The economic consequences of coronavirus are quickly piling up like garbage along the streets of Los Angeles. Breaking supply chains, closed Chinese factories, iPhone disruptions, and massive shortages of Chinese made products. These developments will most definitely get worse before they get better.
The economic impacts will be devastating. As China flatlines, and first quarter GDP growth approaches zero, the global economy, including the U.S., will also be greatly disrupted. Perhaps many low-cost, Made in China products will go on indefinite hiatus. What then?
Quite frankly, the global economy’s overdue for a synchronized downturn. Coronavirus may mark the turning point. But it would have arrived sooner or later, with or without the threat of a burgeoning pandemic.
Still, the prospect of a great plague makes people all the more excitable. A run-of-the-mill recession and bear market is one thing. But add the rapid spread of a hyper contagious virus to the mix, and the human animal is inclined to go mad in unison.
In the meantime, and despite yesterday’s moderate selloff, the major U.S. stock market indexes are near record highs. The expectation of ever more Fed intervention has pacified investors. But that’s not all…
The yield on the 10-Year Treasury note has slid down to 1.50 percent; near the lower limit of the federal funds rate, which is currently between 1.5 and 1.75 percent. In other words, the Fed’s next policy move has already been decided by Treasury investors. Similarly, gold investors, which have pushed the price of gold above $1,620 per ounce, have also preempted the Fed.
But what’s really going on? Moreover, should you panic, yet?
Should You Panic, Yet?
The answer, no doubt, depends on whether you’re a borrower or a lender. By this, some context is in order…
Assuming a financial agreement is made in good faith, both parties stand to benefit. The lender, having loaned money to a creditworthy borrower, can count on steady coupon payments. At the same time, the borrower can put the money to a resourceful undertaking; ideally, something that produces a return that’s greater than the loan.
by MN Gordon for Economic Prism