Ask HN: How bad will the 2020 economic crisis be?
I run a ~40ppl business in Europe (Fr & UK).
While young and in a trendy sector, we aren't a startup, in that we invested a lot in being profitable and using our profits to fund our growth. I'm trying to get a sense of what's to come.
Our revenue this week is down 20x compared to the average of the past 4 weeks. In France, many local businesses are basically down to 0 turnover.
We can read here and there that the economic downfall will be worst than the 1929 crash. What will be the chain of events? How bad unemployment can get? Should we expect the real estate market to crash too? In 1929, what kind of businesses were affected the most, should we expect something similar here?
173 comments
[ 2.9 ms ] story [ 222 ms ] threadEven if peak unemployment is similar, the recover is likely to be snappier.
The heat of the forest fore opens the pine cones, and there is new growth.
Another reason the Great Depression got worse than a normal depression was that the Hoover administration unwisely decided to make money and credit less available during the crash. Today's policy response is more about throwing money at people (sometimes just at the politically connected, sometimes fairly). One can and should question many specifics (the response is not super coherent) but at least it is the opposite of fiscal and monetary tightening.
Another reason the Great Depression stayed so very bad for so very long was as a consequence the FDR administration's unprecedented intervention into the economy. I don't mean Social Security, either, I mean things like the National Recovery Administration, which explicitly sought to turn the US into a planned economy, with minimum and maximum prices for everything, run by local politically-connected cartels with their own police powers.
When the NRA was declared unconstitutional, its practices were shifted into other places. A few of the more ridiculous practices led by other agencies are still around. For instance, the Supreme Court only killed the USDA's Raisin Board in 2015 when a raisin farmer objected to them seizing 89,000 tons of raisins (30% of his crop) to give away for free in school lunches. (The USDA of that time was also great at encouraging the big agribusiness factory farming and pushing out what small farmers were still able to operate.)
None of this planned-economy stuff is on the table today — not in the US, not with this administration anyway, and not with the current US senate. There's an outside shot of a fully nationalized health system if Bernie Sanders wins and Democrats take the Senate, and that's the most ambitious plan, and even if we assume the taxes to fund it were quite stultifying indeed, it's unlikely to be as harmful. No one is coming for our raisins.
Today, everyone's quit the gold standard and the forex situation is very different, blunting impacts of wild currency movements. US and European banks are not at risk of bank runs (as they are stabilized by general government policy and specific interventions), and whatever chaos we see, a ~35% contraction in the supply of USD is not on the table. If we are beset by deflation it's going to be puny in comparison.
It is worth mentioning that the Depression was also associated with major breakdowns in international trade, in part due to lots of tariffs. The bad news is we're tariff-happy again, but not as bad as Smoot-Hawley for now? The protectionist impulse bears monitoring.
And I'll finally clarify that we will still have a recession, and it might be pretty nasty. It's just not going to be Great Depression bad where we can't recover for a decade, not with just what's happened so far.
Meanwhile, not all countries were impacted by the great depression, Spain being one of the countries not impacted because of the isolated economy at the time.
Something thats flown under the radar of this is the new “Families First Coronavirus Response Act” which provides 12 weeks of “paid leave for those affected by Covid 19”.
Most (90%) companies will be bankrupt by week 3 or 4, therefore most are now contemplating just declaring bankruptcy now to avoid any further bleed.
It’s easy to write laws such as this, but where does the money for this 12-weeks come from?
I don't understand this. Why would they file for bankruptcy if their office is overflowing with cases?
Think of it as much needed reset on multiple levels. New supply chains will be created, new business opportunities. Capital re-allocated. It is going to be wonderfull times.
Also historically plagues allow for great upward social mobility which is kick-start for the economy.
Yes, it’s accurate... but I think it also somewhat misses the point. The unexpected consequences of a mass culling several years down the line probably is of the “extremely bad” persuasion.
https://dailyhistory.org/How_did_the_Bubonic_Plague_make_the...
The Black Death was horrific, but had what I would argue were some very positive long-term consequences.
But telling somebody who is managing a 40-people firm facing 20x revenue drop that “it might work out as well as the Black Death did” is... kind of missing the whole point, to be perfectly accurate.
This certainly happened with Europe in the Black Death. I would argue, however, that the present is not a good analogy.
My knowledge of history is a bit sketchy, but from what I understand -- prior to the Black Death, times were rough for ordinary working people. Subsistence farming, in particular, was stretched to its limit; for many peasants, not all that much separated them from starvation.
The Black Death caused a truly massive number of fatalities. Afterwards, when the same total amount of natural resources were available, people had breathing room and the economy was able to expand.
Covid-19, while terrible, is not forecasted to be nearly as bad as the Black Death. The fatality rate is expected to possibly reach 1%, most of that concentrated among the elderly. Although this would be a catastrophe, it doesn't seem likely to have the same direct economic impact. The main economic impact is probably going to come from what is happening now -- bars, restaurants, concert halls, hotels, and such all being shuttered. Especially if this needs to be maintained for a long time.
Moreover, economics are different. So much capital now is concentrated among very big businesses. They'll be fine, especially since there is talk of bailing them out (e.g. airlines in the US). I doubt they'll change all that much, unless coerced by a radical change in public policy. But meanwhile, a lot of small businesses will go under. New ones will start, but I'm afraid (for example) that independent coffee shops will go out of business and that Starbucks will take their place.
I very much hope I'm wrong.
The number of fatalities appears to have increased the bargaining power, wealth and social mobility of the remaining agricultural workers [0], amongst other things.
[0] https://en.wikipedia.org/wiki/Consequences_of_the_Black_Deat...
So did the spanish flu. Everyone forgets that we had the roaring 20s ( one of the great economic, societal and cultural growths ) right after the spanish flu.
Needless, gratuitous (business and other) travel for one - which in turn will lead to much better housing prospects for young people. Treating a house as investment was the most damaging trend of the last two decades.
The loss of accumulated wealth also reduces inequalities.
Wasteful practices will be affected more in all walks of life.
Reducing the carbon footprint is also a massive benefit. We will reduce that more than by any other measure we would have taken.
If only. I but I think wealthy individuals and companies with huge cash war chests are going to be just fine.
Give it another week or so.
I have been "giving it another week" for 3 weeks now, trying to figure out which direction it is going to go.
Pessimism isn't my style.
Enough of the dramatization. It accomplishes nothing but stress.
To what extent is impossible to say right now.
Firstly, though I have not worked there for six months or so, I am Italian (from Milan, in the north, the worst-hit area). The economy there has basically shut down. Consumer spending has collapsed, production has collapsed, and logistics are increasingly untenable.
What can we expect? Six months of this (and some people are projecting up to eighteen months) are going to shut down demand. There’s a term going around now “demand destruction” — I’m not going to pretend to know more than I do, so I’ll admit forthright that I had never heard it until a few weeks ago — that seems to meet the requirements here.
It’s uncertain whether the supply side of the economy will be similarly affected. Probably yes, as governments curb production to slow the spread at the workplace.
Even three months will be dreadful.
Now, let’s think of a few things: governments are stepping in with public support to support businesses, provide liquidity, and support workers that do not have income. That means debt. That means interest payments in future, for those businesses that are fortunate enough to survive. Taxpayers will be on the hook for decades.
The situation is so severe that German economists are proposing a 1 trillion euro Eurobond issue to help support the economies because the southern economies cannot hope to cope with this.
I guess I’ll sum it up thusly: this might turn out to be a “great pause”, but economies and demographics cannot idle without incurring enormous financial costs.
Note: Above is not a value judgement. The measure is necessary to prevent the system from completely breaking down.
There’s an enormous amount of money already sloshing around in the systems, and it seems to be pooling at the top (hence all the inequality).
On one level, somebody could argue that all the typically ‘renter’ activities (rents, licenses, et cetera) should be suspended during the period of crisis to prevent those who “profit from standing still” to absorb more liquidity and boost their wealth whilst the scurrying masses are bled white, but I don’t think that’s practical.
Before this, such as in the 2008 crisis, much of the liquidity injection didn’t flow down the bottom part of economic hierarchy. Thus, they haven’t had much increased spending power. So, no inflation of common items. The prices of trophy and other assets preferred by the wealthy did rise up greatly in the past decade.
If the helicopter money plan actually happens in substantial quantity, then inflation of everyday items might occur this time.
https://en.wikipedia.org/wiki/Helicopter_money
For better or worse, most of the medical costs are going to be spent on the older generation. More debt will become the burden of the current taxpayers and then the next generation.
"economies and democracies cannot idle with incurring enormous financial costs"
This is what worries me about this crisis more than the myriad other issues, like-
-the end is unknown bc we dont have an antiviral treatment or vaccine, and we dont know how long immunity lasts
-we have generally awful, sociopathic high level leadership (I am in the US) and while local leadership may be exemplary (I am in NYS) the ongoing contagion factor means there is no isolation
-so many entities have already been broken that will never return and the implications from which have not begun to be counted
-we have such an awful information availability and consumption imbalance, which will perpetuate bad decision making
Those issues above I believe CAN be dealt with over time, with study, process, mobilization, etc in the course of this pause.
But that work has to be FUNDED.
We DO NOT KNOW how to fund this without
a) creating future "costs" / "obligations" that will weigh on future flows for decades
b) destroying current asset stores in a way that increases uncertainty
I mean, this is what "assets" are for- they are there as a store to create future flows. So for instance I am in favor of a very long block on evictions and foreclosures- 2 years- because many renters have lost jobs and will not be able to find them, in order to force landlords to, where necessary, waive rent and themselves take out mortgages to pay for their own flows. That is what the "value" of their property should be used for, and in times of strife, drawing down on asset stores is sensible.
But that imposes future costs- the mortgage- and even if the mortgage is at 0% there is still principal that has to be returned. And debts are the highest priority obligation.
IOW, we dont have an economic and accounting system where we can just stop, timeout, change the rules, get back on feet, and start again. In our current model the timeout still has to be paid for in the future. And while history is full of debt foregiveness regimes, those were all local. We don't have even the beginnings of a model to institute a global forgiveness regime.
At any rate, the human side of this looks very challenging, though I have optimism that good wins out- but I worry about the accounting side. The rules have to let good come through.
One of the things being negotiated right now is a loan in the amount of current payroll to smb's that would be 100% forgiven if they retain 90% employees. They're completely fucking it up right now but that would be great - if the timelines are good (e.g. keep loaning until this is over, the 90% requirement is so long as $ is loaned).
I am hoping - slight optimistic but scared nonetheless - that passes and we could use. It would remove a lot of stress and given we have low overhead (digital services) even if the worst happened it could keep us afloat almost indefinitely.
BUT fucked up partisan delay + Republicans demanding scary terms are create huge uncertainty which will likely hit markets hard tomorrow.
As written it looks like Mnuchin would have full discretion on who gets loans. Who knows what timeframe or bureaucracy needed to get loan. Even the most optimistic estimate of the individual checks is 2-4 weeks which is not quick enough. Doing a SBA loan is a huge process that takes a long time.
I'm more pessimistic. The extent of the layoffs, even if temporary, is just too large to not have a lasting impact. What happens when people with inadequate emergency savings get laid off and can't pay their bills? There's a cascading effect. Maybe they owe a landlord with inadequate emergency savings who now can't pay his mortgage. Maybe they owe a bill to a small business operating on small margins that can't stay afloat. Maybe they owe a corporate behemoth that has aggressively taken on debt and now needs to lay off a bunch more people to be able to pay off that debt. The federal government's mortgage deferral solution might help homeowners, but it's not going to solve the problem that people are going to continue to need to buy things and not have the money to buy them. Even those of us who are fortunate to have some emergency savings will see those savings dwindle down if we're laid off.
And keep in mind that in a lot of cases, when people lose their jobs in the U.S., they also lose their health insurance. Not a great position to be in during a public-health crisis.
Granted, it's still possible to cash those out and save the money, but there's a little more friction involved.
Of course there will be some people who will immediately save any check from the government, but that's a disjoint set from the people who are in dire need (laid off or reduced hours).
Most of America does not.
If people are getting laid off en-masse, the majority of those people will, within a few weeks, not have enough money to afford basic necessities. Giving each of them $1k/month would soften the blow considerably.
Giving them $3k/month would, for most of them, get them back close to where they were before the layoff, and keep the economy functioning.
Also, not everyone has insufficient savings.
About 30% say they have absolutely zero emergency savings.
I would expect that the number of working Americans with emergency savings to cover even six months of expenses is fewer than 1 in 10.
Granted, there are options such as HELOC, tapping 401k, etc.
But most of us are grasshoppers, not ants.
Granted,
0: https://www.forbes.com/sites/maggiemcgrath/2016/01/06/63-of-...
I’m better a lot of other online sellers are seeing the same as people stay indoors and change how they spend. Of the items I’ve sold they were all hobby items.
Yesterday, I was looking at eBay for lockpicking trainers.
That being said, 60+ days of lockdown, and Wuhan is only now starting to consider easing restrictions. Other countries’ responses have been half measured compared to China, so we might have a longer period social distancing. CDC estimates will need the current measures through July. Other articles I read say we’ll need on-again off-again social distancing for the next 15 months as the virus surges and wanes.
When corporations finally realize remote work is just as valuable as in office work they'll start to wonder why they are employing US developers for $XX,XXX to $XXX,XXX when they could pay a European developer a low five figure salary in a weaker currency and get the same results.
Software engineering already went through a wave of offshoring in the 2000s and the whiplash from that was enough to make many a freelancer/agency/startup rich. We learned that many knowledge and service jobs can't economically be offshored because the benefits of locality (whether thats due to the trust from face to face interaction, efficiency of communication, etc, depends on the field) far outweighs the extra cost.
What do you mean by this? Investment in tech companies by retail/institutional investors, or investment by companies in their own proprietary tech?
"If they would rather die," said Scrooge, "they had better do it, and decrease the surplus population."
Our society has a variety of safety nets to prevent this from being the case. It might need more or better safety nets! You can make this case! Nevertheless, I would opine that it works better when this happens at the government level (paying someone unemployment insurance) rather than at the firm level, for a variety of reasons.
Many companies will have figured out how to run leaner. So post recovery, they may not bring back everyone that was laid off. Lean is good, of course, but unemployment isn't.
Competition will go down. Not every company in every space will survive. So things will consolidate down to the survivors. This probably hits small businesses especially hard. Again, Darwinism isn't inherently bad, but it could, for example, drive wages down.
In short, whatever emerges will not be what we had, and will take some time to adjust to.
Though I'm by no means an economist, I'm with this. What's more I have the feeling the economy might come out even stronger here is my reasoning:
A lot of young people are confined to their homes at the moment. I'm talking about anyone in the 25-36-7-8-9 range(being a representative myself). Fair enough, take away the people who have families and children out of that group and you have a substantial number of people. And in that group are the most active members of society, which in normal circumstances, have plenty of entertainment in their lives outside their homes and work environment(contrary to popular belief). Yes, many spend too much time on social media, but plenty do not. In the additional spare time we have (at the expense of time spent at bars, restaurants, cinemas, shopping centers, etc.), many are occupying themselves however they can. Myself including - I'm almost out of books to read. I've enrolled at several online courses, I'm working on personal projects, including writing a book(which I intend to open source once complete).
My point is that in that additional time, plenty of people will have time to work on current and potentially future problems and open markets that currently do not exist. Sure, many will fail, as usual, but some will succeed. The truth is that multi-billion corporations started as black swans. Stephen King has a brilliant essay called "On being 19". I don't remember the exact quote but it went something along the lines of "When you are 19, you believe that the whole world is at your mercy and no one should mess with you". Which is rarely the case. Companies and entire industries around them(Facebook, Google) might have been started by 19 year olds but they are the Black Swans. The truth is when you are 19, regardless of how smart you are, you lack experience and by implications, adequate amounts of knowledge. Most people have tried multiple times when they were in that age group and 99.99999% have failed. Now people with experience have the time and nothing better to do then use it to the maximum. I'm not looking at it as a Black Swan phenomenon but the next step: Antifragility. If anything, I believe that now is the time to pay close attention and use your resources, knowledge and experience to capitalize on it.
It seems IMHO that such a historically new process cannot proceed linearly but only via sudden accelerations determined by the occurrence of crises (and talking about crises, I guess that in the next decades there will be enough of those)
Or maybe not.
https://twitter.com/search?q=%23fuckchina&src=typed_query&f=...
I don't think the CCP realizes yet just how harsh the backlash is going to be. China has zero soft power now. Expect to see supply chains being rerouted.
https://edition.cnn.com/2020/03/16/africa/jack-ma-donate-mas...
https://www.wsj.com/articles/chinese-doctors-and-supplies-ar...
https://www.reuters.com/article/health-coronavirus-serbia-ch...
And the live-animal markets have produced disease before, every year in fact for decades, and not been 'cleaned up' so far. I have little confidence in any of that happening.
I have no problem with the Chinese as people, but their current government is not to be admired.
That's patently untrue
https://www.nbcbayarea.com/news/coronavirus/bay-area-woman-f...
https://www.shine.cn/news/nation/2003224819/
This is exactly what you expect to happen when efforts at containing the virus have been successful: the number of new cases gradually tapers off, until it reaches 0 or almost 0, and most new cases are due to people coming from areas of the world in which it's still raging.
The outbreak started earlier in China, and it's thus unsurprising to see that they reached this point earlier than in other countries.
Certainly there are new infections but I'm optimistic that they can and will be contained. They simply have too much to lose here to just "manipulate the numbers"
https://www.newsweek.com/chinese-company-donates-tens-thousa...
Chinese companies are sending stocks of masks to help Italy to recover.
https://mobile.twitter.com/heylauragao/status/12386016724542...
China is also sharing the expertise of their medical team with Italy...
Compare with the US:
https://www.defenseone.com/threats/2020/03/us-air-force-flew...
They deprived Italy of half a million testing kits, in the area in which they are most needed!
https://www.theguardian.com/world/2020/mar/16/not-for-sale-a...
And they're trying to deny the vaccine to other countries...
If anything, I expect people to be furious at the US, after this whole event will be over.
Goldman put out a note saying the GDP would dip about 9-10.5% over the first quarter of the year, which is almost the worst we've ever seen. And that's a single quarter, a single quarter. US GDP maybe down 20% by the time this is over.
And keep in mind no doctor that I've talked to thinks this will be over any time before mid 2021.
And probably the worst news is that this is the type of drop that won't be V shaped, for all the talk of 2008, atleast it went down and then went right back up.
Most recession affect a specific geographical area or market sector, This pandemic affects the entire world at the same time, which hasn't really happened since the 1970's gas shortages.
The recovery here will not be V shaped, it will take years and years to recover. People have spent their savings just to survive, governments are delaying tax payments and throwing money at the problem.
This recession/depression will be with us for years to to come and will be the worst thing that anyone alive can remember.
Can anyone make the case that the recovery will be quick? Because I haven't seen anyone make that case yet in a believable way.
I see two extremes, a restart without to much issues. Laid of people are hired again quick. And after some time of rebuilding savings people start spending again. I would say that is not the most likely outcome, unemployment in the US is rising, this will impact the world economy. Remember, all it took 2008 was mortgage defaults in the US and Lehman Brothers to send world economy into a downward spiral.
On the other extreme, the crisis shows all the cracks in our global economy. Some of them fail. Basic dynamics change, and there is no way of predicting what will happen.
The only constant seems to be cheap money. No idea if that is a good thing...
On the other hand, once there's a sign that the end of the pandemic may be in sight, I expect that the US markets will overreact on the side of optimism, regardless of the actual economic damage that has been done. Bear in mind that governments are adding to the vast stockpile of paper "wealth" that's already out there, and that tends to cause asset inflation.
The core of the issue is that there is neither a vaccine or a test, combined with asymptomatic carriers. Hence, the only way to combat this virus is a quarantine for the whole population, which causes severe economic damage.
Once you solve either of these issues (e.g. South Korea), there might be a fast recovery. Did South Korea enter into a depression?
In any crisis, it is easy to assume that the last crisis results will occur, but everything depends on the context.
Let’s get through this, support each other, and be doing everything we can to be ready to spring back into economic action when COVID gets under control.
I think it’s entirely up to the people’s response. The spirit of the country (and govt policies) will determine more about what happens after then pure economics can tell us.
I personally don’t think there’s a good economic analogy so everyone is just guessing.
Let's have a look at company A and company B. Company A employs many people and is not able to offer remote work. Company B doesn't employ many people and can offer remote work. If these companies compete it is clear that company B will grow during the crisis, and company A won't.
In other words, we have structure change bombed upon us.
CEOs and owners say, let's see, a pandemic and suddenly labor disappears. How can we mitigate such problems in the future?
My hunch is that after the crisis is contained economy returns, however it will be even more difficult for people to have a job than before. If the state doesn't help the people, economy will stay depressed because people are laid off and just don't have the money to buy things.
Edit: many little improvements.
That said, interventions can have a huge impact on the extent of that. Interventions that delay/defer/mitigate economic damage at the entity and individual levels I think can do the most to simply “pause” the economy and prevent underlying degradation while we deal w the pandemic.
Imagine the benefit of just all debt being rolled over month-by-month to the end of the loan term, and similar for renters. Defer irreversible economic decisions and go into subsistence mode. I think that will be the best best for the maximal eventual recovery. That will be the difference in a return to prior levels taking 6-12 mo vs 5-10 years.
Sadly I don’t think the US is heading in this policy direction. I half wonder if we should just do it grassroots and then there will be ample support to reimburse it via tax or other incentive.
That’s how I am thinking about it anyway.
Not sure how unemployment insurance works in your country but in the US I spoke to restaurants and they just terminated people so that they could collect unemployment at a higher level than the business could provide income (salary or tips). Do what you have to do fast, and do it empathetically and in a way that preserves your options for restarting / re-hiring when things eventually improve.
The current situation will last at least a month (and how bad it will be while it lasts is yet to be seen), and after that keeping social distances, and closed borders will remain for many months.
The rules will be just different. It may be very bad for some old industries (travel, tourism, are easy ones), and good for some of the emergent ones.
Make sure you have the cash to live properly and satisfy urgent needs if necessary over the next 6-12 months or longer. Only invest the remaining in highly-rated bonds or great stocks with long-term resilience.
The world is facing a liquidity crisis, along with both demand & supply shocks that can’t be easily fixed by governments.
We are in a war with the virus and, in most of the world, we are losing.
Global economy can be rescued only if we can mostly mitigate the virus impact. The other 40% is for the case where we found a way to do that and the liquidity injection & fiscal measures are sufficient.
Though maybe the work of fighting a medical war is more narrow and specialized than the work of fighting a literal war. For example, you cannot institute of draft and make people into doctors in time to fight this. Whereas with an actual war you can stick people on the front lines with a few months of training or put them to work in a factory.
How did you arrive at this probability?
I doubt anyone is going to be super keen on investment in that money loosing miracle startup now money will dry up soon it’s just been so sudden people haven’t really adjusted yet. I don’t think it will be as bad as the depression of 29 though. There is plenty of food available and some limited safety nets will keep people from starving. The gears of forclosure are so slow many will stay in “free” houses for 2-3 years. The real question is jobs, will Americans work the fields? Or Will they just sit on government benefits? Will manufacturing come back? How do we deal with global labor and ecological arbitrage. Honestly I don’t think trump or Biden are going to be capable of addressing these Structural issues so we’re gonna loose 4 more years and risk a second smarter and more dangerous Trump in 2024
Save emergency funds and in the next decade of growth and stockpile for the 30s, when we hit real trouble. Find a currency or commodity that won't be washed out, silver kept China out of trouble in the 30s until the US raised demand for it so much that they got dragged in too.