It’s a surety now that all nations and all sectors are entering a COVID-19 driven recession. There is no way that economy will get a reboot anytime soon, and when it does all of us will be in an unfamiliar territory.
Basic premise of any such reboot will have to first answer a fundamental question –
Who will have money to spend?
Certainly not the government. Taxations is already down, expenses are high owing to war against Covid and there is no market to buy ‘was-bonds’.
As of 2019, Government of India’s spends was 13.21 % of economy. Now with a first quarter washout for the revenues the numbers will come down by a lot.
As for big corporates, liquidity was already an issue even before the lockdown. The telecom sector is stressed so are most of Industrial sectors. With aviation, hospitality knocked out, software exports coming down, even the larger service segment will be at a loss. Barring may be Reliance we don’t think there are very many cash rich companies in India.
How will the banks survive?
While Finance minister has asked banks to defer the EMIO payments, the fact is that the Covid-19 lockdown may destroying underlying repayment capacity of individuals and corporates alike. Chances of defaults akin to Great depression from last century are almost a certainty. The crashes may cause a run on banks destroying fundamentals of any auto-recovery. Even banking restriction to prevent such a run will have a similar impact.
Will Currencies survive?
Very simply put almost all currencies in the world are pegged against US dollar. Us dollar itself is pegged against no one. Since 1971 it’s a fiat currency, where the stability and absolute capital of US economy is taken as the foundation.
Now US itself has debts worth over 22 Trillion dollars with worse GDP to Debt ratio, i.e. the nation can never pay off its dept if it were to be collected. Since no one was ever expected to come and collect the US debt (and merely trade it) the US can maintain value of USD against sovereign guarantees.
This may change as the economies recover post COVID. Uncle SAM does not have enough to pay but do have enough muscle to be a defiant wilful defaulter. What will this do to the world economy is anyone’s guess, but it can dent most of western hemisphere in ways that we cannot comprehend.
And yes, the USD along with EURO might not survive.
So, what’s the deal?
It cannot be just the Franklin D. Roosevelt’s new deal; it needs to be as much of a ration control of Soviet era that may be required.
People, you and me will need to be ready to work against weekly provisions. Do not be surprised by nationalisation of much of those provision providers in the first place.
We might juts be looking at a socialist experiment to aid our capitalist economies. The fear is that even this may fall short to save nations and societies from revolutions akin to those that swept the world about a century ago.
