When the World’s Economy Gets the Flu

History will note that the world changed dramatically in the year 2020—and did so at a breathtaking pace. The respiratory pathogen now known as COVID-19 spread with alarming speed from its first detection in Wuhan, China, to communities all around the world. Called a “novel” coronavirus because no human being had previously had it—and as a result no one had developed immunity—its catastrophic effect on the world economy appears likely to follow a course not experienced in modern history.

Hotels have lost much of their business, sports events are cancelled, airlines cut their flight schedules, and gatherings of more than a few people have been discouraged or even forbidden for the sake of public health. Entire cities have been put on lockdown and substantial penalties have been imposed on those who do not cooperate with authorities. Businesses are forced to lay off workers to stay afloat, so consumer spending drops.

What happens when entire segments of an economy shut down or greatly reduce their activities? The economies of China, Europe, and North America may contract by 10 percent or more in the months ahead, and governments are struggling to compensate for declines in available liquid assets. Without massive government spending, citizens may be unable to cope with the spreading economic pestilence, yet tax receipts to pay for such spending are down because of decreased economic activity. National deficits are ballooning, causing record national debts.

Flattening the Curve…

One of the most dangerous effects of the COVID-19 virus is acute respiratory distress syndrome (“ARDS”), in which fluid builds up in the air sacs of the lungs. Those suffering from ARDS often require a ventilator and a tube inserted into their airway—a procedure that usually takes place in an intensive care unit. ARDS often results in death.

Where treatment resources are limited, doctors must make very difficult decisions. Early in the crisis, doctors in Italy found they did not have enough ventilators to handle the spiraling rate of infection. They were forced to decide who would live and who would die. Manufacturers have raced to build more ventilators to meet world demands, but Italy is not likely to be alone in facing this terrible dilemma.

As infections multiply, the numbers of people who need hospitalization and intensive care can easily overwhelm existing medical facilities. Slowing the infection rate from a sharp upward spike to a manageable pace—or “flattening the curve”—is vital to ensure that when people become infected there will be health care available to treat them.

By now, many are familiar with some techniques used to flatten the curve. One is the practice of social distancing—avoiding contact with others so that transmission of the disease from one person to another becomes more difficult. Diligently practicing good hygiene—such as washing hands frequently and sufficiently—and avoiding touching our face with our hands also help.

Such measures do not end a pandemic, but can slow it down, reducing strain on limited hospital resources and giving medical facilities time to gear up for increased numbers of patients. They also buy time for researchers to search for treatments or even cures. And governments large and small have responded by imposing “stay at home” measures on their citizens in an effort to meet the health care crisis that has been thrust upon them.

…May Squash the Economy

Yet, as governments have closed their borders, trade and other business activities have declined precipitously around the world, and a global recession has become a real possibility. Nations rise and fall over such circumstances, and shaky governments have been known to precipitate military conflicts to divert their citizens’ attention from difficult internal conditions. Perhaps the most onerous and lasting result of these measures will be the increase in sovereign debt—the debt that countries owe inside and outside their nations. National debts are soaring in the most affected countries, and the ability to service the debts in many of the countries is limited. Serious economists are discussing means of cancelling or forgiving large amounts of sovereign debt. Investors are fleeing to safe havens such as U.S. Treasury securities and many are simply holding cash, all hoping to mitigate the economic impact.

The United States and other nations are trying to stave off a liquidity problem that could crash world economies, as in the Great Depression. The U.S. has initiated a multi-trillion-dollar financial program, and the U.S. Federal Reserve and other nations’ banking systems are acting to shore up financial systems. It is important to note not only that such actions impact America’s national debt and the value of its currency, but also that much of world trade is transacted in U.S. dollars. “Uncle Sam” does nothing that does not have global consequences.

China instituted severe measures to slow the initial transmission of the COVID-19 virus. But the Chinese economy provides a significant portion of the world’s supply chain, and the nation’s internal production disruption has rippled around global economies, producing secondary disruptions. China operates under a statist planned economy that assumes vigorous economic growth—an assumption that will be challenged in a world now questioning its dependence on Chinese production. COVID-19 is producing a huge, unplanned economic contraction. In the past, economists have been reassured by China’s hefty dollar reserves, but China’s massive internal and external debt is now a major concern. China’s banking system is especially vulnerable.

Some nations are also seeing a grassroots desire to repatriate national supply chains, making them less dependent on low-cost Chinese labor and goods. While such moves could certainly have a massive impact on China itself, the fact that the nation has long played a central role in much of the world’s production makes the final global effects—both economic and political—of repatriation efforts hard to predict.

In a sense, the world economy has a virus of its own, and the question is no longer whether it is sick. The question is how sick it will become and how long it will take to recover. For the time being, national economies will be in the financial equivalent of intensive care. History is clear: Times such as these are ripe for charismatic leadership to step in and take control of whole nations. A powerful leader promising relief from the effects of this event could step in and amass great power very quickly, especially if the economy does not bounce back rapidly and moves, instead, into a long and difficult convalescence, as it did after the crash of 2008.

A Difficult Choice

National leaders face difficult choices, as the most vigorous measures against the virus will inevitably depress their nations’ economies. Once the infection curve of the COVID-19 pandemic is flattened enough for medical facilities to handle the numbers of sick people, politicians will no doubt turn their attention to restoring their economies. This will mean ending or cutting back on many aspects of social distancing measures as many or all are allowed to return to work. But remember, the flattened infection curve doesn’t necessarily mean fewer people are infected—just that the infections are spread out over time. This will mean that new infections continue to occur for longer periods and that millions of additional infections could follow. The times ahead will be very challenging, indeed.

Every nation is playing the hand this pandemic has dealt—but the deck is full of wild cards. How the various national economies will handle further shocks is unknown, but you can count on this magazine to keep you informed of what it all means.