The coronavirus crisis: will the cure be worse than the disease?

Governments and central banks across the globe are scrambling to get ahead of the coronavirus crisis, writes John Stepek. Will they succeed? And what will that mean for investors and the monetary system?

“Whatever it takes.” It’s the catchphrase of the moment. Everyone from UK chancellor Rishi Sunak to White House economic adviser Larry Kudlow has been using it. And little wonder. Those three magic words became famous when former European Central Bank governor Mario Draghi uttered them in July 2012, effectively ending the eurozone sovereign-debt crisis with his reassurance (or implicit threat) to investors that he would stop the eurozone from breaking up, no matter what. Global authorities are now facing a far more extreme crisis – and they’re pulling out all the stops. Welcome to the era of “helicopter money”. 

This week, as governments introduced increasingly tight measures to encourage “social distancing” and thus impede the spread of Covid-19, they also stepped up their spending plans for cushioning the impact on the economy. On Tuesday, Sunak announced that there will be £330bn of state-backed loan guarantees to support businesses – that’s 15% of UK GDP. He also said that if demand exceeds that amount, “I will go further and provide as much capacity as required”. Small businesses will be able to borrow up to £5m interest free for six months and the very smallest businesses will get cash grants of up to £25,000. And no business in the retail, hospitality or leisure sector will have to pay business rates for the next 12 months. Plans to help out employees were being hammered out in discussions with unions and companies, while mortgage lenders have agreed to give three-month payment holidays to those in trouble. 

Sunak wasn’t the only one. In the US, at the time of writing, politicians in Congress are looking at a package of measures, including sending cheques for up to $1,000 to every American household, worth more than $1trn. Across Europe countries are announcing their own measures. Most eye-catchingly, French president Emmanuel Macron announced similar measures to the UK’s and declared that “no company, of any size, will be allowed to go bankrupt”. Meanwhile, central banks around the world went on a rate-cutting spree, with the US Federal Reserve trying to provide as much liquidity as necessary to global financial markets (although debt markets are still showing huge signs of distress, for reasons we’ll discuss below). 

This time it’s different

Is this the right thing to do? In the wake of the 2008 crisis, here at MoneyWeek we had serious concerns about bailing out the banks. After all, they were the ones responsible for driving the economy into the ground in the first place. And there is no doubt that the sense of moral hazard engendered by those actions and the resulting assumption that central banks would always act to put a floor under share prices (the “central bank put”) is one reason why we have entered this crisis in such a vulnerable state. Companies are carrying record levels of debt (see page 5) and stockmarkets in the US were more overvalued than at any point since the 2000 tech bubble, the biggest stockmarket bubble the US has ever seen. 

However, this is not 2008. The problem today is that we’ve seen a massively disruptive external shock in the form of the coronavirus that has caused huge sections of our economy to grind to a halt, both on the production side and on the demand side. There will certainly be long-term implications for our way of life and geopolitics (more on those below). But, fingers crossed, the “lockdown” phase should be temporary. 

And if that’s the case, then does it make sense to allow thousands of otherwise viable businesses to go bust simply for a lack of cash flow during that period, particularly when many of them can’t make money because people have been ordered to stay at home? Does it make sense to allow millions of workers to lose their jobs as a result? Does it make sense for us to make a significant problem far worse by introducing income insecurity, home repossessions and widespread personal bankruptcies into the mix? Or is it better to provide some sort of bridge across this period in the hope that it is indeed temporary and we can get back to some sort of “normal” soon? 

In this case it seems clear that the latter is the correct thing to do. You may, of course, query the underlying strategy. Shutting down the economy in this way will have long-term health consequences for many – they will suffer because their distress was not as immediately apparent as that of coronavirus victims and it’s quite possible that we’ll look back and wonder if opting for “herd immunity” over isolation would have worked out better. But if it’s the chosen path, then there is no way the government can back out of its responsibility to absorb that blow where possible and for central banks to stand behind them and provide the breathing space to do so. The big question for investors now is: will it work? And what will the longer-term consequences be?

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