Could the coronavirus act as a catalyst for a new global economic crisis? It certainly has that potential—but how would the crisis proceed?
In the December 2018 issue of our Q-Review, we laid out the likely scenarios of an approaching global economic collapse. But, like most things in life, such a dramatic event is unlikely to proceed in a linear fashion. There will be different stages within it.
In December 2019 we outlined these stages, which are likely five: the onset, counter-attack, flood, calamity and recovery. Here, we briefly define the characteristics of each.
Currently, there seems to be two possible ignition points for the collapse: the credit market and the European banking sector.
At the onset, stresses that have been building in the credit markets since the summer of 2019 will explode, shrinking if not eliminating entirely the exits from many parts of that market. Downgrades of corporate debt in the U.S. and peripheral sovereign debt in the Eurozone will push large fixed-income investors, including pension funds, into higher-rated bonds, leading to large-scale selling of lower-rated bonds, forcing wider spreads and even more selling.
Panic will build first in the junk bond market, then in the “investment-grade” corporate bond market, and then rapidly metastasize to engulf the stock market. A frantic retreat to ‘safe-haven’ assets, including U.S. Treasuries, German Bunds and U.K. Gilts as well as cash and precious metals will commence.
Cascading banking troubles in Europe will have the same destabilizing effects on the global stock and bond markets.
The second phase of the collapse will be the desperate efforts of authorities to stop the crisis by a counterattack.
These are likely to include the restarting and acceleration of QE-programs and other market support programs, gigantic fiscal stimulus, increasing trade protectionism and possibly even calls for direct debt monetization (see Q-Review 3/2019 for an explanation).
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