- The stock market collapse has been swift and vicious in response to the coronavirus panic.
- A short-term recession is all-but-guaranteed as restaurants, bars, and small businesses go into lockdown.
- At what point does this turn into something more serious – like a depression?
The stock market is down almost 30% in a matter of weeks. Restaurants, bars, retailers, and small businesses are closing up. New York and San Francisco are on lockdown. As Donald Trump finally admitted:
This is a bad one. This is a very bad one.
But how bad does it get? Analysts mostly agree that a downturn is coming, but about a depression?
Recession vs Depression
A recession is defined as a period of six months or more of economic slowdown. To be specific, two straight quarters of GDP decline. That’s where we’re heading right now. Morgan Stanley said recession is the new normal:
Global recession in 2020 is now our base case. With Covid-19 spreading in Europe and the US after hitting Asia, the disruptions and dislocations in the economy and markets will trigger a [year over year] contraction in global growth in [the first half of 2020].
Recessions are usually temporary. We’ve had 33 of them since the mid 19th century.
A depression is much worse. It is defined as a severe downturn spanning numerous years. We’ve only experienced one – the 1929 Great Depression, and it lasted ten years.
What happened in the last depression?
The Great Depression of 1929 was triggered by the infamous Black Thursday stock market collapse.
The events that followed defined the depression. 15 million Americans (25% of the country) were unemployed, banks collapsed, and world trade dropped 65%.
Are we heading there again? Joachim Fels, an economic analyst at PIMCO said governments will have to act fast to stop it.
Fiscal and monetary policy makers around the world will have to pull out all the stops to prevent what currently looks like an inevitable recession from turning into a depression.
Small business owners face bankruptcy
The stock market crash is a wakeup call. But the real economic impact will come from the closure of small businesses. Peter Tchir wrote the following in his newsletter this week:
The owner of a local restaurant that I go to was almost in tears last night. He was visibly shaken. He quite literally doesn’t know what to do. He explains that he keeps some reserves for unexpected storms or weirdly slow weeks, but he has nothing to prepare for the new order. He is going to have to lay off some employees… He does NOT have the money to pay them. He is adamant that loans won’t help. Loans won’t bring cash flow back and will only put him deeper in the hole!
This is the real problem facing America now. Bankruptcy, unemployment, and delinquencies. These are things that depressions are made of.
Managing partner of Westwood Capital Dan Alpert summed it up:
This is not like a conventional recession caused (as always in recent history) by a debt bubble. We are now, many sectors, experiencing a complete loss of income.
How to stop a new American depression?
Only two things will prevent a full-blown depression. First, a slowdown in the spread of coronavirus (or a vaccine). Two, a gigantic rescue package from the federal government.
Luckily, the latter is on its way. The Trump administration is seeking a $850 billion package which may include a payroll tax cut for the rest of the year.
The next two months are crucial. America is almost certainly about to go into a recession. And the key thing to look at is unemployment numbers. Even White House advisors are worried. Kevin Hassett, former White House Council of Economic Advisers chairman said:
We really could see the worst jobs reports we’ve ever seen in our history.
Keep your eye on the next few months of job reports. And if things continue beyond 2020, we could be looking at a long-term depression.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.