CORONA: the economics of fear

| March 16, 2020

Dickson Igwe, Senior political contributor

The US Stock exchange has dropped into bear market territory. There has been a sustained downturn in the US stock market for the first time since Donald Trump became President in 2016. Wall Street is the benchmark in global stock markets. Since the beginning of the Corona Crisis nearly $6 Trillion has been wiped off global stocks: this is worse than the 2008 financial crisis, and there is no end in sight.  

Then, in the President’s address to his nation on March 12th 2020, the intended effect of calming fraying nerves, backfired. The address, far from being a presidential calming of the nation, was Trump’s usual defense of a ‘’dubious’’ status quo, blaming outsiders for the Corona Virus.

The stock markets, instead of stabilizing, plunged further into bear territory, losing hundreds of billions of dollars. The President went as far as banning travel from Europe for 30 days. Interestingly there was no ban on Ireland or the UK where Trump owns resorts.  

And a stimulus package that included proposed tax cuts, and market intervention by the Federal Reserve, creating $1.5 Trillion to strengthen a tanking financial system- much more than the injection of the $800 billion Obama asked the Feds to put into the banking system in 2008 failed to lift the market.

This injection of financial capital initially lifted markets. But by the end of the trading day, markets dropped back down into bear market territory. With Corona, stimulus will have no effect until worldwide fear dissipates. That is very unlikely at present.

Investors, who ultimately drive and control the markets, may be risk takers. However, there must be specific markers of stability and certainty in the marketplace. These are conditions that are specific and measurable allowing for the efficient operation of the trading floor; such as a stable banking system, political stability, sustainable economic growth, national security, which in turn drive consumer and business confidence, in the institutions that govern society.

The problem with the Corona virus is that it has turned certainty upside down. Instead of certainty there is uncertainty. In other words, the markers that decide the sustainability of business and financial investment are as unpredictable as the spread of the virus.  With every announcement on the spread of the virus investors get ”jumpy.”

For the past 11 years stocks have been in bull market territory. This is the longest rise in stocks in recent history. It practically guaranteed Donald Trump’s re-election. That Second Term is presently very much up in the air owing to the present pandemic and resulting economic crisis.

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In bull markets, the prices of stocks rise year after year. This rise in stocks is a matter of investor confidence. Rising stocks are driven by investor confidence. Economics is first and foremost human behavior. Belief and faith are major components of economic theory and practice.

When that faith in the markets is destroyed, usually by some external shock to the system, a bear market is the result. A bear market is the direct opposite of the bull market. Instead of optimism, and a belief by Jack the Investor that stocks are perpetually rising there is pessimism.

The overall market index- a spread of stocks used as a measure of the value of the stock market- falls over a sustained period of time, historically up to 20% of the total market value of stocks.

That fall of over 20% of total stock market value is sustained and further falls are expected. A bear market foretells what will happen in the wider economy. In the supply sided economy a sustained fall in the share price is a traditional marker of failing business and consumer confidence.  And that is what is taking place.

When investors get nervous, consumers follow suit. As investors pull back from spending on their supply chains, banks stop lending for fear of bad debt driven by layoffs and bankruptcies, and consumers zip their wallets in fear. Bad debts increase, and falling revenues impact cash flow, increasing financial leverage in the markets.

With every announcement by health officials of the spread of the Corona Virus, fear takes hold, and both market and business confidence take a hit.

Then, consumers- a critical component of markets- run scared. Consumers in the Age of Corona are being fed by the global press a diet of bad news, and more bad news. The result is a further fall in business and consumer confidence. This pessimism becomes a self-fulfilling prophecy. The result is Recession.  

Consumers and business owners are fearful. People read in the news that cruise ships and aircraft are incubators of the virus. That kills travel plans and that in turn drives the cruise ship, airline, and hotel industry, into the ground, with job losses and bankruptcies.

In the wider market environment, announcements of school and college closures, and shut downs of institutions and organizations as a form of containment against the spread of the virus, further exacerbate falling public confidence.

The result of the preceding is permanent downturn in both the financial and business markets. The end result is recession.

The problem with a biological crisis like the present Corona Virus Pandemic is that it is not easily controlled by forces that are under the tutelage of governments, financiers, administrators, managers and investors.  No one can tell how Corona will pan out until the virus works itself through. As the pandemic gets worse so does pessimism and fear.

The greater the fear and terror, the greater the bear market, and the greater the bear market the greater the likelihood of a prolonged recession. 

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Category: African Caribbean, Culture & Society

About the Author (Author Profile)

Dickson Igwe is an education official in the Virgin Islands. He is also a national sea safety instructor. He writes a national column across media and has authored a story book on the Caribbean: ‘The Adventures of a West Indian Villager’. Dickson is focused on economics articles, and he believes economics holds the answer to the full economic and social development of the Caribbean. He is of both West African and Caribbean heritage. Dickson is married with one son.

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