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Comment by screye | Hacker News Reader

I am not well versed in the economics of depressions, but almost all the ones I know of were preceded by some monetary imbalance or the explosion of a bubble based on falsely propped up ownings.

1929 was stock being leveraged off mortgaged homes and loans, that was clearly no sustainable.

2000 was the dot com burst.

2008 was mass defaults on home loans.

Is there any reason why apart from slow business for 2 months due to corona and the oil war (that resulted from corona causing a loss in demand), the economy can't juts go back to being business as usual once this all passes over ?

Is there a particular kind of asset, the collapse of which will seal this drop as a proper depression ?

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Most businesses don't have the cash reserves to handle effectively shuttering for 1-3 months, which is probably what will be required to get a handle on the Coronavirus outbreak without overwhelming our medical systems. This means those businesses will be forced to lay off many (if not most) employees, possibly going bankrupt altogether, and those laid-off employees will themselves have trouble paying their own bills causing them to go bankrupt, lose their house and car (and health insurance in the US!), etc.

It's a huge vicious cycle that will almost certainly lead us into a deep recession in the short term, and will likely require huge fiscal interventions by the major governments of the world to prevent an outright depression (as all the remaining monetary options have already been used up to little effect). It's telling that Senator Mitt Romney was floating a temporary Yang-style UBI today... even a week ago that would have been unthinkable to hear from a Republican, even a moderate like him.

1. Most of those problems are being tackled: localities, states, and the fed have interest free loans and many have frozen rent and evictions (for both residential and commercial real estate). As far as that goes, 1-3 months with the above addendums makes me skeptical about mass bankruptcies. 2. This is such a silly point I keep hearing: "Everyone is a socialist in a crisis", "Oh suddenly people realize UBI and universal healthcare are good!" - DUH! Collective problems require collective solutions. Everyone agrees that the tax-payer foots the bill for the healthcare of veterans in WW2, everyone agrees with price-controls when fighting Nazi Germany. Everyone agrees with collective action to fight collective threats because it's necessary.

If you contract a pandemic disease, collective action must be taken for the good of everyone else. If you break your leg falling of your roof on a bender, you and only you should foot the bill. This isn't hard: supporting collective action against Coronavirus doesn't mean M4A is a good idea for more normal situations.

Many believe the economy has been propped up by the Fed (by lowering interest rates) because they've been afraid of a recession. The Fed also doesn't really have any more ammo left to prop things up.

So, the cause is that the Fed has been propping an economy that is ripe for a recession and a reset. The coronavirus is the trigger that will force the hand.

Many currencies have been propped up and artificially kept competitive via QE as the new tool to augment interest rates as having driven them so low, they had to use something else. The next tool in the box is negative interest rates.

Kinda all leads into a perfect storm, and now have whole generations having grown up with no saving mentality and a have today, pay tomorrow expectation that if things ever go back to normal, real interest rates that encourage responsible spending instead of artificially stimulating an economy. Well, it will be a huge education for many and as always, the people end up paying for it.

Many people think the world is rife with real estate bubbles, definitely in china if you don’t think there is a big one in the USA. The stock market rose very quickly with respect to earnings as well, and we’ve had over a decade of very low interest rates world wide, leading to lots of debt both private and public.

Consumer habits and psychology are going to be affected for years. We're going to see jobless rate skyrocket, small and large businesses defaulting left and right. Your tech job is definitely not safe either.

Bankruptcies can be pretty damaging. If we see a lot of loan defaults, we might see a banking crisis.

...but probably not. Banks are very well capitalized these days - much much better than 2008.

Banks can cover some things going wrong, sometimes, not everything going wrong at once.

Just takes one queue at a bank, few social media posts and next thing, all those branches have queues due to panic and end up with a self fulfilling prophecy so to speak.

Heck, if people can panic buy toilet roll, nothing is out of the reach of stupidity.

My bank would only let me take $3k out today , they said come back tomorrow for another $3k .... it is already starting.

Those are pretty normal restrictions. Why on Earth are you withdrawing that much cash?

Your account is FDIC insured up to $250,000.

Isn't there FDIC insurance for precisely this reason? I have no reason to believe that the counterparty here is illegitimate.

If I had to bet, it'd be a corporate debt bubble propped up by the Federal Reserve low interest rates and practice of quantitative easing. As the coronavirus creates a supply shock, businesses aren't going to be able to produce enough goods to sell and as a result, they will default on their debts. Similar to the 2008 burst, this is going to cause a ripple effect in the financial industry where banks are going to try to deleverage, inadvertently causing a credit crisis that slows down the global economy because no bank will want to lend out to something that's not a sure bet. How did the Federal Reserve start this? Because by having credit easy to attain, companies were willing to issue riskier bonds with higher yields.

> Is there a particular kind of asset, the collapse of which will seal this drop as a proper depression ?

That's a good question. Right now the market is reacting to on-the-ground realities. The follow-on question you are asking gets to: what will be the aftershocks?

The thing that I'm concerned about is the amount of risky business loans[1] that have been handed out in the past decade because rates were so low and mutual funds were looking for high returns. If a lot of businesses go bankrupt and that, in turn, puts the banking system at risk, then things would be ... bad.

[1] including businesses taking "no covenant" loans to—in some cases—pay their earlier investors dividends!

The only depression you named was 1929. 2000 was barely a recession. 2008 was more severe but...still not really. The US unemployment rate hit 10% which is high...but most countries Europe have had rates at this level for decades. For reference, the current rate in France has an 8 handle.

In terms of depression vs recession, to put it simply, the risk is that we move into a situation from which escape is difficult. For example, and this is a hypothetical, everyone in airlines loses their jobs, this causes demand to fall, more people lose their job, supply falls, etc. Depressions destroy resources. Recessions reallocate resources.

So I don't think this looks particularly serious...if policymakers act promptly. This means ensuring that credit is supplied to companies that are solvent and firms that insolvent are shut down. The only thing that looked bad going into this was everything going on in tech, and the level of corporate debt (and its distribution). There is still a huge amount of complacency here (a big part of this cycle has been ETFs...I talked to a quant the other week who is neck deep in corp bond indexes who confidently told me defaults wouldn't rise...the guy has never looked at a balance sheet in his life).

But one very bad sign is gold and govt bonds falling with equities. This is probably being caused by someone running a risk parity strategy trying to get out of their positions but it could also be a sign that liquidity is disappearing (and people are selling whatever they can sell). Equally, last week the momentum tech stocks weren't really selling off, and now they are really starting to tank (although this is probably a good sign long-term, short-term people are clearly panicking).

Also, as a point of history, there was no "mass defaults" in 2008. The default rate definitely rose substantially and there was a liquidity crisis but this ended up working itself out and the vast majority of these assets came good (we know because the govt bought them all).

>For reference, the current rate in France has an 8 handle.

I'm no expert here, but weren't the French literally rioting a few months ago..? And beyond the markets: you keep downplaying this and 2008 as not "being serious." I mean sure, maybe for your portfolio - but can we avoid trivializing the gravity these economic movements can and will have on the lives of millions of people?

If we are very lucky the epidemic will not even be peaking yet in the US two months from now. If it has, we are looking at catastrophic losses of life. More likely the noose will not be loosened for 9-12 months. It’s gone too far to be contained and can only be slowed until a vaccine is widely deployed. The economic damage is incalculable.

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