Tuesday, February 4, 2020

Disaster Preparation—Why Irrational Exuberance?

Popular Economics Weekly

Stock and bond prices are gyrating when the world economy doesn’t seem to know what to make of China’s coronavirus that has now spread to some 23 countries, according to latest reports.

And that is not a good time for irrational exuberance to appear in U.S. financial markets, since much of the financial gyrations are driven by excess liquidity—too abundant cash from the 2017 corporate tax cuts are pushing stock prices to record highs, and bond yields to record lows—both signs of price bubbles sure to burst on signals that world trade in particular could be affected by what economists call such an unpredictable, “exogenous” event.

The medical consensus to date is that the coronavirus doesn’t seem as virulent as the 2003 SARS outbreak, yet the number of deaths and infection rate to date has already exceeded that of the SARS virus.

The NYTimes reports this respiratory virus has infected more than 17,000 people, killing “at least” 360. “But the Wuhan coronavirus may be highly transmissible, as contagious as seasonal influenza that kills many more, and the death rate is still unknown.”

Why could this pandemic that the World Health Organization has now labeled a global public health emergency be dangerous to global growth?

Nobel economist Paul Krugman says it’s because China’s economy is many times larger than it was in 2003, so the effect of closing down major Chinese cities until more is known about the virus could be economically devastating to China and other economies that depend on Chinese goods and services. The EU is one such market that is worried because 20 percent of its exports now go to China.

Crude oil imports to China, the world’s largest consumer of oil, have also dropped 20 percent and oil prices are down approximately 10 percent, which has OPEC producers scrambling to cut production quotas.

Other economists are voicing similar warnings. Yale economist Dr. Stephen Roach, former Morgan Stanley chief economist and chairman of Morgan Stanley’s Asia Desk, is making good sense with his predictions of worse things to come.

He’s talking about world trade volumes, which have dropped precipitously. And worldwide growth depends even more today on world trade, which has already been harmed by the Trump trade wars.

Roach in recent Project Syndicate comments, said that from 1990 to 2008, annual growth in world trade was fully 82 percent faster than world GDP growth. And this cushion has shrunk dramatically, to just 13 percent over the 2010-19 period, “leaving the world economy more vulnerable to all-too-frequent shocks.”
“The IMF’s latest assessment put global trade growth at just 1% in 2019 – its seventh consecutive downward revision,” said Roach. “Indeed, last year was the weakest trade performance since the historic 10.4% plunge in 2009, which was the worst contraction since the early 1930s.”
Is Roach being an unnecessary alarmist? I don’t think so, when compared to the Great Depression. Now is not the time for irrational exuberance of any kind with world economies retreating in the face of so much geopolitical uncertainty (e.g., rising isolationism from rising nationalism).

Are we prepared? 

Harlan Green © 2019

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

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