The ongoing pandemic caused by coronavirus(COVID-19) is going to cause a recession worldwide. As the world comes to halt in true blue “Atlas Shrugged” style the real question then is what will be the nature of this recession.
A classic recession is defined by a slowdown in growth. Business shrink, incomes reduce and aggregates like Gross Dometic Product (GDP) are used to count it. The term used to depict this phenomenon is called deflation. In a classic textbook sense, it is the opposite of inflation (ie rise in prices). But that is a classroom case.
With everything is left to people’s natural behavior, the principles of supply-demand-value will cause result in inflation or deflation. The world is no longer in classroom conditions. Definitely not since Nixon removed the gold peg on currency notes. To cut the story short as we enter the world on central bank printing notes at will, the financial market working on second or third-order derivates these effects needs to be taken into account. That why the economics literature coined terms like disinflation, stagflation, negative inflation and so on(which we don’t detail for sake of brevity).
Forced revisit to fundamentals
But the current shutdown caused by a pandemic is going to make us revisit all of these variants and reduce them to basics. This is because of one fundamental characteristic of this crisis: shutdown.
When economic activity goes to halt the world is reduced to barter level. Because this shutdown has just started we have not entered that situation. If the shutdown doesn’t extend very long (say a year), we might just skirt with this level and come back.No matter to what degree we approach this ideal barter level of the economy it will pose a great question on our banking/lending practices. The fundamental assumption of lending is that the other party has a productive use of the money given. That is why it is called capital . And that is why interest becomes a legitimate demand. If there is a way you can earn more money by taking it from mine, give me some share of your profits.
Definition of Capital under question?
As the shutdown becomes more and more normal (I pray it doesn’t ) the very notion of capital and interest comes under scrutiny. So no matter how much money central banks and governments give people if people don’t go back to active production (the economic activity of value)the very notion of the value of money will come under question. But that is an extreme and rare possibility. What this discussion helps with is a meaningful remedy to the economy without causing another round of easing (like post-2008 era).
Since economic activity is frozen, the government world over can put a freeze on interest calculations of all types. This retains the sanctity of capital-deposts-loans and relives the economy of the broad-based collapse of businesses (of all shapes, more small ones ).
At the present government of India has announced that all term loan payments can be skipped for the next 3 months. It relies on the assumption that when the shutdown is over the business will somehow pay it back. A tall assumption for 2 reasons.
- It is shut down and not a slowdown. It a process of a reboot. All businesses will open the counter as if it is the day of their life. Being back to the usual collection numbers will be a gradual process.
- Yes, the interest accrues, as if nothing happened.
Is it fair and realistic
Is it fair to depositors? It is. Faced with the risk of total capital loss and interest loss any option that preserves the original sum is a fair and realistic option.
The second question is it realistic? Especially countries where interest rates are near zero. This is the classic no yield scenario none likes. But that is precisely the benefit. In shutdown time preservation of capital itself is the benefit. To GDP or deficit calculations of different governments, it more or better of what is going on :). It will pose a very grave threat to financial markets(stocks, bonds, etc). It is such a dreaded scenario that it will be laughed at.We skip the detailing so that we stick to our topic(but it is a matter of interesting question as to how stocks are valued when the economy is at halt !).
Can we skip rent?
It is not a theoretical but a moral question. Since the crisis has just begun there can be arguments of various kinds on what happens to rent. If we approach a longer shutdown were practically none is going to work and will tend to earn nothing the notion of rent comes under question. Whether it is housing or commercial rent has the same underlying assumption as a loan. Which is of productive use.If that doesn’t happen people either default on payment or keep the property . As much we can put economics, it is also a legal question. But it is more of a moral question that everyone needs to understand.