The economy of fear is an explanation of the situation brought about by the Coronavirus
 |
| The economy of fear is an explanation of the situation brought about by the Coronavirus |
Behavioral economics provides many explanations for what traditional economics may fail. By relying on psychology, it provides explanations for some exceptional cases in which the functioning of the system or the current prevailing capitalist economic system may be disrupted.
The economic situation caused by the repercussions of Corona and the behavior of the financial markets, oil, and minerals, including gold now, can be called the “Economics of Fear” case, which can be explained within the perspective of behavioral economics.
Stocks on various markets in the world are collapsing, oil collapses in less than two weeks to less than $ 30, achieving declines of more than 50%, gold (the safe haven as it is called in times of economic crises) is also collapsing in a strange scene that has not been repeated often. CBOE Volatility Index (-VIX), also known as the Markets Anxiety Index, is at its highest levels.
The Fed's sudden and violent cut of interest twice, not separated by two weeks (the first on March 3 by half a percent, and the second on March 16 by one percent), so that the interest rate is now close to zero, and the approval of a quantitative stimulus plan of $ 700 billion did not provide a reassuring message to the markets, Rather, it gave more indications to the markets that the situation is very dangerous, which caused panic once again, as all markets continued to decline. The markets are not listening now to the voice of the capitalist system and its traditional tools.
The traditional system that includes the use of stimulus tools in cases of expected economic recession, which center around reducing the interest rate and quantitative stimulus plans by pumping more money into the markets, does not work efficiently now, rather the opposite is what happened, and the markets received the stimulus tools with more successive collapses that do not Anyone can predict its extent.
The problem now is that the global economy faces mutual devastation on both sides of supply and demand at the same time because the Coronavirus creates a sudden and simultaneous stop on both sides.
The traditional treatments of recession are based on stimulating the demand side by creating more purchasing power in the hands of the people to buy more, so demand rises, and the almost stalled wheel of production begins to turn again, and through the multiplier effect, the economy begins to recover again.
But the situation now occurring due to the Coronavirus is that most of the movement is almost stopped (travel, flying, entertainment, schools and universities, compulsory vacations for employees ... etc.) and the calls to stay at home found many ears - forcing or choosing - to limit the spread of the virus, and from Then the traditional mechanism for encouraging demand becomes ineffective as people are at home, and their consumption is minimal, and the general trend in most countries is not to leave the house except when absolutely necessary.
As for the supply side, it is not the other way better. The supply chain - in the event of the spread of the disease, God forbid - will be in the news. We have seen this as a miniature model in China when cases of infection were at their highest rates, as factories stopped production, and what is already in stock of final products does not find someone to transport it to the consumer due to the suspension of transportation and shipping.
In this turbulent and unusual situation, the psychological factor plays the largest role, and the state of panic that spread at the level of everyone, the media played the largest role in its industry, so monitoring screens and anticipating the steady increase in the number of people infected with the virus, and in return for it governments deal with traditional tools at the economic level, It has produced these continuous and continuous crashes in all markets without exception.
Therefore, we believe that it is necessary to address the current situation as urgent measures on two levels, the first is the psychological treatment of these successive events by sending reassuring messages that the markets can accept that take into account the current psychological state, through behavioral economists who must study the phenomenon and similar historical cases. And the second is the economic treatment of the effects of what is happening - especially if the duration of this crisis is prolonged and a vaccine is not discovered within a few weeks - but through unconventional tools, whether at the level of stimulating demand with more automation and the use of technology in the purchase and payment movement from home and without the need to go out to the market, as well as Gradually switch to remote work whenever possible.
In conclusion, it may not be necessary for all of the above, (at least in the short term), as the financial markets are only waiting for news about finding a vaccine for the virus, or the disease receding by entering the summer months, as some claim, for the markets to return to green again. However, I think that this crisis will leave a deeper impact (in the long term) in the degree of reassurance about the efficiency of the tools of the capitalist system itself, as the crisis I think is now in the system and its traditional mechanisms, and in the near future, we will see.