Fiscal and monetary implications of COVID-19 with some predictions

Mar 24, 2020 Letters

DEAR EDITOR,

Globally, central banks and governments are scrambling to salvage the economic impact of the COVID-19 virus. Governments are seeking massive fiscal stimulus with the hope of salvaging market confidence and activities. Likewise, central banks are using expansionary monetary policies to put more liquidity into the system with the hope of stimulating economic activities or at least soften the landing.
While both of these measures are welcomed and would certainly have an impact on the margin, they are unlikely to have the kinds of macroeconomic impact that policymakers are hoping for, impact that in ordinary times would be considered an appropriate policy response. And this is the best case scenario.
Why would all this stimulus and liquidity not have the kind of impact as expected? This answer is because the current market meltdown and collapse of aggregate demand are not due to market forces but from environmental factors for which the market has very little (if any) influence. The economic deceleration (hopefully not a full stop) is a deliberate and necessary decision to address the environmental (more like existential) risks and not a natural or market consequence of it. In this regard, the economic slowdown is not the same slowdown that occurs during market-induced recessions.
The implication of this is that the traditional fiscal and monetary tools are not likely to provide an effective and sizable stimulus response. Put differently, even if people are given money to spend, their ability to spend is physically and naturally constrained. The supply chain and physical movement of people and goods are grinding to a halt. If this virus is like a sneeze which is heavy but short, then maybe we might be able to salvage most of our way of life. But if this is more like a flu (the irony here) then I believe at the end of this we will be closer to the bartering and agrarian ages than we have ever been since leaving those economic states.
Where does this leave us? I don’t have the answer to that question. But I will offer some broad predictions. Even after this nightmare has ended, economic life would be forever altered and a new normal will take shape, one that we have no idea or at best vague ideas about. That our current real economic infrastructure will be able to adapt quickly is more of a wish than a healthy expectation. Second, whatever the future looks like we will certainly not be able to rely on traditional fiscal and monetary tools for effective responses of this nature and will have to develop new ones. I suspect with global climate change being the potential elephant in the room, our economic troubles of the future will have much more to do with the natural and built environment than the typical market forces that we are accustomed to.
There is a lot more to be said on this issue and I am sure economic historians and forecasters, pundits and noble thinkers will have lots to say about this. These are just my two cents on how I see this playing out.

Sincerely,
Dhanraj Singh, MBA., MSc., BSc.
Economist and Executive Director
Guyana Budget Policy Institute

Discover more from Kaieteur News

Subscribe to get the latest posts sent to your email.

Latest News