Corona pandemic: Black Swan on the Way to Depression

Corona Pandemic: Black Swan on the Way to Depression

by Ralf Streck

[This article published on 4/13/2020 is translated from the German on the Internet, https://www.heise.de/tp/features/Corona-Pandemie-Schwarzer-Schwan-auf-dem-Weg-in-die-Depression-4701563.html?seite=all.]


The IMF expects the worst consequences since the Great Depression after 1929 - who will pay for it? Will there be "socialism for the rich" again?

For a long time, various experts had talked down the effects of the coronavirus pandemic, although they were already more than clearly visible at the beginning of February. One month later, experts from the Organization for Economic Cooperation and Development (OECD) described the virus as "the greatest economic risk since the financial crisis". At the beginning of March, the organization, which brings together 36 industrialized countries, had developed scenarios for this purpose that had long since been overtaken by reality.

In the positive scenario, it was argued that global economic growth would fall to 2.4% in 2020. In the negative scenario, the experts assumed that growth would fall to 1.5%. In view of the events in China and the fact that neither Europe nor the USA took appropriate precautions, it was not difficult to foresee that the negative scenario was also viewed far too positively. After all, there had long been a wave of contagion beyond the Asia-Pacific region. And in Italy and Spain, too, the virus was already out of control by the end of February.

Assessing dangers early enough?

And so these experts now admit that it is all water under the bridge and that it will not only get worse, but really severe. It will probably be even worse than after the financial crisis from 2008 onward. This process has shown once again that highly paid "experts" were unable to recognize the dangers and react early enough, just as they did before the last financial crisis. For a long time, not only was the danger of the virus misjudged, but economists also failed to see that the virus would be the Black Swan that could cause the massive problems in the global economy to break out.

Now the virus is steering the global economy into the next major crisis. However, it should be noted that these crises are as much a part of capitalism as the Christmas tree is at Christmas. In fact, in addition to trade and currency wars, rising corporate and consumer debt and bubbles forming due to the glut of money from central banks - above all the European Central Bank (ECB) - have long since been indicating that a crash is imminent.

"There is no question that the next financial crisis, economic crisis or a financial and economic crisis - as was the case from 2008 - is coming. The question is only when it comes" - this had already been noted at this point in view of the ever more clearly discernible crisis parameters in December 2018 (preparation for the next financial crash). Since then, the signs have become more and more consistent. Even without the coronavirus, the economically significant euro zone officially just barely scraped past recession at the end of the year, even though the European Central Bank's monetary doping had in the meantime even increased again.

Germany, the economic locomotive, was even in recession for a practically brief period last year, which is why the European Central Bank (ECB) again intensified the crisis mode that it had never really left.

It was also clear that the relatively strong growth in the USA was mainly financed by excessive debt. This was even clear to Donald Trump, who therefore exerted massive pressure on the Federal Reserve to further fuel the economy by lowering key rates.

"Experts" like to use disaster scenarios to implement political goals. The International Monetary Fund (IMF), for example, had talked about the catastrophic effects that a Brexite would have on the global economy. In Washington, for example, a "Brexite shock" had even been fabricated before the referendum. That this was completely exaggerated was already clear at that time.

The virus is the amplifier...

Real dangers for the global economy, on the other hand, are either overlooked or underestimated, such as the coronavirus pandemic. However, and this is another area where we should not let the "experts" pull the wool over our eyes, the massive crisis that is just beginning is not a crisis triggered by the coronavirus. The virus is only the catalyst that will break open long-standing problems.

However, the virus exacerbates them, because combating it requires even drastic measures such as lockdowns to contain the pandemic, in order to save the health system from collapsing. Otherwise, in addition to the mortality of the virus, many people would die from curable diseases or after accidents, simply because they cannot be treated. Examples that triage even had to be applied in the middle of Europe have long been found in Italy, Spain and France.
So it was only now, when even a blind person could see that it was going to be really tough, that IMF Director Kristalina Georgieva finally spoke plainly at the spring meeting of the IMF and World Bank. It was already clear that global growth in 2020 would be strongly negative. "We expect the worst economic consequences since the Great Depression," Georgieva said. The IMF now expects per capita income to fall in 170 of the 189 member states.

It is preparing the populations for the fact that, according to the IMF, it will be the ordinary people who will have to tighten their belts once again. Next year, too, a "partial recovery" at best is imminent.

But it could also get worse, the IMF now also believes. And it now also wants to bring all the heavy artillery into position and even make a trillion US dollars available as loans.
The new magic word: "trillion".

"Trillion" is now the magic word in this new foreseeable world economic crisis. Whereas billions were thrown around in the last crisis, now it is trillions that are being handed out. This also makes it clear that the problems have not exactly become smaller, but even bigger.

The US Federal Reserve has just launched a two trillion dollar credit program to support the country's economy. The ECB, too, had already announced new bond purchases in the amount of almost one trillion dollars.

The fact that trillions are now being extended worldwide is being celebrated on the stock markets around the world as if there were positive economic data, corporate profits and strong growth to celebrate.

The IMF is announcing a depression, and France expects the economy to have slumped by as much as 6% in the first quarter, i.e. more severely than at any time since the Second World War. In Germany, even the Federal Minister of Economics, Peter Altmaier, is now assuming that things are likely to get worse than during the financial crisis. Meanwhile, the money junkies in Frankfurt, New York and elsewhere are popping champagne corks.
Expectations on the stock market and the labour market

The German leading index DAX, for example, gained almost 11% last week, and on the last trading day before Easter it gained another 2.2%. Since the crashes it has thus gained 13%.

Since the massive slumps in March, it has even gained almost 30% again. This alone shows that what is happening in the bloated financial markets no longer has anything to do with real economic developments. However, it does show their expectation of being able to tap into the trillions.

But the behavior of the stock markets is in stark contrast to the fact that the corona virus pandemic is currently sending shock waves through the global economy, as the data from the US labor market, for example, show. In Spain, as many jobs were destroyed in March as in four months during the 2008 crisis.

The effects are already much stronger everywhere than they were after the financial crisis began in 2008, when the insolvency of the US investment bank Lehman Brothers sent shock waves around the globe, leaving no doubt about a global economic crisis.

The consequences of that time are well known. There were massive bank bailouts, in which mismanagement and debts were passed on to the states and taxpayers as national debt. Heavily affected weak countries were covered for the bank bailouts with absurd "rescue programs" that were devised and controlled by the International Monetary Fund (IMF). And they have plunged countries like Greece into misery.

This has also led to health systems being put on the IMF's austerity cutback list. To pay for bank bailouts, the scissors of the "troika" - IMF, ECB and EU Commission - were used.

The deadly consequences can be seen these days especially in Italy, Spain and now also in France. One of the consequences is the ESM rescue package. From the allegedly "temporary" EFSF, the ESM mutated into a permanent facility.
What remained of the last major crisis

Does anybody remember the absurd objective of the programs drawn up by the IMF, according to which Greece's debt should be reduced to 120% in 2020? That this was completely absurd and unattainable with this policy was clear by 2011 at the latest.

We are now in 2020. Before the new crisis, Greece now has a real debt ratio of almost 180%. Even in Italy, which was particularly hard hit by coronavirus, the debt level and the debt ratio have only risen steadily in recent years.

Italy recently had 2.4 trillion euros of national debt on its books, almost 140% of annual economic output. In both countries, as in Spain and France, the debt and debt ratio are now set to explode and have also continued to rise.

With the exception of Portugal and Ireland, the countries that were supposedly "saved" are clearly weakened and facing another massive crisis. Unemployment rates are still particularly high in Greece and Spain at 16.3% and 13.6% respectively, but Italy, too, at 9.7%, is still well above the rate before the 2008 crisis. In addition, the countries' social security coffers are empty. And there are hardly any reserves left in the populations that have long since been bled dry.

Three out of four major euro countries in a difficult situation

With Italy and Spain, three out of four large euro countries, along with France, whose data also look bad, are now in a very difficult situation, as they are also particularly affected by the coronavirus. It is precisely in view of the fatal situation facing Spain that the country is now rashly attempting to relax measures.

Sending many people back to work, even though the virus continues to control the country, is a desperate bailout of the economy. It is a dangerous game that Italy is fortunately not trying to play, because it could prove fatal for many people and fatal for the economy if there were to be a second wave and another real lockdown.

However, it is not only falling on our feet that a "crazy" policy was made at the time, as Nobel Prize winner Paul Krugman and Joseph Stiglitz had rightly criticized. This policy will now also cost us dearly, as the rescue package of half a trillion euros that has just been put in place to help the countries that have been particularly hard hit.

And you don't have to be a clairvoyant to know that this will not be the end of the last crisis. In any case, Germany alone wants to provide 600 billion euros to stabilize its large companies. That alone is more money than the half a trillion that is to be used to stabilize countries in the eurozone.

Krugman also recently pointed out that practically nothing has been learned from the last crisis. Not only are the "madmen in power" still in power, but above all we have not learned "the lesson" from the last crisis. As he aptly put it: "We are in a worse position to deal with a crisis today than we were in 2007" Important reforms in the financial system were at best timidly tackled and there was little regulation.

"In general, we have done very little to address the problems that caused the Great Recession," Krugman said. He also correctly notes that the central banks now also have virtually no room for maneuver, unlike in 2008, when key interest rates were already cut to zero. This policy will now also cost us dearly, as the rescue package of half a trillion euros just indicated, which is now intended to help the particularly affected countries.

And you don't have to be a clairvoyant to know that this will not be the end of the last crisis. In any case, Germany alone wants to provide 600 billion euros to stabilize its large companies. That alone is more money than the half a trillion that is to be used to stabilize countries in the eurozone.

Krugman also recently pointed out that practically nothing has been learned from the last crisis. Not only are the "madmen in power" still in power, but above all we have not learned "the lesson" from the last crisis. As he aptly put it: "We are in a worse position to deal with a crisis today than we were in 2007" Important reforms in the financial system were at best timidly tackled and there was little regulation.

"In general, we have done very little to address the problems that caused the Great Recession," Krugman said. He also correctly notes that the central banks now also have virtually no room for maneuver, unlike in 2008, when key interest rates were already cut to zero. As a result, there are only significantly weaker tools for reactivating the economy.

Can the masses build up pressure?

Given the fact that we are less prepared to face a challenge that is likely to be even greater than the one we faced after the last financial crisis, one can only expect that the results for the broad masses of the population will be even more drastic.

The question should urgently be asked now, while the distribution of the money is going on eagerly, who will pay the bill that is coming up? Will there again be socialism for the rich, that debts will be socialized, but the profits then privatized again, as in the last crisis?

There is an urgent need for instruments to raise money where it is available in large quantities. However, for more than 10 years now, people have been waiting for the once promised "Tobin Tax", which was supposedly already agreed in the EU. The taxation of transactions on the financial markets not only generates income, but also regulates these markets.

An adequate taxation of international corporations and the abolition of tax loopholes, as they are also granted in the EU by various states such as Luxembourg, Ireland, Holland and others, have also been waited for in vain.

The question is whether the broad masses have learned anything from the last crisis, whether they can build up such strong pressure not to be asked to pay again for the costs of rescuing large companies, banks and states.