mxx1's avatar

GFC vs Pandemic

The meltdowns in equity, credit, debt, and money markets look like textbook signs that the coronavirus crisis could tip the global economy into another GFC-style liquidity crunch.

The fear is that inter-bank credit lines will dry up again as banks lose confidence in each others’ creditworthiness and become reluctant to lend to coronavirus-hit companies.

However, there’s a bigger issue at play. There is reduced expenditure and consumption due to lockdowns and closures; leading to reduced employment and thus even less consumption.

Supply chains are very interdependent, much more so than people imagine, and they are getting massively disrupted as all sorts of businesses shut down.

The result? A flow on effect where even more businesses shut down because it’s easier to do that than adapt to this difficult environment.

The government is making it worse by allowing businesses to put themselves into cold storage, with no fixed costs. No rent, no labour costs, no debt repayments, etc. All government mandated.

As a business manager, you could go for broke and try to make it work, or have a nice holiday and wait for the whole thing to blow over. Australian business types don’t have much character, so taking they’re taking the easy option.

The Chinese on the other hand, they go for it. Someone’s else’s loss is their gain. You make cars one day, then a pandemic hits and days later, you’re making face masks.

The result? It’s not a lack of liquidity for business that will result in the next recession; it’s a short-term lack of customers and a lack of balls. When it’s all done at least another 25%, if not more, of Australian business activity will be transferred to China. Another 25% will be bought at bargain prices by the Chinese.

Although it begs the question, why bother? There will be a flow on effect to Australian consumers such that they will not be able to afford as much. So as a market, we’ll be shite for just about anyone.

The share market will take a big hit just like the GFC. But for different reasons. Then we had a liquidity crisis. Now we have a consumption crisis. At the end of every supply chain, there lies consumer consumption that ultimately drives all business activity.

So the best thing a government could do is to keep people employed and give businesses good reasons not to shut down.

The super funds should wait for the stock markets to halve in value and then go on an overseas spending spree. This assumes there will be some sort of bounce in the global economy when the virus thing settles down.

That’ll be true unless it lasts longer than 2 years. My rough estimate is that the half life of business knowledge and skill in hibernation is about one year. So after 2 years you pretty much have to start from scratch and re-invent and re-learn everything that you once knew, as a business and as a supply chain.