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Stock market: “the coronavirus is a shock comparable to September 11 and the 2008 crisis”

The Coronavirus epidemic is certainly a shock equivalent to those which followed the attacks of September 11, 2001 and the bankruptcy of Lehman Brothers. Before the collapse of the twin towers, the global economic balance seemed clear: emerging largely victorious from the cold war against the USSR, then from the war in Iraq, the United States seemed able to provide economic and financial security and material of the planet. The fall of the towers of the World Trade Center, a few months after the bursting of the Internet bubble, showed that the reality was far from being so obvious.

This catastrophe thus highlighted the security dangers, while durably weakening the supremacy of the developed countries. Nine years later, another shock, another plunge into the unknown and a new paradigm shift. This time, all the certainties about the banking and financial system collapse in a few days. And for good reason: contradicting the famous principle of Too big to fail (too big to be allowed to go bankrupt, note), the American authorities decide to bankrupt the fourth largest business bank in the world, in this case Lehman Brothers.

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By the same token, they also put an end to the undivided reign of mathematical finance in the extreme which for a time suggested that one could increase returns without increasing risk. After coming close to bankruptcy, banks in developed countries are adjusting, stopping speculating with their own funds and pledging to limit their risks.

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In return, the world will initiate its strongest recovery since the Marshall Plan: massive drop in interest rates of all central banks, global fiscal stimulus of $ 5,000 billion worldwide (i.e. era 9% of world GDP), a generalized “printing press”, which will reach 4,000 billion dollars on the side of the American Federal Reserve and 3,000 billion euros for the European Central Bank.

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If this debauchery of resources has obviously prevented the re-issue of the 1929 crisis, it has also created a multitude of financial bubbles, especially on the stock markets and public debt markets. Against the backdrop, the unalterable rise of the Chinese economy, which has become both the factory of the world, the indisputable and undisputed locomotive of world growth, but also the creditor of a large number of companies and of states across the globe.

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Only here, the investors and the citizens of our beautiful Earth often forget an inescapable basic rule: the trees do not go up to the sky. China is experiencing it painfully. In fact, from 1980 to 2019, its real GDP (i.e. excluding inflation) soared by 3200%. Over the same period, its weight in world GDP in purchasing power parities increased from 2% to 20%.

A success that no one dared to dispute, especially since it has made it possible to significantly reduce the inflation of products consumed around the world. This major advantage thus made one forget that the sanitary and democratic standards of the Middle Empire were far from satisfactory. The Wuhan Coronavirus epidemic has dramatically set the record straight. The economic consequences of this sad situation are already observable: a historic recession in China, which will unfortunately spread to the whole planet.

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In this context, as in 2001 and in 2008-2009, the economic crisis will prevail, the stock markets will collapse and unemployment will durably increase. Faced with this new chaos, some people do not hesitate to call for an end to globalization and withdrawal. Obviously excessive reaction. You shouldn't throw the baby out with the bathwater. Let’s not forget that without globalization, the emerging countries could not have developed and world poverty would have decreased.

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However, since crises are always phases of opportunity, lessons must be learned from past mistakes so as not to repeat them. In other words, globalization will never be the same again: increase in health controls, reduction in imports of Chinese products, relocation of certain activities and productions in developed countries … As often, the current crisis therefore carries within it the seeds of redemption .

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But let's not dream: the recovery will take time. Before France produces its own computers, it is for example clear that water will flow under the bridge … In addition, this relocation movement will have perverse effects. Starting with a strong and lasting decline in Chinese activity. However, China being the main engine of global growth and realizing approximately 40% of this growth every year, it is necessary to prepare for a durably softer international activity.

Likewise, the reduction in purchases of products from low-cost countries and the relocation processes will automatically generate increased inflationary pressures. What, in fine, will put pressure on bond interest rates. This is all the more so as public debts will increase massively further because of the current crisis. Here too, we must prepare for substantial restructuring of public debts, with cancellations which will cost creditors dearly.

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A new global paradigm will emerge over the next few years. And if the uncertainty surrounding this new international order remains high, one thing is certain: the world will emerge from the crisis from above.

Marc Touati, Economist, President of ACDEFI

His latest book, A World of Bubbles, is still leading the sales of its category on Amazon.fr

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