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IPFS News Link • Economy - Economics USA

If the Virus Hadn't Caused the Crash, Something Else Would Have

• https://www.msn.com, Satyajit Das

But it's only an accelerant: If not Covid-19, as the disease caused by the virus is known, something else would have started the conflagration. Shortfalls in revenue and cash flows, caused by the shutdowns, have simply exposed the vulnerabilities of a structurally unsound economic and financial system.

A fall in revenue is problematic but manageable without debt. Unfortunately, in the aftermath of the 2008 crash, debt levels were increased rather than reduced, encouraged in part by low policy rates and the abundant liquidity engineered by central banks globally. Global debt as a percentage of GDP rose from around 250% in 2007 to 325% in 2019. Current debt levels are triple what they were in 1999. Businesses and households, with declining or no income and high levels of borrowing, now face an existential struggle to meet large financial commitments.

A second problem is that, in the "everything bubble," asset prices were priced for perfection. Policymakers boosted the values of financial assets to increase economic activity via the wealth effect, and to support borrowing to protect financial institutions.

High asset prices reflected high leverage, in the form of leveraged loans for private equity or structured investments such as collateralized loan obligations. Debt-financed share buybacks and distributions to shareholders inflated equity values by increasing earnings per share, but simultaneously raised corporate leverage. Toxic layers of debt were heavily exposed to significant revenue downturns.


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