almost 4 years ago • 3 mins
The world’s major central banks have gone all Oprah, doling out emergency interest rate cut after emergency interest rate cut – while governments have increased spending in a bid to help vaccinate the economy against coronavirus’s spread.
Lower interest rates and bond-buying (a.k.a. quantitative easing) is classic “monetary policy”: both effectively manipulate the supply of money – or the cost of borrowing it – in an economy. When rates are cut – as they have been recently – people and companies should in theory be encouraged to save less and spend more, which typically has a positive effect on economic growth.
But in places like Europe and Japan, that theoretical relationship had been in question for some time. What’s more, encouraging spending was perhaps destined to be ineffective as more and more of the world went into quarantine and spent money only on life’s essentials. That left companies like airlines and restaurants to bear the brunt, which led to cuts in routes, opening hours, and staff. And seeing as the services industry makes up the majority of developed market economies, unemployment rose.
All this could kick off a downward spiral: fewer employed people means fewer people with the ability to spend, which would decrease spending further and cause even more job losses. So in a bid to steer clear of that outcome, governments – in addition to but independently of central banks – have stepped in. Italy’s government announced a $28 billion package to help people and companies survive the current challenges, while Germany has reportedly set aside a $500 billion company bailout fund. The UK is well on its way to confirming similar measures, while the US is weighing up the idea of a $1,000-3,000 cash injection for every household.
If you’ve saved up for a rainy day, you might well be feeling more secure than the average bear. A good rule of thumb is to keep aside three months’ post-tax salary to help weather life’s more testing times. Of course, that’s easier said than done. In reality, the average Brit has less than one month’s salary set aside for emergencies, and in the US, 20% of people don’t save any of their salaries at all. That’s why, in challenging times, people tend to turn to short-term debt like credit cards, inevitably piling on interest payments at a time they can afford them least.
Some investors have the unenviable task of trying figure out when markets will recover, and they might be looking for clues in a couple of areas. China’s a good place to start: it seems to have made it through the worst of coronavirus-related disruptions, and suggests that the market will trough when reported cases or deaths begin to stabilize elsewhere. Other investors mightn‘t be looking for a recovery at all, but for companies and industries that might yet benefit from an extended shutdown.
With more people now working from home than ever, coworking space company WeWork might find itself under even more pressure than it’s used to. Adding insult to injury, its majority owner SoftBank could be about to back away from its promised $3 billion of spending due to ongoing investigations in the company by US officials.
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