workers at work, nobody out buying things = no money coming in to businesses. Businesses are forced to cut workers and make less product so there's less to buy anyway. No selling, no profit. No profit and you've lost The Game of Capitalism®.

 

And of course, capitalism is built upon sheer ignorant happy-go-lucky optimism. No capitalist ever sits down and thinks "Gee, what if there was a huge pandemic and all my workers got sick or had to stay home for weeks?" They only think in dollar signs.

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If it wasn't for the efficiency capitalism distributes goods and adapts to demand, I would agree with @RoseGoesToYale and @Jon A. 100%. I think mindless consumerism and investments based solely on speculations instead of real goods and services are more particularly to blame. It's funny that the only time I saw a business making a prudent reserve was in a non-profit environement however and I work in accounting.

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Is C-19 to blame. In part yes. In part Brexit and the loss of consumer confidence in Britain is. In part a natural slowdown in China is. There are other contributing factors as well 

It could be said that it's the straw that breaks the camel's back when it was already overloaded. 

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Alawyn-Aebt

First off, sorry for the long post. I love economics too much to allow a change to discuss it to pass.

 

What he says somewhat makes sense, but at the same time part of what he says does not. As a broad overview of depressions and recessions being dictated ultimately by debt as he says in the beginning of the video it ignores the points, first mentioned by Marx and not theoretically disproved, that overproduction leads to depressions and recessions. While I do think the present situation and 2008 were primarily caused by a bubble driven by debt explaining away 1929 or many other periods of economic downturn as being primarily debt-caused is a bit of a stretch. The theory behind business debt is that it should go to investments and capital not to a mere increase in pay or as part of a continual short-term reliance on debt. Sadly, as evident by the overnight repo market failure in late 2019, many businesses are hyper-reliant on very short-term lending to meet funding requirements. The good news is that the businesses are not insolvent, at least at present, rather they are only illiquid. Illiquidity is easier to solve than insolvency. The video sees illiquidity everywhere, which I must agree with him on. Although there have been no publicly-available studies that I am aware of documenting the scope of the present illiquidity.

 

The next part is where the video struggles. It reviews the crowding out phenomenon and inflation. While crowding out is a fear, crowding out only takes place if there is no extra room. If a government issues debt it does remove liquidity from the system, but unless that liquidity was going to be spent on something else it was just going to sit there unused. We saw this in 2008 when banks held on the reserves rather than spending simply out of fear which resulted in threatening the financial system. But there was no crowding out because there was those unused reserves that, while they made people feel safer, were actually threatening everything that was relying on short-term loans. Crowding out is like this: Imagine 5 people are in a room that can only fit 5. That is the market for bonds when the economy when it is running at full capacity. However when an economic downturn happens the economy does not function at full capacity meaning now there is only 2 people in the room built for 5. If the government then creates more debt the new bonds in turn fill up the room, but remember the room already has capacity for 3 more, meaning there is no crowding out. Stiglitz has even found evidence for a crowding-in benefit rather than a crowding-out downside and Krugman has called crowding out a "Zombie economic idea" that should finally die in light of lack of evidence.

 

Second is the issue of inflation: inflation is really low and has been. The money supply (M2 to be precise) has doubled since 2008, yet total inflation has been less than 2% annually. That is shockingly low inflation especially considering the increase in the money suppy. The formula to understand the relation between inflation and money supply is this: Percentage Change in M2 times Percentage Change in Velocity of M2 equals Percentage Change in Inflation times Percentage Change in GDP. If M2 +100%, inflation +2%, and GDP +2.6% (statistics for the USA, but most western countries have similar numbers) that means that for the equation to balance there was a massive decline in the velocity of money. The equation, with V filling in for velocity looks like this 100%xV=2%x2%. By using this equation one can see that the decline in velocity is astounding. I do not know the reasons for this but the bigger problem is the crazy-low velocity not fear of inflation which is extremely minor. Also the house-buying example he had way blown way out of proportion although in Wiemar Germany it might make sense.

 

Data :https://fred.stlouisfed.org/series/M2https://fred.stlouisfed.org/series/CPIAUCSLhttps://fred.stlouisfed.org/series/GDPC1

Alright, now to specific responses:

1 hour ago, Howard said:

First off, government does not make prudent reserves.

The issue is that government reserves actually might drag down the economy. MMT economics is hinged entirely upon this idea and it is widely accepted among the Post-Keynesians. Excessive government surpluses could harm the economy unless one can manipulate the currency to mitigate any effects, as Germany effectively does by using the Euro.

1 hour ago, Howard said:

What do you think of the video? Are we really to blame for our economic woes? Are you of the opinion that it's all corona virus' fault?

The coronavirus just was the instigator of fear, the makings of it were already there. Humans are always the ones to blame for economic failing because we created the economy and through out actions both economic and political either choose to play within the rules or overthrow the rules.

 

I could of course take the solidly anti-capitalism stance and expound the failings of it, but others already have done that. Honestly at this moment I am more concerned about the US's inability to value human life (read what the Texas lieutenant governor said) and Republican's supreme lack of knowledge about economic matters (If they follow through all the nutty things some of them have said it could be much worse than 1929) to really care about overthrowing capitalism at the moment.

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Well, basically the combination of capitalism and mindless consumerism is what going to end it for USA either way. I think that USA is like a balloon that was just waiting to be popped, really. It's just that Covid-19 happened to be the one to put the American's economy under serious pressure.

But knowing the American's companies, they would happily sacrifice people's lives in the name of profit (money that won't go to actually solving/helping

 the situation with the virus... like for example, in my country banks, rich people, ect. are practically racing to make donations to the hospitals who are dealing with the sick people, the tests, apparants ect.) and greed.

 

Spoiler

I mean, look at GameStop (yes, I know that it's stupid for me to use the video game industry as an example but hear me out), a non-essential chain stores for video games who were already on life-support (they closed like hundreds of stores last year) refused to close because apparently according to them, video games are essential. They were literally risking the life of their own workers, customers, citizens, ect. just so they could do a quick profit. Of course, GameStop was finally forced to close anyway by the states for that.

 

Although, I hear that apparently there are bunch of people (boomers included) were ready to sacrifice themselves so that the stonks arrow can go up in the name of the "young generations".... as if they literally weren't calling Millenials and alike "lazy, entitled and whiny bitches" (despite the fact that Millenials and alike literally have to work 3 jobs at a time in order to be able to pay for their most basic needs) those last years.

 

Spoiler

 

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Scottthespy

You could call Covid 19 the spark that's lighting a powderkeg of issues the world's been sort of just sitting on for a while. The problem could have sat and muddled along and not really come to a head for decades more, but then this pandemic showed up and set everything in motion, and now we're very suddenly in quite a bit deeper than projections expected.

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@Alawyn-Aebt great summery of the issues with the film!

Since that's all been said I'll summarise my thoughts with this: Covid-19 and the shut down is the direct cause of this specific market crash, but a bear market was an inevitability. If covid hadn't come along then something else would have sparked it over the next few years/decades. Personally I was betting on Brexit causing one. Every time a market crash happens it seems new and scary and different from any one before and that's what really causes the bear market at the root of it all, the fear of the economic situation leading to lots of panic selling.

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We technically don’t even have true capitalism, otherwise “non-essential” businesses wouldn’t be ordered to close and corporations wouldn’t be getting bailouts, both of which would certainly play a part in causing the recession. Not to mention inflationary monetary policies mandated by the government, which also is not capitalism.

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I think in NZ the reaction to the virus will have a pretty big economic impact. Every single shop except grocery stores and medical places have had to close for at least a month, meaning thousands (millions?) of people suddenly out of work, not buying anything, not being able to pay rent.. As far as I could tell, we were doing fine economically (not amazing, not terrible) but I don't know what impact this quarantine will have :o

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45 minutes ago, Not Pan Ficto. said:

I think in NZ the reaction to the virus will have a pretty big economic impact. Every single shop except grocery stores and medical places have had to close for at least a month, meaning thousands (millions?) of people suddenly out of work, not buying anything, not being able to pay rent.. As far as I could tell, we were doing fine economically (not amazing, not terrible) but I don't know what impact this quarantine will have :o

I haven't heard a single thing about NZ in the news, have you had many cases? 

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3 hours ago, KrysLost said:

I have yet to see anyone propose a system other than capitalism that wouldn't fucking fail or be a dictatorship.

True, but that doesn't make capitalism wonderful. It just means we haven't come up with a better solution that works for everyone, yet. It doesn't mean there isn't one.

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2 hours ago, Gloomy said:

We technically don’t even have true capitalism, otherwise “non-essential” businesses wouldn’t be ordered to close and corporations wouldn’t be getting bailouts, both of which would certainly play a part in causing the recession. Not to mention inflationary monetary policies mandated by the government, which also is not capitalism.

I shudder to think what would happen in a 'true capitalist' society because of covid 19.

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andreas1033
3 hours ago, KrysLost said:

I have yet to see anyone propose a system other than capitalism that wouldn't fucking fail or be a dictatorship. 

America is no capitalist country.

 

A real capitalist country would be anarchy state.

 

America has the biggest gov infrastructure in the world. Trump spends endless amounts of gov money buying shares in stock market(this is not a capitalist system), to try and stop teh falling stock market this last week. A capitalist stock market would be free market, and what ever happens happens, ie people buy shares, and what ever happens, is dictated to by the mood of the people.

 

America is no capitalist country.

 

You need a license from your gov to do so many things. This is not what capitalist country would do.

 

America may of been a capitalist country up until 100 years ago, but its long gone. Like europe, and russia, and china, usa is half capitalist/half socialist. There is no country that is a main country that is absolute in its system.

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45 minutes ago, Acing It said:

I shudder to think what would happen in a 'true capitalist' society because of covid 19.

Assuming that people are rational (which they seldom are), they would have refused to work and only go out for bare necessities, effectively shutting down non-essential businesses. Businesses with no prudent reserves that are non-essential would need to declare bankruptcy, maybe even close down with no hope of reopening if their their products does not correspond to demand. Sure, that would translate in high unemployment, but rational people would have some sort of financial pillow and the available money usualy spent on crappy products would be available for inovation.

Then again, people are seldom rational.

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2 hours ago, Acing It said:

I shudder to think what would happen in a 'true capitalist' society because of covid 19.

People would choose for themselves how to protect themselves instead of relying on governments which have already killed, tortured, and imprisoned countless other people to force people to do so using the threat of violence.

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2 hours ago, theV0ID said:

I haven't heard a single thing about NZ in the news, have you had many cases? 

I think we are up to 450 cases but no deaths as yet thankfully. Our entire country went into lockdown on Wed, so no one is meant to leave their house except to get food, and all schools, shops, and businesses are closed other than some supermarkets and pharmacies (and medical places). Even our online stores closed, like our version of Amazon, online bookshops (despite the fact that couriers are still running, but they're no contact).. Mostly everything closed. Oh and borders are closed, and domestic travel prohibited. The lockdown is to last for a month minimum, but I wonder what happens after that? After the lockdown lifts, we only need a few cases to start going through schools or whatever for us to be in exactly the same place we were before the lockdown, so how does that work? :o 

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A lot of people have been predicting a recession for a while now. The type of growth we've been having in the past several years is not sustainable, and signs of domestic production have been going down. The pandemic definitely didn't help, but I think it has been baking for a while.

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@Not Pan Ficto., the idea behind lockdown is to get the virus to burn out. The hope is that people are contagious for a limited period of time, and by preventing interpersonal contact for that period, plus a bit extra to err on the side of caution, there will be no more people with the virus to pass it on to others 

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48 minutes ago, Skycaptain said:

@Not Pan Ficto., the idea behind lockdown is to get the virus to burn out. The hope is that people are contagious for a limited period of time, and by preventing interpersonal contact for that period, plus a bit extra to err on the side of caution, there will be no more people with the virus to pass it on to others 

Yeah but it's still around the rest of the world, so when the borders open up again etc.. it only takes like 10 cases to start spreading it around once someone comes into the country with it. Seems the only real solution is perpetual lockdown until they get a treatment that actually works :o

 

 

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2 minutes ago, Not Pan Ficto. said:

Yeah but it's still around the rest of the world, so when the borders open up again etc.. it only takes like 10 cases to start spreading it around once someone comes into the country with it. Seems the only real solution is perpetual lockdown until they get a treatment that actually works :o

 

 

This is why watching what is happening in China is really interesting, as they are in the process or easing lockdown. As far as I'm aware their new cases are people coming into the country now, but I'm (pessimistically) guessing that they'll have a second wave of transmission within the country soon. The rest of the world can learn from what happens there at least.

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The measures are taken in order so not all people get sick at the same time so the hospitals don't get overhelmed. I do expect, for reasons mentionned above, that there will still be new cases of COVID-19 after the measures are relaxed, but at a slower rate than it is spreading right now.

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Nah, it's been obvious for some time that a recession was coming. Hopefully this one will be the final nail in neoliberalism's coffin that 2008 really should've been.

 

13 hours ago, KrysLost said:

I have yet to see anyone propose a system other than capitalism that wouldn't fucking fail or be a dictatorship. 

Capitalism and a dictatorship aren't mutually exclusive. Most of today's dictatorships are probably capitalist.

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10 minutes ago, Still said:

 

Capitalism and a dictatorship aren't mutually exclusive. Most of today's dictatorships are probably capitalist.

I still ain't seeing those proposals. 

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45 minutes ago, KrysLost said:

I still ain't seeing those proposals. 

Where the fuck did I say I had a "proposal"? I was just pointing the fault in your initial argument.

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