InvestNow News – 24th April – Legg Mason – The Unintended Consequences of Covid-19
13 April 2020 – Tracy Chen, CFA, CAIA
The COVID-19 outbreak is a classic black swan event, in that it came out of the blue, and the global economy will not be the same even when it fades away.
The virus disrupted the intricate workings of globalisation that we took for granted over the past four decades. The pandemic exposed how vulnerable the foundation of the global economy is, which was built upon the free flow of labour, capital, and goods. In addition, the world order will not be the same after this event. The global economy will be in a reshuffle from permanent changes to societal, corporate, and institutional behaviour. With the magnitude of uncertainty, I attempt to assess the impact to the global economy and implications for global investing, though it might be too early to predict the permanent changes from this outbreak.
A Fast Track to Modern Monetary Theory (MMT)
The COVID-19 outbreak and the various containment measures centring around social distancing have created a massive supply shock—and more importantly—demand shock resulting from the income shock. With interest rates already so low, the marginal efficacy of monetary policy is diminishing. Hence fiscal policy will play a more dominant role in mitigating the massive shock. The ever-increasing fiscal deficit as a share of GDP will necessitate the increased issuance of government bonds. The COVID-19 outbreak could, therefore, accelerate the introduction of MMT to developed markets, which will have profound implications to bond investors.
The Invisible Hand
The seemingly more effective containment of the COVID-19 outbreak in China demonstrates its capability in mobilising resources, surveillance of its citizens, and the strengthening role of state-owned enterprises (SOEs) in the war against the COVID-19. There will be more debate over which governance model is more effective when confronting a crisis or war. Fast and unprecedented policy reactions to address the income shock in the western world portend more government involvement in economies, which will become less market-driven. Even after COVID-19 fades, in the future, it will be far from easy for the “invisible hand” to let go of the control.