Economic uncertainty

We are facing three major issues: the pandemic, the recession (or maybe a new depression), and social protests.

These three threats are related. The response to the pandemic caused the economic lockdown and the recession. The lockdown and the economic distress contributed to the social protests.

Will this economic recession persist for years to come ?

The bad story is that this recession is global. The Chinese economy, South America and major economies such as France, Germany, Italy, and the U.K. are suffering just as much or more than the U.S. The global costs are worse than the sum of lost output in each country.

This economic crisis could become a financial crisis as world trade decline has a ripple effect on lost revenue, debts and finally banks.

A V-shaped recovery is highly uncertain and weak growth for years to come is more likely expected with high unemployment rate, a growing work-from-home business model, higher saving rates, and bankruptcies.

Central banks printing money policy is here to help ?

Well, it’s not really clear. This policy is based on monetarism theory which states that changes in money supply are the most important cause of changes in GDP. The quantitative relation between money supply and velocity is given by velocity = nominal amount of transactions per period divided by money supply with the assumption that velocity is constant. Well, velocity is not constant and now velocity is near zero.

What about debt levels and Government spending ?

Debt levels are already too high. For instance, in France the new added debt will increase the France debt-to-GDP ratio to 120%. That’s the highest in France history and puts France in the same league as Greece, Italy, Lebanon and Japan.

With such medical and economics uncertainty, we are facing years of austerity and slow growth with an expanding wealth gap.