It is for the first time in the modern era that the world is facing economic downturn due to an unconventional economic reason. We had witnessed conventional economic downturns like the Great Depression of 1929 and the Recession of 2008. Both resulted in the collapse of the world economy in varying degrees and wreaked havoc on the economic well-being of the peoples. Also, both had the characteristic that they were man-made. But the current economic turmoil is neither man-made nor conventional; it has been inflicted on the world by nature, so the effectiveness of the conventional monetary and fiscal measures in fighting the downturn is anybody’s guess. Conversely, it will be science, scientists and healthcare workers who will be the protagonists clearing the way for an economic revival.
What is the Great Depression? In order to understand this question, there is another question that is a prerequisite to be asked: How do governments fight economic downturns? In other words, what measures do governments use to revive consumer demand? There are mainly two macroeconomic measures that are deployed to fight economic downturns. The first one, monetary instruments, is used by central banks. These include tools like repo rate, which is the rate at which central banks give loans/money to commercial banks and this benchmarks the interest rate at which commercial banks extend loans; reverse repo rate — the rate at which central banks borrow from commercial banks; and various cash reserve ratios that mandate proportions of deposits to be kept by commercial banks as reserves with themselves as well as with central banks. By reducing these rates and by adjusting reserve levels, central banks can make more, cheap liquidity available in banking systems, enabling commercial banks to lend more money at lower interest rates, thus, bringing more money to the pockets of people to spend and revive consumer demand.
The second macroeconomic measure is fiscal instruments which is the domain of union governments. Tools like taxation — both direct and indirect taxation, corporate taxation — stimulus packages, public borrowing etc. come under this. Governments can cut tax rates so that people will be left with more money to spend; similarly, corporates will have more money to invest. Governments can reduce borrowing from commercial banks so that they will be left with more funds to support businesses and people through loans. All these measures can result in having more liquidity for economic activities and resultant revival of consumption.
The Great Depression was the deepest, longest, severest and the most widespread economic downturn of the 20th century, happened across the world during 1929 to 1930. It started in the United Sates of America, with the crash of its stock market on September 4, 1929 and followed by the crash of share prices globally on October 29, 1929 — known as Black Tuesday.
The Great Depression devastated economies around the globe, with personal incomes, tax revenues profits and prices going down. Every industry was affected — farming communities suffered as crop prices fell, construction activities coming to a virtual halt, heavy industries dependent on the primary sectors getting collapsed, etc. All these led to widespread unemployment. The situation was further exacerbated by consumers cutting down their expenditures, thus, further eroding demand. The decline in the U.S. economy was the primary factor that created the domino effect leading to the collapse of other economies in the world.
There are many economic theories that explain the Great Depression, and among them, Keynesian Theory and Monetarist Theory are the most debated ones. The Keynesian View contends that fiscal loosening by governments by using deficits through spending large sums can compensate the aggregate lower spending caused by massive declines in incomes, employment and private investments. So spending by government will keep more people employed, creating more income and demand — multiplier effect resulting in economic revival. Governments, including the U.S.A., did not use this fiscal instrument resulting in the stock-market-induced recession snowballing into the Great Depression. This view upholds effectiveness of fiscal measures to fight economic downturns.
The Monetarist View states that the Great Depression was caused by the failure of central banks, including the Federal Reserve. The view contends that since the Depression was started as banking collapse — monetary contraction of 35% — it could have been prevented to grow into the Depression by cutting down interest rates and injecting more liquidity into banking systems. This view upholds the effectiveness of monetary measures in fighting economic downturns.
The United States Government had already come out with USD 2 trillion — 2,000,000,000,000 — stimulus package to support the economy and that another one is under preparation to fight the COVID-19 pandemic. The European Central Bank, or E.C.B., announced a monetary injection of USD 820 billion through private and public bond purchases. Furthermore, the E.C.B.said it would roll out cheap loans to banks in the member countries at interest rates as low as minus 0.75% and that it would step up bond purchases under its USD 2.9 trillion bond-buying program. Japan announced a fiscal stimulus of USD 1 trillion to support the economy in its fight agonist the pandemic. Governments and central banks across the globe are injecting trillions of USD into the their economies as the virus deepens its stranglehold.
Through monetary and fiscal policies, more money at lower capital cost can be brought into the hands of people who are expected to spend them, resulting in revival of demand, thus, reversing economic downturn. But, what if people are not in a position to spend even if they are fed with money, for their movement is restricted to their homes for a significant period of time? What if people have become cautious and discriminatory in spending — spend only on essentials and avoid spending on semi-luxury and luxury goods — even when they are proffered cheaper and affordable money? What if people metamorphose themselves into a new-normal of deciding to live within their means and refusing to leverage any extra liquidity to pomp up their living? All these questions have only one answer: consumer demand will not be revived as desired and expected by the loosening of monetary and fiscal policies. Conventional macroeconomic measures from man failing to tackle the unconventional economic catastrophe — let me call it as the Great Suppression — inflicted by the Mother Nature.
Let’s make a comparison between the historical data of the Great Depression and the emerging and indicative data of the Great Suppression. The world economy shrank by 15% between 1929 and 1932. The European Central Bank’s Chief projected that the world economy would contract by 12% this year alone. So over a period of three years — 2020-2023 — will it surpass 15%? It is highly likely. During the 3-year period of the Depression, the international trade fell by more than 50%. The World Trade Organization says that the international trade is expected to fall between 13 to 33% in 2020. During the Depression, unemployment rate rose to 23% in the U.S.A. and to as high as 33% in some countries. The Great Suppression already brought the unemployment rate in the U.S.A.to 14.3% as on May 8, 2020, and the United Nations said 1.20 billion — 37.5% — out of 3.30 billion working population was expected to lose their jobs due to the pandemic.The unemployment scenarios across the world are poised to get worse, making these numbers to increase further, may be even surpassing the unemployment number of the Great Depression.
Will this Great Suppression by nature be bigger, longer, deeper and more severe than the Great Depression? I think the answer to this question depends not alone on the fiscal and monetary measures being deployed respectively by governments and central banks but mainly on the 7-letter word called VACCINE. This virus-induced Suppression of the world economy can be stopped only through a vaccine because as long as one infected person remains at some corner of the world, the virus has the potential to unleash its virulence on the word again.The world is in peril like never before. The superheroes who can save the world and its economy from the Great Suppression are science and scientists.