Interlocking balance sheets and the corona-induced sudden stop

This post highlights the financial problems caused by (the reaction to) the coronavirus. I look at the balance sheets and cash flows of five sectors. The five sectors are (1) businesses that continue operations, (2) businesses that are closed due to the coronavirus, (3) households, (4) the government and (5) banks.

Key findings:

  • Businesses face a cash crunch
  • The net worth of households falls by about 50% of GDP due to lower stock prices
  • Each month of lockdown costs about 2% of annual GDP
  • The accrual of fixed costs while revenue is down is the fundamental problem of the corona crisis
  • Loans and tax deferrals can prevent bankruptcies for a while
  • However, loans and tax deferrals don’t protect businesses and households against insolvency
  • Therefore, the government should transfer resources to those hit by the crisis
  • Fiscal consolidation after the health crisis is over imperils the recovery
Continue reading “Interlocking balance sheets and the corona-induced sudden stop”

If you’re betting on herd immunity (bad idea!), do it in a controlled way

To be clear: exposing people to a deadly virus in order to achieve herd immunity is insane. Policy makers and doctors who seriously considered this option should be tried for crimes against humanity. Millions would die, even with the best medical care.

Herd immunity violates the Nuremberg Code

Belgian virologist Marc Van Ranst wanted1 to keep schools open so children would have herd immunity by the time there’s a second wave of the virus.

Such a “strategy” violates several points of the Nuremberg Code:

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Helicopter money as a weapon in the war against the coronavirus crisis

This post was originally intended to be published elsewhere, but ultimately wasn’t. Note that this article is only about helicopter money. However, governments and central banks urgently need to do much more. The state should bail out all businesses. Businesses should hold on to their employees even if they cannot work so the economy can have a V-shaped recovery. The government should pay the workers. I also have other proposals for the ECB, see here and here.

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How the ECB can stop the coronavirus crisis overnight

I haven’t posted on the blog in a while, but I’m very active on Twitter.

Here’s my 3 point plan for the ECB:

(1) The ECB should issue bonds, which are risk free (the ECB cannot default on euro liabilities). It should buy every sovereign bond trading at a yield of 40 basis points or more above the yield on the ECB bonds.

(2) The ECB should set the interest rate on TLTROs at -5% until six months after the coronavirus public health crisis is over.

(3) The ECB should do helicopter money as soon as businesses are operational again, because the outlook for price stability is bleak.

Coronavirus economics: dangerous hacks versus credible voices

The coronavirus pandemic once again demonstrates that a lot of prominent economic commentors are dangerous. Their recommendations will amplify the economic shock caused by the virus.

People who claim that

  • the coronavirus is not the job of central banks
  • this is mainly a supply chain issue
  • we have to beware of the long term consequences of doing fiscal/monetary stimulus now
  • we should continue business as usual

are spreading falsehoods.

Don’t listen to that guy!

Here is a selection of people who do grasp the importance of acting now in order to prevent an economic meltdown later.

Scott Sumner and David Beckworth: How central banks should respond to the coronavirus threat (podcast)

John Cochrane: Corona virus monetary policy

Skanda Amarnath:

This is not a drill

The ECB, government leaders and the banking sector must act immediately to stop the financial panic caused by the coronavirus.

A recession can still be avoided.

Banks should provide bridge loans to businesses suffering from the corona shock.

The ECB should do a TLTRO-like operation, providing cheap funding proportional to banks’ SME/corporate credit portfolios. Make the terms of the ECB loans conditional on coronavirus metrics. For example: banks should repay 4 months after the last new COVID-19 case is detected in the EU.

If Europe’s leaders fail to act decisively, the financial costs will snowball.

The economics of the coronavirus on Twitter

The coronavirus won’t cause a recession

But the reaction of policymakers might.

The direct impact of the coronavirus on the economy is limited. Unlike disasters such as hurricanes or earthquakes, there is no material damage. Few workers have been incapacitated by the virus.

Once the spread of the virus is under control, the economy can recover quickly.

The greatest risk is that politicians and central bankers will let financial uncertainty get out of hand. The stock market has taken a hit. Some companies will need to defer payments.

Continue reading “The coronavirus won’t cause a recession”

Het coronavirus zal geen recessie veroorzaken

Maar het gelanterfant van beleidsmakers misschien wel.

De directe impact van het coronavirus op de economie is beperkt. In tegenstelling tot bij rampen als orkanen of aardbevingen is er geen materiële schade. Het virus heeft nog maar weinig mensen werkonbekwaam gemaakt.

Als men er in slaagt om de verspreiding onder controle te houden, kan de economie zich snel herstellen.

Het grootste risico is dat politici en centrale bankiers de financiële onzekerheid uit de hand laten lopen. De beurzen hebben klappen gekregen. Sommige getroffen bedrijven zullen uitstel van betaling nodig hebben.

Continue reading “Het coronavirus zal geen recessie veroorzaken”