Hearing a lot of people say that this crisis is going to be like 2008. It’s not. Here’s how it’s different (thread incoming!) – TLDR; supply shocks are very different from debt shocks. /1
1) 2008 was a banking/financial crisis. This isn’t. That’s important because when debt is the main culprit, lowering interest rates can make a difference. Especially when you actually have interest rates to lower. /2
2) This crisis is a supply shock. Pandemics affect supply chains by closing factories and constricting logistics. They become a demand shock when companies have to close because there’s nothing to sell, or customers can’t get to you. /3
3) Rate cuts won’t have any effect on a pandemic. The theory is they will help businesses by lowering debt costs. Maybe, but that won’t make much difference if there’s no demand. /4
And they won’t get businesses to borrow in order to spend ‘cos everyone is spooked. No-one knows when supply chains will get back to normal, or when demand will recover from the secondary effects. /5
4) Fiscal measures could help, but they bring political consequences. Boost relief, help ailing companies, compensate for mandated losses – budget deficits go through the roof. This affects govts’ ability to borrow, which affects debt markets, which feeds back into int rates. /6
5) Try to keep the budget deficit in check while boosting relief by cutting spending elsewhere, and you could lose the next election. /7
6) In a supply shock, there’s not much that monetary policy can do, especially when rates are at historically low levels anyway. Helicopter money could help – but give people a chunk of money to spend during a supply shock, and you could get runaway inflation. /8
7) Raise rates to combat that inflation, after encouraging everyone to take out more loans, and you could have another crisis on your hands. /end
