Corona virus causes massive economic downturn and recession – understanding the mechanics of money
The mechanics of money transation are very complex. Most people are thinking why the developed countires are borrowing so much money leading to a massive debt which is going to be a burden on our generations.
To put into context , Coronavirus is unprecedented situation that our generation has seen since invention of internet and digital media.
There is lock down in most countries to prevent Convid 19 spread. More than 937,000 infections are confirmed in at least 180 countries and territories, including at least 47,000 deaths as of 2nd April 2020 mwhen I am writing this blog. People are not allowed to go to the work and hence they can’t get wages (unless they are supposed to be emergency worker or are hose who can work from home on a digital media). Thi shas led to massive fall in stock market indices and a recession which is worse than that in 2008 and perhaps worst in past 100 years. The latest figures of coronavirus toll can be seen through clicking the link here
Why can’t the money be just printed to allow people to spend and thus have no poverty?
Whay can’t we just keep inflation low. What is the difference between money and debt raised through credit card or bank loan? What determine the interest rate? What things need to be thought of before borrowing is decided.
In fact borrowing long-term money while interest rates are low during a recession is a good way to obtain capital for expansion of your company when the economy begins to recover. In fact, that is exactly the strategy employed by many large corporations when issuing corporate bonds. Your small business might not be able to access the public debt markets, but low interest rates drive private investors to private placements of debt, which you may be able to access.
The economic impact of the borrowing and debt is explained in the video below, please take some time to udestand it, it will put many points in context and ease your anxiety and annoyance, specially if you are a business owner.
Borrowing spending debt cycle to keep economy going
Why not just borrow more money in recession
Its not that simple. While the benefits of borrowing money at low interest rates are easy to understand, there are drawbacks. If your business is slow during a recession, your revenues might not cover the interest payments on your new debt. Its inevitable that the interest will rates rise again, you can stockpile the borrowed money in interest-bearing securities at the same or higher rates until you need the money, but an extended period of low rates, such as that following the credit crisis of 2008, can force you to dip into your borrowed funds to pay your interest payments.
Coronavirus induced recession is going to last a lot longer as it has massive impact on the global economy and many businesses have already gone burst despite of some help from the governments. The governments are borrowing more mnoney from world bank in order to give to the local businesses so that they can survive this crisis period and hope that when the crisis is over they will be able to generate more money and thus reiase the national economy.