“If the Virus Hadn’t Caused the Crash, Something Else Would Have”

April 1st, 2020

Via: Bloomberg:

The novel coronavirus has already had a significant impact on the global economy, which will worsen if the outbreak and the shutdowns designed to contain it continue for very long. But it’s only an accelerant: If not Covid-19, as the disease caused by the virus is known, something else would have started the conflagration. Shortfalls in revenue and cash flows, caused by the shutdowns, have simply exposed the vulnerabilities of a structurally unsound economic and financial system.

A fall in revenue is problematic but manageable without debt. Unfortunately, in the aftermath of the 2008 crash, debt levels were increased rather than reduced, encouraged in part by low policy rates and the abundant liquidity engineered by central banks globally. Global debt as a percentage of GDP rose from around 250% in 2007 to 325% in 2019. Current debt levels are triple what they were in 1999. Businesses and households, with declining or no income and high levels of borrowing, now face an existential struggle to meet large financial commitments.

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