Special Briefing: Can Free Cash Save Us From Recession?
WHY YOU SHOULD CARE
Because the global economy’s under a two-pronged attack.
By Dan Peleschuk
This is an OZY Special Briefing, an extension of the Presidential Daily Brief. The Special Briefing tells you what you need to know about an important issue, individual or story that is making news. Each one serves up an interesting selection of facts, opinions, images and videos in order to catch you up and vault you ahead.
WHAT TO KNOW
What’s happening? World markets are going haywire as investors remain unsure about whether governments can stop the financial bleeding caused by the rapidly spreading coronavirus. But faced with the prospect of a global recession, officials are trying anyway: Today, the Bank of England announced it’s cutting interest rates to 0.25 percent, while European Central Bank President Christine Lagarde is expected to unveil her agency’s crisis measures tomorrow.
Why does it matter? As the debate rages over how to contain the coronavirus, so too does the discussion over the most appropriate responses to the economic fallout. Pointing out that monetary policy — such as slashing interest rates — isn’t much use anymore, experts are increasingly pointing to fiscal policy (think tax cuts or public spending) as the next-best option. Either way, they say, one thing is clear: Governments need to move fast.
HOW TO THINK ABOUT IT
Supply and demand. The global economy’s currently being hit on two fronts: Sluggish manufacturing has disrupted supply chains around the world, leading to a so-called “supply shock,” while spooked consumers are spending less on travel, goods and other luxuries, producing a “demand shock.” Taken together, they’re sending investors into panic mode because it’s a self-perpetuating cycle that could spell serious short-term danger.
Central decisions. ECB chief Lagarde is under pressure to act after Wednesday’s decision by the U.K.’s central bank (which itself followed a recent Federal Reserve rate cut). But she’s got few options, since local interest rates are already either at zero or negative. Buying more government and corporate bonds, as well as easing lending to small- and medium-sized businesses, may be the only tools the ECB can muster. But experts say monetary policy isn’t useful anymore: Rate cuts take longer to be felt — and besides, panicked people aren’t very likely to spend on big-ticket items such as cars and houses anyway.
More money, fewer problems? That’s why analysts say fiscal measures, such as President Donald Trump’s proposed payroll tax cut, are a better bet. But some are calling for more aggressive moves that shield workers and encourage spending. Among those options are expanded unemployment insurance or even free cash, much like the 2008 U.S. stimulus that sent hundreds of dollars to each individual or family to help cushion them from the oncoming recession. Yet that’s no magic bullet either, since it’s unclear whether such pocket-boosting measures will be compelling enough to get people shopping at packed malls or dining out. Italy, the hardest-hit country in Europe, has sought to lighten the burden on its own citizens by temporarily suspending mortgage payments.
Tech-tonic shifts. Besides laying waste to the global economy, the coronavirus crisis is also testing just how technologically savvy various industries — from tech firms to Ivy League universities — really are. Social distancing might help contain local outbreaks, but places as varied as Nike factories and Starbucks cafés still depend on the physical presence of both workers and consumers. How will universities manage with virtual classes, without students filling dorms and using other on-campus services? Can Wall Street traders manage remotely? The answers to these questions, which coronavirus may help expose, could be even more revealing for the future economy.
WHAT TO READ
The Best Stimulus Is Coronavirus Testing Kits, by Alan S. Blinder in The Wall Street Journal
“Interest-rate cuts have little economic impact until a year or two passes. It’s too late for monetary policy.”
There’s No Need to Panic About a Recession, by Henry Olsen in The Washington Post
“For now … the market decline looks to be just another example of how traders use unwelcome news as an excuse to take profits.”
WHAT TO WATCH
Sizing Up the Coronavirus Impact on Global Economies, Markets
“Monetary policy cannot end the coronavirus, clearly — there needs to be some sort of fiscal support.”
Watch on Bloomberg Markets and Finance on YouTube:
Oil Price Plunge ‘Best Form of Stimulus for the Global Economy’: Schroders Economist
“Of course, this is all very negative for investors and for markets, especially in the near term, but this is fantastic news for the consumer of global energy worldwide.”
Watch on CNBC on YouTube:
WHAT TO SAY AT THE WATERCOOLER
Philanthropy to the rescue? As governments scramble to address the financial fallout from the coronavirus, private wealth appears to be tackling the outbreak itself. This week, The Bill and Melinda Gates Foundation joined forces with Mastercard’s Impact Fund and British charity Wellcome to unveil a $125 million “incubator” for vaccine research. Facebook founder Mark Zuckerberg, meanwhile, announced that two of his organizations would boost funding for tests around the San Francisco Bay Area.
- Dan Peleschuk