One thing that is interesting about the whole covid19 scenario is that we are actually able to watch an economic recession unfold in real time along with the general cause and effect actions that are birthing it into existence. In 2008, other than maybe a few extremely savvy individuals, no one really saw the recession coming until long after it had already occurred. Even then many of us (myself included) didn't understand it fully until movies like "The Big Short" and a few other documentaries literally walked us through the events step by step. But now, our current situation is quite different. In the case of the 2020 and beyond recession, we can actually see the steps happening in real time.
This article is about my understanding of the economic situation that is unfolding at the moment in Canada. However, since many nations across the globe are all doing the same thing at the moment, the ideas contained within may also apply to many other nations as well.
Robbing our Future Selves
In response to the covid19 virus much of the worlds economy was effectively shut down. The effects of shutting down business is seemingly quite obvious. Small businesses are currently struggling and will continue to struggle until things go back to normal. Overall, many businesses will probably go bankrupt or be consumed by large corporations. Big Corporations on the other hand are currently going into conservation mode. They are laying off people and halting capital expenditures in order to conserve cash and brace the storm. These situations are to be expected.
The governmental side of the situation is a little less obvious despite it being even more interesting. I have personally come to think of it as a sort of rob our future selves scenario.
For instance, to combat the effects of shutting off the economy the government is offering relief to citizens in the form a $2000 a month relief package that they are calling the Canadian Emergency Response Benefit (CERB). They are also offering relief to businesses as well, both large and small. To fund this relief, the government is issuing new bonds which they themselves are buying and holding. This allows them to print new money into circulation and give it to the public.
In general, printing new money has the effect of increasing the rate of inflation within a country and at this point there is no reason to think that this situation is any different. In the short term (2-3 months) this probably isn't a huge deal, but in the long term (12-18 months) this could lead to hyperinflation which would completely dissolve the value of money in the country as we know it. Assuming that safe guards are in place and that we experience a manageable rate of inflation, we can expect the cost of goods and services to increase in order to make up for the additional money in the system. This will have the effect of essentially wiping out all of the progress that has been made over the past few years to combat poverty in the country. For example, higher inflation will make a $15 minimum wage equivalent to say $11 minimum wage a few years ago, or something like that. I didn’t actually do the math on that but you get the idea - leaps forward in wage increases will be unwound by higher rates of inflation.
The new debt created for the relief also has to be paid back in the future as well. In the past, like during war times, governments issued bonds to fund the war effort. However, instead of buying them themselves they sold them to the public at interest. They essentially asked the public to fund the war effort and paid them back at a later time with interest. This current situation is much different. The loan did not come from the public but rather from a central bank - the bank of Canada. So instead of the public getting money back for the loan they issued to the government, they actually have to pay off the debt that the government created. So given that our future selves need to pay back the loan, the government will most likely increase taxes and cut government spending in order to do so.
With all of this in mind (i.e. higher inflation and higher taxes in place) we can assume that in 2021 and beyond not only will people be making slightly less money but their money will also be worth much less. We are also seeing measures like this taking place on a global scale which adds a lot of complexity to the issue and makes it hard to understand the overall impact on the world. Some economists predict that we will see much higher rates of poverty worldwide, possibly in the range of a 5-20% increase. They also suggest that poor nations will likely be the most effected overall. I believe this has to do with the strength of a country's gross domestic product (GDP) in that countries with larger GDP's will be more insulated to the effects of all the above.
There is also the case of mortgage deferrals in Canada which acts as another robbing the future-self type situation. Deferred mortgage payments do not disappear (obviously) but instead get tacked on to the back of the mortgage term. Currently, mortgage rates are the lowest they have been in history and they can't really go much lower than what we are seeing now. Since mortgages are typically paid back over multiple decades, interest rates will almost certainly increase before the person who deferred their payment is finished paying off their loan. As such, any deferred payments will likely be paid by the individual at a higher interest rate than what they are paying now. So because of this situation, people will not only take longer to pay off their mortgages but in the long run, they will also likely end up paying more for their homes overall.
The Stock Market
When news of covid19 hit and governments began discussing shutting down the economy and we saw a massive drop in the stock market. This was likely caused by investment banks pulling their money out rapidly at the first signs of trouble. Savvy investors who tend to be slightly ahead of the curve quickly followed suit and began pulling their money out as well. Caught up in the fear, the general public did the same shortly afterwards. Unfortunately, at this point it was probably too late for most people to save their money. The damage had already been done and the market hit bottom. It is possible that panic sellers sold at the bottom and may end up buying back in at a higher rate then what they sold for.
Interestingly, the stock market bounced back in a huge way and is currently quite a bit higher than the previous bottom. It appears to be rising again which is also quite curious to me. Unemployment is currently high, companies are losing money, stocks are eliminating their dividends to conserve cash, some are issuing more shares, and the effects of the shutdown haven't actually been realized at this point. With all of that in mind, why are markets going up???
It could be that the increase in the market may be caused by banks investing money that they received from the Bank of Canada (or any central bank) at 0% interest. Investment banks may be trading in the market which is causing it to temporarily go up. This could also potentially explain why we are seeing these massive swings in volatility - big banks making big trades.
Conclusion, or Lack Thereof
Unfortunately, I do not have a strong conclusion to this article. Conclusions are not my forte. I’m hoping though that the body of the information provided speaks for itself and acts as a kind of play by play of events that have taken place thus far and the likely results that will come from them (at least as they appear to me). I would like to add though that this is just my understanding of the situation and much of it is speculative in nature. That being said, please feel free to correct any errors that you see in my thinking or to add your thoughts to the discussion. I would like to try and understand this situation more, so I invite you to bring forth your ideas as well.