Is The FED Merging with The Treasury Department Amidst COVID-19 Pandemic

The COVID-19 pandemic has rattled the global financial sector in ways that even the brightest minds in economics could ever imagine. The global economy is under immense pressure as macroeconomic uncertainties continue to fuel concerns of an imminent recession. The U.S economy, which was growing at an impressive rate prior to the crisis, has already started feeling the pressure considering developments in the past few weeks.

Stock Market Plunge

One of the longest Bull Run in the stock market has come to an abrupt end. Major stock market indices led by the S&P 500 and the Dow Jones Industrial Average have already plunged into the bearish territory, tanking by more than 20%. The implosion has come at the backdrop of the spread of the coronavirus that has taken a toll on various sectors of the U.S economy.

Concerned with the risk of an imminent recession, policymakers in the U.S have swung into action in a bid to avert the events of the 2008-2009 financial crises. Stringent measures, as well as drastic economic policies, have come into play as policymakers seek to curtail the COVID-19 fallout.

There is no doubt that the U.S central bank the Federal Reserve and the Treasury have on their hands an arsenal of tools they can use to avert the U.S economy plunging into recession as it did in 2009. The FED has so far shown the lengths it is willing to go to ensure the U.S economy sails through, unscathed, amidst the Coronavirus pandemic.

U.S Monetary Policies For COVID-19 Pandemic

Over the past month, the central bank has cut interest rate by 150 basis points. With interest rates near the zero territory, the FED might as well have run through its 2008 crisis book. In a bid to calm the stock markets, which has experienced extreme levels of volatility in recent months, the central bank has initiated a $1 trillion a day in repurchase agreements. In addition, it has confirmed unlimited quantitative easing programs.

Fed Chair Jerome Powell

The Coronavirus Aid Relief and Economic Security CARES is one of the program designed to caution taxpayers in the U.S amidst the coronavirus pandemic. The congress approved program includes a $2.2 trillion package that will be distributed to people as well as businesses greatly affected by the pandemic.

The $2 trillion packages will offer six months’ worth of relief, targeting among other people student borrowers. American taxpayers are poised to receive $1200 in paychecks to cover various expenditures as the country remains under lockdown.

The bailout package will increase funding to unemployment benefits as well as offering small businesses finances to pay employees, among other benefits. The package also provides at least $100 billion to help hospitals in the U.S battle the Coronavirus pandemic.

While the response has provided some form of reprieve, it’s the manner in which they’ve been carried out that has continued to raise serious questions. One of the questions that are increasingly sending shockwaves in the capital markets is whether the U.S central bank, the Federal Reserve is slowly merging with the Treasury department.

Is The FED Merging With Treasury?

However, it is the confirmation of a $625 billion worth of bond-buying program that might as well have got the FED at crossroads with economists. The purchase program will see the FED purchasing both governments guaranteed securities as well as corporate bonds. Once the dust settles, the FED will end up owning two-thirds of the treasury market, given the rate at which it is buying securities in the market.

The FED might as well have assumed a role that is not under its mandate on embarking on the aggressive buying spree. Under the law, the Federal Reserve is only allowed to purchase and lend against securities that have a government guarantee. Some of the products that the central bank can buy include treasury securities, as well as agency mortgage, backed securities. It can also spend its balance sheet on debt issued by Fannie Mae and Freddie Mac.

However, that has not been the case with the recent wave of purchase. The central bank has ended up buying more corporate bonds that don’t have federal government security. By spending on corporate bonds as well as other securities, the Central bank has essentially assumed a role initially reserved to the Treasury department. Similarly, it is becoming increasingly clear that the FED might as well have merged with the treasury department.

The FED and the Treasury department are supposed to operate independently. However, that has not been the case, especially on President Donald Trump's constant bashing that the FED is not doing enough to protect the U.S economy. Similarly, the two have had to work together to the extent of their operations appearing intertwined.

In a bid to shrug off any merger concerns, the FED has resorted to the creation of special purpose vehicle (SPV) for each of its operations that go beyond its mandate. The Treasury Department on its part has started using its Exchange Stabilization Fund by making equity investments in each of the SPV created by the FED
.

While it is the Treasury Department that is buying all these securities as part of the bailout package, it is the FED that has ended up financing everything. Conversely, the FED is acting as the banker providing all the finances that the Treasury Department needs to purchase all the securities in the financial markets.

What is simply happening is that the FED has given the Treasury department access to its printing press. Whatever the Treasury department needs to purchase in the financial markets, the FED is sure to provide the money. In essence, the Treasury Department appears to be in control of the central bank.

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Is It Safe To Invest In The Stock Market Amid Coronavirus Concerns?

The stock market in the U.S has been in a state of flux lately due to the economic impact of the coronavirus, which has evolved into a global threat. Stocks have been on free fall due to investor panic. This is usually the case whenever negative news is released, and the current situation involving the COVID-19 pandemic is perhaps the biggest threat that the market has experienced in a long while. It is clear that investors have been pulling their funds from the stock market, and this has exasperated the situation even more.

Is the market headed for a recession?

This is a question that strikes fear into the hearts of many investors and market experts. An economic recession is a likely outcome, but the U.S government, along with governments from other countries around the world, have been implementing measures aimed at preventing their economies from collapsing.

For example, the U.S Federal Reserve announced various economic control measures on March 15th, such as a stimulus program worth $700 billion. It also slashed interest rates to extremely low levels close to zero. These measures are meant to help the economy to stay afloat or to prevent an economic crash. However, there is one problem. The COVID-19 pandemic is still going on, which means that stocks will still be affected if the viral threat is not subdued anytime soon.

The impact of the coronavirus on the market is clearly evident and not just in the U.S but also across the globe. The NASDAQ had dropped by 12.3% by mid-March while the S&P 500 had dropped by 11.9%. The FTSE 250 index, which also features some top UK companies dropped by 7.8% by mid-March.

The U.S Federal Reserve has implemented various economic measures aimed at supporting the economy. However, the Federal Reserve can only do so much. The coronavirus threat is still a weighty matter that is fueling fear among investors, and its prolonged impact may have a devastating effect on the stock market. However, government intervention brings up some questions on investing in the stock market.

Is it really safe to invest in the market?

Any investor knows that the best time to invest in the stock market is when prices are low. The stock market has been on a downfall for the past few weeks, which means that even large-cap stocks are getting undervalued. In other words, the lower prices of stocks present investment opportunities for anyone looking for a good entry. On the flip side, there is still the coronavirus is still undefeated and the markets are not out of the woods yet.

The answer to the question, however, depends on the type of investor. There are basically two types of investors. The retail investor who basically invests in a stock at a low price to sell at a higher price, sometimes shorting stocks and then there is the trader who invests over the long-term to earn dividends.

The current situation is certainly not ideal for dividend investors because stocks have been losing value on account of the coronavirus impact on the markets. Social distance and quarantine are the measures implemented to try and curb the spread of the virus. This also means that non-essential workers have to stay at home. Many companies have thus been affected, and some have even had to halt their production operations.

It is thus not safe to invest in stocks whose companies do not provide essential products or services. On the flip side, stocks that provide essential products may not experience that big of an impact since they are still able to make sales and thus contributing to share earnings. The fact that the stock market has been on the decline also means that retail investors have a chance to purchase stocks when their share value is low. Unfortunately, it is currently unclear how much longer the economy will continue to take a hit, especially since there is still no cure for the coronavirus, and the number of infections and deaths continue to rise.

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The US COVID-19 Stimulus Package Could Erode The Value Of The Dollar In The Times Ahead

Late Wednesday 25 March 2020, the US Senate approved a bill aimed at stimulating the economy. Dubbed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act for short), the legislation avails $2 trillion to American people and businesses to deflate the impact of the COVID-19 pandemic. The monies will enable American workers who just lost their jobs to put food on the table. For the businesses, the funds should help them to stay afloat until the storm passes.

The coronavirus stimulus package is not an unprecedented initiative by the US government. To be sure, the government has stepped in to help Americans to get through many other recessions in the past. However, the sheer size of the money involved in the current stimulus package is astonishing.

After the Great Recession in 2009, President Barack Obama signed a similar bill called the American Recovery and Reinvestment Act (ARRA), 2009. Like the CARES Act, the ARRA aimed to put America back on the recovery path after the ravaging credit crisis. Under the ARRA, Congress agreed to a one-time payment of $250 into the accounts of 52 million recipients. Coupled with tax rebates to businesses and corporate bailouts, the ARRA gobbled up $831 billion. At the time, the sum was insane, and few were certain about its effectiveness. A decade later, the question of effectiveness still attracts fierce debate.

Highest jobless claims on record

Much of the US is on lockdown as authorities urge citizens to stay at home. This order emanates from the fact that COVID-19, otherwise called coronavirus, is highly contagious. Although new information has been streaming in fast, it is clear that the virus stays on surfaces for up to 72 hours. Besides, people can easily catch the virus through inhaling droplets from infected persons’ coughs. As a result, authorities are urging citizens to minimize social contact to stem the spread.

Unfortunately, social distancing implies one thing. Life grinds to a stop. This sudden stop is having an effect on the economy that is worse than the credit crisis of 2007/08. According to the US Department of Labor, more than 3 million claims for unemployment benefits came in from Americans in the week ended March 21. To put this into context, the highest claims during the Great Recession clocked 665,000.

The COVID-19 stimulus package sounds just right, or does it?

Given such record figures, one would imagine that the $2 trillion stimulus package is right. Indeed, this is true until one considers the goal that the monies hope to achieve. The bulk of the funds will go into buoying big corporations and small businesses. In fact, more than $1 trillion of the funds will go into tax cuts, bailing out corporations, and provision of loans and grants to small businesses. This analysis by Bloomberg shows a detailed breakdown of the distribution of the funds.

Clearly, families will receive about $290 billion in direct payments to boost the size of their disposable income. Particularly, adult individuals will receive up to $1,200 each, and $2,400 if married. Each household will receive an additional $500 for every child. Besides, there is an estimated $260 billion dedicated to expanding the unemployment insurance program. Here, some employees will receive a benefit equal to their monthly salary. For the first time, the economic stimulus package ropes in self-employed individuals and independent contractors.

Nonetheless, there is a lingering question about whether the stimulus package is what it looks like. In a crisis like the Great Recession, the problem was a collapse of the credit markets. Therefore, any recovery initiative targeted to stimulate demand and production. In such a case, a stimulus package would work just fine. On the contrary, the problem that America and the world are facing today is far from the Great Recession. In the first place, the sudden stop is because of a medical pandemic. Secondly, the direct payments made to families are for discouraging them to go out to work.

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The Rise of The Digital Economy & The Need For Currency Digitization

The world has undergone a massive transformation that very few people could have ever imagine. Digital transformational has taken root, transforming how people live their daily lives in addition to giving rise to multi-billion dollar industries. Similarly, the transformation has given rise to a robust global digital economy.

Catalysts Fueling Digital Economy

Digital economy refers to a broad range of economic activities that rely on digitized information as well as technology as key factors of production. Some of the key factors fueling the digital economy revolution include computers, smartphones, the internet, as well as a revolutionary technology in the form of artificial intelligence, blockchain, and augmented reality.

The growth of digital economy has also brought about tremendous disruptions. While some jobs have been scrapped due to the use of technology, so have new exciting jobs tied to digital economy cropped up. For instance, the emergence of e-commerce platforms has given rise to new opportunities in the form of online stores as well as delivery services, even on rendering brick and mortar stores absolute in some cases.

The widespread use of smartphones continues to fuel the digital economy, conversely enhancing the way people live their lives. With a simple tap of the smartphone, it has become easier to book a ride, let alone order a meal, as well as pay a bill without making a physical appearance.

Financial institutions continue to fuel digital economy with exciting innovations that have made it possible for people to do almost everything from the comfort of their homes. For instance, there are mobile apps that are making it possible to pay for bills, apply for new credit cards, and open new accounts without stepping foot into banking halls.

The use of technology has also allowed banks and other financial institutions to enhance service delivery in addition to enhancing productivity and triggering cost savings. The use of software and automation has already taken foothold leading to the scrapping of repetitive operational tasks and processes.

Going digital has become imperative for companies looking to address the needs of the digital generation. At a time when the Coronavirus pandemic is causing havoc, firms that embraced the digital revolution are riding the wave with much ease. The integration of new technologies has made it possible for such firms to allow workers to continue doing what they normally do, from home.

Data-driven platforms leveraging the latest technologies have also cropped up, conversely fueling the digital economy in unique ways. Ride-hailing services are such platforms that have made it possible for people to commute from one place to another by ordering rides straight from their smartphones.

Digital economy has also proved to be one of the factors behind some of the fastest-growing economies in the world. In Singapore, the Digital economy is poised to add close to $10 billion to the country’s GDP by 2021.

Currency Digitization to Fuel Digital Economy

The emergence and widespread use of blockchain technology appear to be fueling the next phase of digital economy transformation. The emergence of cryptocurrencies powered by blockchain technology has forced central banks around the world to rethink their monetary policies.

Digitization of local currencies is the latest trend, gaining foothold as countries look to gain an edge when it comes to financial transactions. It has become increasingly clear that the future of money will be more in digital form rather than physical cash.

Governments are racing against time to try to digitize their currencies as they try to stay ahead of time. The digitization being talked about by central banks mostly involves the conversion of the current form of cash into electronic cash.

People around the world are increasingly shunning the use of traditional cash in favor of electronic cash. The emergence of platforms, as well as apps that make it possible for people to send receive money as well as make payments from handheld devices without handling cash, continues to fuel the use of electronic money.

While most transactions, even in the advanced digital economy, are still carried in cash, the share of cash in circulation has significantly reduced. People are increasingly refraining from handling cash opting for electronic money, given the convenience it brings about. Cashless economies is no longer a farfetched dream given the millstones made on the use of electronic money in settling almost every transaction around the world.

Cryptocurrency Threat Impact

The threat posed by cryptocurrencies on traditional fiat currencies is another reason why countries are racing against time to come with their own version of digital currencies. Cryptocurrencies are increasingly becoming a preferred means for some people in meeting various financial obligations.

The fact that cryptocurrencies operate the same way as any electronic money is one of the factors that continues to fuel their use. The security levels that come with the use of cryptocurrencies in settling transaction is another reason behind their increased use. Likewise, cryptocurrencies tend to come with some of the lowest transaction costs that normal payment systems struggle to match.

Faced with the threat of cryptocurrencies taking over the mainstream financial sector, governments and central banks around the world are contemplating coming up with their own version of digital money.

China is one of the countries’ that is preparing to launch its own digital currency as it looks to increase control over the movement of money. Sources indicate that China’s digital currency bares similarities to the botched Facebook’s digital currency, Libra. It will also come with features embodied in cryptocurrencies such as Bitcoin.

Just like other countries, China is plotting a digital currency to protect its economy at a time when newer payment systems are increasingly cropping up. The use of cryptocurrencies, for instance, has increased the risk of illegal money flows as well as fueling money laundering. In addition, China hopes that the proposed digital currency will help fuel its fast-growing digital economy.

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Fear As One Of The Major Factors That Influence The Financial Markets

The financial markets are quite popular because they offer a lot of opportunities for investors to make money, but at the same time, they are quite risky, and losses are a common thing. Different factors cause price changes in the market, but they can largely be categorized into two: Fear and Greed.

Although greed has a significant impact on trading decisions, fear is arguably the more influential of the two forces. People will always want to make money from the financial markets. However, the fear of loss leads to decisions that influence the overall performance of the market. The problem with fear is that it compounds the impact of a market-changing event such that the impact of fear is far greater than the impact that would have resulted from the occurrence of the event.

How and why does fear manifest in the financial markets?

The materialization of fear in the financial markets and its impact is a narrative that has repeated itself over and over in history. Fear is one of the underpinnings of human behavior. We are naturally afraid of loss or anything that can potentially harm us, and we tend to focus on self-preservation in the face of adversity. This type of human behavior also extends to our investments, especially in the financial markets.

People invest, for example, in stocks, derivatives, or commodities expecting to cash in as prices improve. However, they also know that there is a risk of loss if the market tumbles, and this is where the fear of losing their wealth overtakes them. Investors usually withdraw their investments if they hear anything unfavorable about the markets. This is the reason why market sentiments or price predictions have such a huge impact on market performance.

The tendency of selling based on the fear that prices will take a hit causes a market crash, and this behavior is known as panic selling. It has played out in the past in multiple instances, and perhaps one of the best examples was the 1987 stock market crash in which the stock market fell by 23 percent in a matter of hours. Speculative sell-offs in the market played a huge part in this particular market crash. Another example of the impact of fear and panic selling is the dot.com bubble between 1999 and 2000, which led to the downfall of many upcoming stocks that had been overvalued back then.

How fear is currently affecting the financial markets

The current situation also demonstrates how one situation can lead to panic in the market. The COVID-19 pandemic has become a global crisis, and the financial markets have taken a huge hit. The production activities of many companies have been affected by the situation. However, the stocks have tanked by a huge margin, and the main factor behind the bearish outlook in the market is panic selling.

Some investors have been busy pulling their investments from the market while others have been shorting the markets in the expectations that there would be massive selloffs. Before the COVID-19 threat, there had been other sell-offs, especially the Brexit-induced Euro and GBP selloffs, as well as the selloffs fueled by the U.S-China trade war. In other words, fear in the financial markets tends to manifest when negative social, economic, or political events occur, thus swaying investor sentiments to sell. The opposite is also true where positive social, political, and economic factors encourage investors to buy.

The volatility index

Fear is such a huge force in the financial markets that it is even measured. There exists a volatility index that economists and market experts use to measure the level of fear in the market.

The volatility index above demonstrates the level of fear in the market during the financial crisis of 2008 and the current fear levels induced by the COVID-19 pandemic. It looks like the coronavirus threat has so far provoked more fear than during the financial crisis of 2008. This demonstrates just how dire the situation is currently.

To put into perspective just how much COVID-19 has affected the markets, especially over the past two weeks, the price of crude oil has dropped by 60 percent, and the stock market has tanked by 40 percent. The price of silver and gold has also been on the bear trend at 40 percent and 15 percent, respectively. Airlines have taken a massive hit as flights have been grounded due to travel bans, and of course, people are afraid of traveling to avoid being more exposed to the viral threat. So far, airline stocks have lost over 50 percent of their value. Bonds have also dropped by 10 percent after reaching a historic high just a few weeks ago.

This time the fear in the financial markets seems to be correctly placed

Often in the past, when investors panic sell, the reason pushing their fear is usually because they anticipate other investors to do the same. However, this time the threat is actually real, and it seems to be grounding most non-essential businesses. The Coronavirus situation has become a global pandemic. Schools have been closed, people are not going to work, and most importantly, people have been advised to self-isolate or self-quarantine themselves to help prevent the spread of the virus.

It is also quite a concerning situation because thousands of people have died so far, and this threat is quite severe. We currently do not know how long it will take before things get back to normal, but from the current scenario, that might be weeks if not months. This means the financial markets will continue to take a hit, and we might continue to see the grip of fear continuing to affect the markets.

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The Great Bailout Of Our Time And How It Has Helped The Economy

There was a time right before the 2008 economic crisis when major banks were deemed too big to fail. Unfortunately, the banks got too reckless. Trading derivatives had become quite the norm back then and but eventually, the value of those derivatives went up in smokes, leading to massive losses. The banks that were too big to fail suddenly found themselves in massive debt. The government had to swoop in to save the day through bailouts.

What is a bailout in economics?

A bailout is a situation where the government provides capital infusion to organizations or businesses that are facing bankruptcy. Bailouts are supposed to help the businesses and organizations to meet their obligations. For example, if a government bails out a bank, it will give the bank enough money to pay off its obligations, including the amount it owes to its clients.

Major global financial institutions such as the International Monetary Fund also bailout countries by providing capital infusions during times of financial crisis. Governments may also implement some measures such as Quantitative easing in an attempt to stabilize their economies. Quantitative easing is where a central bank purchases financial assets such as government bonds in an attempt to inject more money into an economy. Governments also use interest rate cuts to regulate the level of inflation in a country and also as a means of controlling the value of a currency.

The bailout after the 2008 economic crash

Bailouts can be issued in the form of a loan or bonds which are to be paid out later. One of the best examples of the U.S government intervening to issue bailouts was after the economic crisis of 2008, which the government was supposed to give out roughly $700 billion to bail out the major banks that took a hit as a result of the recession. Interestingly, these were the same banks that played a key role in the financial crisis.

The bailouts that have taken place so far in the U.S

The bailout that came after the financial crisis of 2008 is not the only economic bailout that has taken place in history. There have been multiple bailouts, as we shall discuss below.

The Great Depression

Great Depression is the duration of economic stagnation and economic decline that happened after the 1929 stock market crash in the U.S. President Franklin D. Roosevelt, who took office in 1933, immediately started working on economic recovery measures. His administration particularly instituted bailout measures as well as rescue programs designed to help push the economy back to the path of recovery.

The bailout measures included the government’s purchase of defaulted mortgages from banks, and this helped to get the banks to get back on their feet. Many people also lost their homes as a result of the mortgages problem. However, the government came in and helped not only the banks but also the people. Meanwhile, the government also launched programs that helped create employment such as building the Hoover Dam, building schools, the construction of post offices, building new bridges, and repairing old ones and farmers received subsidies, as well as price support for livestock production and other agricultural activities.

The loans and savings bailout of 1989

Savings and loan institutions (S&Ls) in the U.S were originally made so that they could provide mortgages to prospective homeowners. They offered higher premiums on deposits than banks to attract more deposits. They also tried their hand at commercial real estate, but they were poorly advised and had wanting lending policies, and back then, the government was not as strict as far as the lending policy was concerned.

Things got more concerning for the S&Ls when the Federal Reserve hiked its interest rates. This meant that S&Ls were forced to give out higher interest on their deposits compared to what they earned from the lower interest loans they offered, as well as what they earned from the fixed rate. These issues caused the downfall of roughly half of all the S&Ls in the U.S. between 1986 and 1995. Consequently, the S&Ls defaulted on loans worth billions of dollars.

The government had to intervene to do some damage control. One of the ways it did that was by covering federally insured deposits that were worth billions. The government had to use bailouts worth $293.3 billion to support the S&Ls industry, making it one of the largest bailouts in history. The U.S government also made some reforms. Those changes were made through the Financial Institutions Reform, Recovery and Enforcement Act, which was introduced by Congress in 1989.

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Is The Economy Finally Headed For That Highly-Anticipated Downturn?

It is no secret that many economists believe that we are headed for another economic recession, and the signs have been there. For example, the U.S Treasury Yield curve inverted late last year, causing some panic since it traditionally inverts right before an economic crash. There have also been other issues that cannot be ignored, which point to an economic recession being overdue.

Unusual economic expansion

Economists remain amazed by the fact that the U.S economy has been expanding for more than a decade now. This is a good thing because it means the economy has been growing, and it continues to grow, but the concern is that it will eventually reach a point where it will collapse. Continuous growth for an overextended duration raises concerns that a collapse might be easily be triggered.

The truth is that ever since the last economic recession of 2008, the U.S government and also governments from other countries have been keener on making the right economic policies. They have been trying hard not to make the same mistakes that caused the previous economic recessions.

It also helps that the economic expansion in the last ten years has been slower compared to economic expansions before previous economic crashes. To put that to perspective, the U.S GDP grew by 4.3% on average every year in the 1980s and an average of 3.6%. It grew by a slower 2.3% in the past ten years, and this may have contributed to the extended growth while remaining relatively stable.

Slower economic growth allows the economy to adapt to changes in market dynamics and other factors that may affect economic performance while the proverbial house of cards remains intact. However, economists are curious about whether the U.S economy will continue to expand, and how long it will continue to do so.

The elephant in the room

But what if the next economic recession will be out of the governments’ scope of control? Analysts and market experts are on high alert, especially because of the Coronavirus threat, whose impact is starting to weigh on economic performance. Other than the obvious threat to people's health, the coronavirus is disrupting trade, especially now that countries are trying to prevent the spread of the disease. Some countries have already temporarily halted any imports coming from countries like China where they are already trying to contain the virus.

There is another problem. The concerns regarding the spread of the coronavirus is bound to have a massive negative impact on investments. Investors are bound to pull their investments, thus causing a massive sell-off. The scary thing is that sell-offs have already started happening due to investor panic, and investors have also been shifting to safe havens.

The situation has gotten so concerning in the economic sector that the 10-year US Treasury yield hit a new low on the first Tuesday of March 2020. This was likely triggered by the sell-offs for assets with riskier profiles in the market and the shift to safe havens as investors try to protect their wealth.

The global economy

What was initially a threat in China is now turning out to be a major problem for the global community and, subsequently, the global economy. This is because the disease is disrupting the dynamics of trade across the world. For example, countries are on high alert as far as imports are concerned, and travel advisories have been issued, especially to countries that have already reported a rising number of coronavirus infections.

The coronavirus is not the only issue affecting the global economy. There have been tensions regarding global trade due to the tensions caused by the U.S-China trade war and the Brexit issue. Interestingly, the two geopolitical issues contributed massively in the slow-down in global trade, and they are not yet resolved.

Concerns about the big bad

Although the China-U.S trade war and Brexit are weighty issues, they are not an immediate threat are far less pressing concerns compared to the coronavirus threat. If the virus cannot be controlled and it ends up spreading globally, then its game over. This is a disease that could potentially lead to millions of deaths that are quite scary to the global community.

Deaths caused by the coronavirus are the biggest concern right now, and the effect of this concern might have a major impact on the global economy. China has a few lessons to teach us about how things can potentially turn out. Schools in the Asian country have been shut down indefinitely, and people cannot go to work, and these steps are necessary to avoid being exposed to the virus. This type of situation is enough to bring an economy to its knees.

Unfortunately, there is nothing that central banks can do to alleviate the impact of an uncontrolled spread of the coronavirus in the world if that were to happen. The same thing that is happening in China would thus happen in many other countries, thus forcing the global economy into a downward spiral. Most of the economic impact would not even be tied to the number of people infected or the number of lives lost but to the fear and stigma concerning the disease.

Many people around the world will likely avoid public places, especially crowded places, and this means that consumer habits will be affected. Fewer people will attend major sports events or restaurants, and this type of reaction by the masses will likely affect many businesses.

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