Monetizing a Financial Crisis’ Incubation Period is Bad Medicine
With no fiscal priorities, mayhem will follow.
Let me throw this out there. For every month of the pandemic, it will take those affected by it 6-times as long to regain their financial health, if they can.
The financial sickness following this pandemic will be even harder to tame since governments and central banks are trying to fix the disease during the incubation period, which is only pushing the stock market higher from which to fall.
When the financial sickness begins in earnest, sometime this summer, new efforts to monetize the debt will probably fail. Every person and business has been led to believe they will get bailed out. That isn’t possible. What happens when various industries, businesses and people realize no help is coming? Will they panic? And if so, what will be the consequences?
If we had known for sure that the coronavirus was going to get out of China in December would we have done anything differently? Fortunately, we did know; that is, anyone who follows China knew. So why didn’t governments outside China close their borders? The answer is that they believed China would contain the virus, as happened with SARS-1.
China obviously believed they could contain the virus. After all, they had built a very expensive facility close to Wuhan to deal with such viruses. Why wouldn’t they feel confident? China may have tried to cover it up, politically, but that aside, it made the same decision that other countries made. They could deal with it without the need for contact-tracing and mass quarantine.
The media has not made a distinction between China’s effort to contain the virus and its effort to keep the economy going (which meant squashing fear). There are always people working at cross-purposes, as there are today. We can’t say today that China should have shut down Wuhan immediately without looking in the mirror ourselves.
That said, some countries, like South Korea, mobilized quickly because they believed the virus might not easily be contained. They hadn’t forgotten what SARS-1 could have become. But hindsight is 20–20. The coronavirus may have died out and South Korea’s economy would have suffered.
For many risks in life, we can easily predict the likelihood of their occurrence. Since the Avian Flu and SARS-1, China has addressed the risk by pouring money into the Wuhan Institute of Virology.
What China, or anyone else, could not predict is the severity.
Like a biological virus, a financial virus financially kills those with weak finances, market-type vulnerabilities or high debt.
Like the coronavirus, there is an incubation period and a period of sickness. Let’s say for the virus it’s 7 days and the sickness is 21 days. Financial periods of incubation and sickness are generally measured in quarters, if not years. The belief that the economy can re-open and everything returns to “normal” has no basis in economic history.
We need to belabor the fundamentals.
In our debt-based economy most debt is priced monthly, when most people and businesses make a payment. If you have $120 in debt and make your $10 payment we can assume the debt is still worth $120 for your creditor; that is, your creditor, who holds your debt, could show anyone wanting to buy the debt that payments have been dependable. But what if the debtor misses a payment. What is the debt worth? It’s impossible to say, right? They might eventually make the payment. Or they may never make more payments. So the debt can be worth anywhere between nothing and the $120.
The 30 days before that payment is the incubation period. The debtor is not richer or poorer. The debtor only experiences financial sickness once that payment date arrives.
The economy only began to stop in a real way around March 15th. Most likely, most made their March 31st payment. The first payment that must be made after the financial-sickness incubation period began would be May 1st.
That day is tomorrow. Most businesses and workers will not be able to make that payment and have no prospect of ever making it up! Worse, June 1st doesn’t look good either, or July, or any month in the foreseeable future!
Worse, the government’s efforts to prevent defaults cannot work; indeed, it will ultimately make matters worse.
There is not a single historical period where a loss of economic activity was followed immediately by a period of double the economic activity in the same time frame. In simple terms, a 20% down month is not followed by a 40% up month. Certainly, debtors can recover from a loss, but only by re-working their finances, which usually means a combination of expense reductions, asset sales, capital raises and restructuring their debt.
Most creditors will not forgive debt. Even if they wanted to, most debt is built on other debt, the complexity of which is impossible to unravel.
There is so much I’d like to write about. Here are some thoughts I hope to one day go into.
- In growing economies people equate assets with cash and credit.
- In shrinking economies people equate assets with expenses and debt
- As the pandemic’s economic shutdown shrinks asset values, debt remains.
- We are a country with declining income. As income shrinks, debt increases
- Debt defaults trail income by at least 3 months, if not a year
- In a few week’s we’ll have 3 months, March through May, of significant lost income.
- Only money can make debt and tax payments. If you can’t sell assets, whether it be a sticky-bun in your shop or 30 Rockefeller Center, you default.
- Bullshit jobs are easy to destroy and difficult to make
- Most people are both creditors and debtors which is why it isn’t simple for every creditor during the pandemic to forgive loans.
- Creditors lend money based on assets. To forgive any payment is to pass proportional value over the debtor. The creditor will always feel the debtor owes the money. The debtor will always feel the creditor accept a loss based on events the debtor could not control.
- It may be better to take the asset backing the loan back and reloan the remaining value to someone else.
- It is often psychologically easier to believe the property will one day earn its expected income while empty. It’s easier to lease out an empty space than an occupied one.
