The likelihood of a global recession has risen dramatically in recent weeks. The World Health Organization (WHO) recently reported that COVID-19 has infected more than 100,000 people across 92 nations and territories. It has killed 3,500 people. Amesh Adalja, a senior scholar at Johns Hopkins Center for Health Security, said the outbreak is still in the first inning. It isn’t yet clear how many people have the disease, how quickly it is spreading or even how deadly it is. Bill Gates in a meeting of American Association for the Advancement of Science warned that the coronavirus could cause 10 million deaths.

There is a looming risk of a financial panic and a credit crunch. Oxford Economics, a leading global think tank, slashed its global economic forecast to 2% in 2020. Oxford’s director of global macro research wrote: “The effects of financial market weakness and the disruption to daily life around the world will trigger lower consumer spending and investment on top of the disruptions to the global supply chain.” Goldman Sachs revised its earning estimate for the year for U.S. companies to 0% growth in 2020.

Central banks and financial regulators have tried to ensure that markets do not freeze up by providing funds to those who need them.

Globally, governments are trying to protect workers by preventing layoffs and keeping incomes stable. China’s government has enacted a temporary cut to social security contributions. Japan will subsidize wages of people who are forced to take time off to care for children or for sick relatives. Singapore has announced cash grants for employers of affected workers. Italy will offer tax credits to firms that experience a 25% drop in revenue.

To contain the coronavirus, China has locked down nearly 60 million people in Hubei Province. Furthermore, it quarantined and imposed travel restrictions on hundreds of millions of its population. Northern Italy has quarantined 16 million people.

On Tuesday, the Federal Reserve cut interest rates by 50 basis points. The yield on the 10-year Treasury briefly fell below .7 %, its lowest level in history. Some economists predict that overnight funds will go to zero by the end of the year.

On Friday, President Donald Trump signed an emergency supplemental spending bill package of $8.3 billion in federal assistance to government health officials and to support research and development of a vaccine, including:

  • $3 billion for research and development of vaccines
  • $2.2 billion to fund public-health programs
  • $1 billion for medical supplies and other preparedness measures.

Attempting to model economic activity and provide solutions to overcome the coronavirus is very difficult.

The coronavirus outbreak provides different challenges than 2008. From 2008 to 2010 global composite monetary policy led to cuts of interest rates of three percentage points. Today, because world interest rates are already so low, monetary authorities cannot undertake similar action.

We need to take action that (1) increases supply and demand and (2) provides liquidity for companies and households that will face a cash crunch. The virus has disrupted the supply of labor, goods, and services. Researchers at the Bank for International Settlements, an institution owned by central banks, project that over 12% of firms in the developed world will generate too little income to cover their interest payments, thereby leading to widespread bankruptcies.

Many workers do not have sufficient safety nets. According to the Federal Reserve, 40% of American adults would be unable to meet a $400 unexpected expense and therefore won’t be able to pay their monthly bills.

Stated simply, if America’s growth rate drops to zero from 2%, aggregate demand will drop by $400 billion. To offset some of this decline, we need to think of a major fiscal stimulus package.

Originally published in the Sarasota Herald-Tribune