The Financial and Economic Impact of Covid-19

The Financial and Economic Impact of Covid-19

In April, just after governments of major countries started printing money to support their citizens and their economies against the crippling impact of Covid-19, I wrote about my concerns for what economic impact this will have in the future in an article titled, "Will the printing of Covid-19 'Helicopter Money'​ lead to Hyperinflation later?". This collection follows the financial and economic impact of Covid-19. By being aware of what the future could hold can help us better prepare against eventualities and spot opportunities when they present themselves. 

The Incoming Currency Crisis is Starting: Be Prepared

Jack Chapple | Posted: 20th Jun 2020 | Source: 1st Jun 2020 | Economics, News & Current Affairs

In April, I wrote about my concerns about the inflationary pressures that can apply to economies when governments start printing money. This video also argues for the possibility of the opposite happening: deflation, and it occurs when the demand for cash exceeds the government's ability to increase the money supply. Over the past three years, the US dollar increased by 10% each year because of this deflation. On the surface, deflation sounds good because it increases the purchasing power of your money. The problem is, deflation increases the real value of debt. Now, with Covid-19, this is not good for those who are borrowing money: governments, businesses or individuals will have a higher debt burden. Countries who have high levels of debts and go through major deflation are at risk of going through a crisis called a Deflationary Spiral. 

In the Great Depression, this is what happened:

  • Deflation → prices ↓
  • → businesses made less money
  • → mass lay-offs, wages ↓, spending ↓
  • → mass lay-offs, wages ↓, spending ↓ and so on...

This is what Jack Chapple is suggesting might happen. 

How will countries pay off their debt after COVID-19? | Counting the Cost

Al Jazeera English | Posted: 20th Jun 2020 | Source: 20th Jun 2020 | Economics, News & Current Affairs

Jan Randolph, director of sovereign risk at IHS Markit, explains how countries may pay off debts in the coming years.

Take-away: 

  • Governments will lose tax revenues; deficits widen, debt levels as a ratio of the public debt to GDP are at record-level highs. 
  • How will governments deal with this? Can governments continue borrowing from their central banks? It depends on a few factors: If a government can borrow long-term at low-interest rates, that makes it easier for them to service debts. But it is not a free lunch, and it will need to be paid back. 
  • Will investors continue to buy up these new debts? This depends on the confidence they have of each government, whether investors see each government as responsible. 
  • Most economists agree that now is the time for governments to support the economy so that there is income later to service the debt eventually.
  • After the second world war, when the US had similar debt-level ratios, debts were paid back in the 50s, 60s and 70s. Also, in the 60s and 70s, the US had a lot of inflation, and that helped ease the debt levels down. BUT, investors now will be put off investing if governments are seen to be stoking inflation. 
  • Can we be printing money and be okay with that? It depends on who you ask. If you ask a German monetarist, they will disagree. Because in the 1930s, this practice decimated their savings, which eventually lead to the second world war. Printing money would create problems if it leads to inflation. 

 

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