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Comment by lancewiggs | Hacker News Reader

The S&P500, the best general index, closed at 2386 today. It's risen over 300% since the last crash, the GFC in 2007. It's been an extraordinarily lengthy bull run, and well overdue fo a crash.

Before the GFC the index was 1550, and after it was ~760 (~50% drop)

At the peak of the dotcom boom it was generally under 1500. In 2002 after that crash it was 800. (45% drop)

The recent peak was ~3380. A 50% drop is ~1700, which is almost 30% below where we ended today.

The question to ask yourself is how does this collapse compare to the dotcom collapse and the GFC?

The dotcom collapse affected internet businesses and was contagious (sorry) from there.

The GFC start with banks and finance and was contagious from there.

This starts with pretty much every industry, and has immediate impacts on supply and demand. It's going to be very ugly.

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The thing with dotcom and GFC is that they both revealed fundamental problems in the marketplace. Dotcom was over-hype around internet startups, GFC was the financial house of cards around subprime mortgages. There was no "going back to the way things were" in those cases.

In this case, on the other hand, the primary mechanism is "people can't work/aren't going out and buying things". That's absolutely going to "go back to the way things were", in some sense. It's just a question of how long it will take, and how much damage will be dealt in the meantime. But it feels very different from those other ones, which could be good or bad.

Put differently, the GFC was like organ failure: things couldn't just heal, they had to be reworked and replaced. The current crisis is like a knife wound: the basic problem will heal on its own, but in the meantime you have to keep from bleeding out and hopefully avoid necrosis.

Are you sure COVID-19 didn't partially prick a systemic issue that was hard to see on the rise (as many also missed the housing crisis before the fall)? For example, the amount the stock rise was attributed to stock buybacks in an unsustainable manner caused by late stage government policies (tax cuts, low rates). There has been some pretty extreme levels of corporate debt that correlates with this.

It probably did prick a bubble. But all the economic recovery measures for the pandemic may, ironically, push further out the point at which the systemic issues break the market and force resolution. Especially in the U.S., economic aid invariably ends up contributing far more to corporate balance sheets than it does citizens' wallets. I mean, what was the first response of the GOP to prospective economic issues? Cut taxes, including payroll taxes, which could have dealt a death blow to Social Security and Medicare considering how many Republicans are itching to get rid of those programs entirely.

Once COVID-19 passes I would expect more of the same. For reasons that aren't entirely understood, inflationary effects of monetary stimulus are highly attenuated, at least for the average consumer, although they clearly contribute to the ever increasing wealth of top earners, not to mention financial assets. Who knows how long we can keep going down this road.

'inflationary' effects are manifested elsewhere: inflated financial assets (say, stocks); inflated real estate wherever top earners live.

In crashes all the vulnerabilities tend to collapse at once like a house of cards, and in a sense we have learned things one crash at a time. When gold was the primary form of money, there were many crashes because of lack of control over money supply. Likewise with fiat, all the crashes from indebted governments trying to print their way out and inducing hyperinflation.

In the 1929 crash there was a run on the banks because there was no confidence in their survival. The world going to a wartime economy and increasing public spending reinvigorated things but it eventually caused high inflation in the US by the 1960's - one of those factors in the country's "1970 turning" in many policies. Fear of the balance sheet getting out of control again created the strategy of huge bailouts in the latter part of the 20th century, but a downside of doing it just through lending is the "crowding out" of those actors who aren't given bailouts - which in prior recent crashes were generally individual workers, homeowners and retail investors who just took it on the chin and were told to lower their expectations.

This time is different. The attention is on individuals and their problems, and I'm seeing an uptick in discussion of UBI and benefits beyond the existing trend. There isn't faith in this crisis being solved through the existing toolset.

You don't get to bundle criticism of a basic income tax reduction with these other economic policies, just because there's a crisis.

Are you aware of the the corporate debt binge that's been going on for years now and stands at nearly $10 trillion dollars? People have been ringing the alarm about this for quite some time:

https://www.washingtonpost.com/business/economy/corporate-de...

Previous recessions were a lack of demand. What happens when it’s a lack of supply?

We can’t go back to the way things were if the global supply chain is damaged or completely stopped. And that’s not even considering local businesses that may never come back after this is over.

I think this one is more about demand than supply. White-collar workers are of course being productive from home, but even manual work - in an employer-controlled environment - could conceivably be made safe. Amazon just announced that they plan to hire 100k warehouse and delivery workers.

Public spaces on the other hand (retail, restaurants/bars, travel destinations), are just totally infeasible to make safe until things are fully over with. That's a serious cut to demand that just has to be waited-out.

How is there a lack of supply and not of demand right now? Most of China is already back to work, and we'll see lack of demand in the coming weeks/months when people isolate themselves and not going out buying things.

It's both - but the supply side could take up to a year to fix. I work a small company but our lead times have tripled.

if we hadn't centralized on China, as the global sole manufacturer the supply issue with covid wouldn't have been too drastic. in nature everything has redundancy points e.g you've to 2 arms so if you lose one, you can keep functioning to a good extent. big companies ie monopolies n the likes of Github as central failure points should be taken out completely. we need multiple suppliers, operators to provide redundancy.

> In this case, on the other hand, the primary mechanism is "people can't work/aren't going out and buying things". That's absolutely going to "go back to the way things were", in some sense. It's just a question of how long it will take, and how much damage will be dealt in the meantime. But it feels very different from those other ones, which could be good or bad.

This to me is more akin to a natural disaster which wipes out large amounts of our economic infrastructure in the form of consumer spending. How do people and businesses bridge the gap? Businesses are already over-leveraged due to incredibly cheap debt. Some have good balance sheets and will survive, but many many will not. Most small businesses cannot survive 2 months without being in business, let alone 6. The solution can't be for them to take out loans which they'll never be able to pay off.

The thought that this is just an acute problem that will go away is wishful thinking. The effects will be further and wider than many of us can imagine right now.

>That's absolutely going to "go back to the way things were"

China printed money in the past 10 years on a scale we've never before seen in history (300% Debt-to-GDP). They remain in a trade war with the US, are being blamed for the virus and their economy has shut down. Things aren't "going back to normal".

I said that with a very specific meaning and you're taking it out of context.

>you're taking it out of context

You claimed the the GFC and dotcom bust "revealed fundamental problems in the marketplace", but "In this case...the primary mechanism is "people can't work/aren't going out and buying things". That's..going to "go back to the way things were"

To which I explained to you there are fundamental issues with this as well, mainly the world's second largest economy is messed up, royally. What context did I miss?

From my own comment:

> the primary mechanism is "people can't work/aren't going out and buying things"

As soon as it's safe, people will very quickly start working and consuming again. The world around that mechanism will have changed - some businesses will have closed, some jobs will have been lost, some personal finances will have taken a hit - but people's desire to work for income and spend money on goods didn't break. It's only being blocked for a little while. The circumstances around that are an independent question.

>As soon as it's safe, people will very quickly start working and consuming again.

Your premise is at fault ("this is about buying goods"). The virus is a catalyst, not a cause.

Do you know if the Chinese economy will ever recover in the way you claim? Are you even considering the world outside your country? This is bigger than a few people not going out to bars and restaurants. Industrial production has been slowing for months, global debt was increasing exponentially for a decade, political tensions are rising globally, people are dying around the world because of government mismanagement of a pandemic.

You can keep repeating that things will go back to normal when people start shopping again, but if that's the extent of how you view what's happening now, you're likely wrong.

> people are dying around the world because of government mismanagement of a pandemic.

Disproportionately affecting people outside of prime working ages.

> political tensions are rising globally

For now, and they will eventually subside. Because they always do. And always will.

> Do you know if the Chinese economy will ever recover

Why wouldn't it (eventually)? Demand will change, but people aren't going to forget how to work, how to buy, or how to build. There is a _ton_ of cultural infrastructure that goes beyond physical infrastructure and ultimately, unless we were all building stuff nobody actually wanted or could use (e.g. dotcom bubble) the economy will eventually recover.

We don't know the timing, or the extent that bad assets will be kicked out (e.g. mortgages), and we also don't know to what extent money printing has erased savings, but ultimately there's a tremendous amount of cultural and physical infrastructure that will continue to exist, and a tremendous amount of demand that will return.

One counterpoint: the crest of baby boomers is going through retirement. This severe market downturn and recession will absolutely destroy many pensions in the US that were already woefully underfunded. This will be extremely brutal.

Time for them to toughen up and pull themselves up by their bootstraps.

At ~65 years old, there isn’t much in the way of bootstraps for them to pull up on.

9/11 happened during the dotcom crash, which likely had a much greater effect on the economy as a whole.

> well overdue for a crash.

This is not how markets work.

Curated markets (QE) do. Sometimes it's called a "correction", which makes sense, but does not change the inevitability.

> well overdue fo a crash.

Not sure why a crash has to be expected or should be the norm.

For the last decade many of the largest corporations have been taking on massive debt loads in order to buy back stock and inflate their stock price. This is a result of extended low interest rate policies. The corporate "logic" is, "we are growing at 3%, we can borrow money 1% now and take that cash immediately, and since we are growing faster than the interest we'll have no problem paying it back". So they buy their own stock back, and their stock price rises. And when many corporations do this, all of their stocks rise and the market rises, and rises, and rises - like its been doing for the last 10 years. At the same time, debt grows, and grows as the FED scrambles to keep cutting rates so that companies can keep borrowing and allowing for cheap money so that this stock market rise can continue. Then, eventually, there is a period of time when they dont grow at 3% - worse yet they shrink (like during a pandemic). Then, all of a sudden, they are left with trillions in debt that they cannot service (debt that has been collateralized into bonds and sold off to other investors, which will also default). That results in a cascade of asset selling to raise cash, which tanks the market, which results in more selling and you have a crash.

https://www.investopedia.com/terms/b/boom-and-bust-cycle.asp

All you have to do is have an unlikely intersection of events (one being a bust) and you have a crash.

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