There is plenty of negativity and doom and gloom out in the world right now, and in this series there certainly is some of that. Ok, plenty of that. So I thought it might be best to begin the Finance Guide with something a bit sunnier: even while coronavirus pummels the “real” economy, the United States will not suffer a financial
crisis…or at least not right away.
Before the coronavirus crisis, there were few underlying financial instabilities in the American economic system. There certainly were nothing like the massive bubbles in real estate markets in 2007. Nor was there the sort of broad industrial dislocations that triggered the 1979 and 1983 oil shocks. There wasn’t even a sector-focused overbuild a la the 2000 dot.com
bust. The system had its warts, but they were all part of normal late-economic cycle business. Maybe worth a bit of concern, but nothing fundamentally out of whack. The mass of the Boomers’ approaching retirement (but not yet being there) helped keep financial markets well capitalized, and high levels of capital flight into American financial markets easily explained why stock valuations were so high.
Coronavirus obviously changes things, but let’s be clear, this is not
a typical recession. In the lead up to a typical recession, people get a bit too giddy and eventually bid up the price of some sector or subsector or asset class or skill set. That imbalance eventually forces a reckoning that crunches the bid-up item in specific, and associated items in general. That crunching eventually returns pricing to sane levels and we start expanding again. In a financial
recession the banks and capital markets are somehow involved, and so their
crunching limits capital availability to everyone, cascading their issues throughout all other sectors. That’s why financial recessions (like 2008) tend to hurt so much.
That’s not what we are in. We chose
to have the coronavirus recession. We chose
to separate ourselves from one another. We chose
to not interact or travel or go to work or restaurants or malls. The nature of this recession makes it no less serious – in fact, it is likely to prove more impactful in terms of economic activity lost than the 2008 financial crisis – but it does mean any changes to America’s underlying economic structure are unlikely to be as disruptive or long-lasting as a financial recession would be.
The U.S. Federal Reserve has already injected more liquidity into the American financial system during the coronavirus crisis than it did during the entirety of the 2008 financial crisis. In just the past week it declared it would commit unlimited funds to purchasing securities to prevent market freefalls, and in just a week expanded its balance sheet by a half trillion dollars. That’s nearly as much distressed debt as than the Fed purchased during the three-month nadir of the 2008 crisis. President Trump signed into law March 28 a $2.2 trillion fiscal stimulus and relief program. That’s more ammo than was put to use in the last three recessions combined – and we’re not even two weeks into the economic crisis.
And while it may be heartless to say so, the people coronavirus are likely to kill are not the people who are essential to economic growth in the crisis’ aftermath. The virus so disproportionately targets the elderly that everywhere there is credible data, the vast majority of deaths are over age 70. While the United States has plenty of elderly and what we are about to experience will be heartbreaking, the fact remains that the United States population is not only the youngest
of the developed world (excepting Ireland, Iceland and New Zealand), but is actually younger than many parts of the developing
world, most notably China. While I most certainly do not fall into the camp of people who call the virus the "Boomer remover," the fact remains the United States is not going to have a coronavirus-caused skill shortage down the line. Recovery will “only” take money.
So what challenges does the world of finance face?