The Effect of COVID-19 on the U.S. Economy

How the 2020 Economic Meltdown Will Different From the 2008 Great Recession

There is the global pandemic spreading throughout the world and which has driven the global economy into a downturn and recession in the generation and there is panic radiating throughout the society. IMF chief Kristalina Georgieva said that this global pandemic has driven the global economic downturn and that will require massive funding to help developing nations. According to the new analysis from the United Nations Conference on Trade and Development (UNCTDA), the UN trade and development body titled ‘The COVID-19’ shock to developing countries towards whatever it takes program for two-thirds of the world’s population is left behind.

The report has indicated developing nations might have to face the tragic economic crises due to coronavirus anytime after the virus will come into control. Most of the courtiers have been lock downed including China, the USA, Japan, Germany, Italy, UK, Spain, India, South Korea, etc. partially or fully and the companies are stopped to produce and many businesses will face 2020 as a horrible year in terms of earnings and many people may have to leave out of their jobs. 

Almost all business around the world have taken up loans from financial institutions and with no production and no earnings the situation could be a major surge in the number of non-performing loans and that may create bankruptcy in major financial institutions in Europe and the USA usualness the government will protect them.

People who are locked inside the residence because of virus spread cannot earn and many people around the globe will fail to pay house and other mortgage and this could create the financial crises in the globe. Countries like the USA are creating different bills or funds to fight against possible adverse economic outcome but all the countries that are suffering from the virus cannot do the same and consequences may harsher.

The US economy is going through the biggest economic meltdown for the first time in many decades. The Great Depression is the only time people saw this level of economic fallout. At the moment many businesses have been closed, the stock market has been on a free fall and millions of Americans have been laid off.  

The number of unemployed people has been skyrocketing. The whole economic setup has been interrupted. We have a health problem and an economic collapse at the same time and this makes the economic crisis very different from what we had during the 2008 global financial crisis.

Here are some of the major points that show how 2020 health-driven economic crisis could differ from the great economic recession of 2008.

Federal Reserve USA

FED’s Interest Rates

During the 2008 financial crisis the Federal Reserve had a 500 basis points margin to lower interest rates as a way of stimulating the economy and this enabled them to lower rates from 5% all the way to zero, however at the moment the FED only have a margin of 160 points and they have already slashed the rates to zero. 

Traditionally the Federal Reserve can lower or increase interest rates as a way of managing the economic cycle. Low-interest rates mean it will be cheaper to borrow money if people borrow money spending increases and this results in an economic expansion. The opposite happens when the Fed increases the interest rates. This is the cool thing in initiating monetary policies and regulating levels of credit in the economy. 

In recent days the United States economy has been performing poorly because of disruption in global supply chains. At the same time businesses across the United States have been closing. Recent data shows that the US economy has been slowing very fast. This is what has provoked the FED to lower the interest rates all the way to zero as a way of boosting the declining economy. This was necessary because economists are predicting that the recent economic fallout will be several times bigger than the 2008 global financial crisis.

Quantitative Easing

Quantitative easing means printing money out of thin air/unexpectedly and then pumping this money to the economy. This is a monetary policy which the FED initiates in circumstances where a lowering interest rate is not enough to stimulate a declining economy. Usually, money is created if banks issue loans at various specified interest rates, and this is the basis of the current debt-driven monetary system that runs our economy. 

Debt is created once the credit is issued but this system has its own shortcomings but it has been effective in protecting the economy from inflation because money is given out for specified purposes. This does not directly affect the price of various commodities but when done excessively it creates debt bubbles like the housing market bubble in 2008. These bubbles are very dangerous to the economy because if they're not managed well the law wastes cause of the financial crisis as has happened back in 2008. 

If not done well quantitative easing can easily cause inflation and this is the reason why in 2008 only predetermined financial institutions and banks benefitted from the program. If everyone is given the quantitative easing money there will be a major risk of inflation this will not necessarily improve the condition of the economy just like happened with the Swedish paper money in the 17th century. In the 2008 economic meltdown, the Bush administration initiated a 700 billion dollar bills to bail out banks as a way of stimulating the economy. It worked very well and the US economy remains stable until 2019 when the FED announced a 60 billion dollar quantitative easing program because they had anticipated economic fallout in 2020. 

This was a way of cushioning the economy before the crash happened but no one knew that the crash would be triggered by this health problem. For the last two months, the US economy has been performing very poorly. The stock market has currently lost more than 30 percent of its value. Experts are warning that the worst is yet to come. This economic meltdown has forced the Federal Reserve to start the biggest quantitative easing program in American history. This is because the US economy is going through an economic crisis that experts are warning that will be bigger than the Great Depression.

The Federal Reserve injected 700 billion dollars into the financial markets in the first phase of the program. And later on, 1.5 trillion dollars was given to the banks. A few weeks back President Trump signed the historic stimulus package worth two trillion dollars of which 250 billion dollars will be given to families and individual workers. These numbers are historical and at the moment quantitative easing program close to five trillion dollars. All this cash has been injected into the American economy and many experts are worried that this is going to cause inflation or at least the dollar might lose its value.

American Elections

In 2008 when the economic crisis started getting out of hand, Obama had already won the Democratic Party dominations. At the same time the divide between the Republicans and the Democrats were not as severe as it is at the moment. This time the Democrats have a big hatred there Trump to a point where they are demonizing his leadership. 

Furthermore, for the first time the Democrats have Bernie Sanders as their candidate. He is the first candidate who has socialist ideas within a capitalist America. Because of the recent health problems an economic meltdown it's unclear if the presidential elections will be held on time or whether the general elections will be delayed. In a nutshell, this is the time when America is so divided for the first time since the Civil War. The 2008 economic meltdown is still fresh in the minds of most Americans and they have a presidential candidate who is against bailing out the big corporations. This is a kind of complex situation and the future remains uncertain.

Global Health Problems

The Federal Reserve had already begun the quantitative easing program in 2019. This means that they were anticipating an economic crisis but little did they know that what they were preparing for would be triggered by a global health problem. Their actions were within the ten-year period economic cycle where the economy booms for eight to ten years and this is later followed by an economic decline. 

Since the 2008 global financial crisis, the US economy has been booming and about 10 to 11 years later an economic crisis is here again. Now, this is normal in the US economy but this time it is very complicated because of this global health problem and a global economic crisis is both happening at the same time. Unlike the collapse of the housing market in 2008 this time the health problem has slowed economic activities all over the world. Supply chains have been severely disrupted, Airlines are suspending their flights and many businesses are being closed across the United States and the world.

The Rise of China

Since the collapse of the Soviet Union we now have another global power that's challenging the United States and China seems to be doing pretty well. China has already managed to control this health issue and they are already establishing diplomatic relationships by helping European countries solve their health problems. On top of this President Xi Jinping was allowed to be the Chinese president for life. 

This is totalitarianism but it will help China in executing its long term strategies. China is gaining soft power at the expense of the collapsing American Empire however Americans are waking up to this reality and this is forced President Trump to begin the trade war. The future of US-China relationships remain uncertain even during this period of tremendous health and economic challenges.

Short Term VS Long Term Debt Crisis

Just like the economy works in the cycle’s debt is also cyclic. Borrowing continues to a point where no more debt can be taken and it reaches the point where all those debts just have to be paid. During this economic meltdown, we have a lot of debt much more than we had in the 2008 global financial crisis. 

We are at a point where we cannot take any more debt and instead we have to pay the current outstanding debt and this means that the US economy will have to contract this has been factored into the current economic fallout which experts a warning that can turn out to be a depression if things are not addressed on time. It’s very clear we are living in extremely difficult economic times. 

We have a historic level of economic meltdown and experts are warning that the worst is yet to come. This is the biggest economic crisis in many years and it can only be compared with the Great Depression. In less than two months millions of Americans have lost their jobs and hundreds of companies have been forced to shut down their operations. 

The global health problem that we all are going through is making the economic meltdown much more severe and makes it totally different from the 2008 financial crisis. All the governments including the US government should focus on solving this health problem because it is the only solution if the economy is to open up in the near future.