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  • If you're worried about the economic

  • toll of the coronavirus crisis you're

  • not alone.

  • It's scary there is no clear forecast

  • and each country's experience will be

  • different. Here's what we do know a

  • steady flow of money, goods, services and

  • the people to make them flow is

  • essential to a healthy economy. And, that

  • flow is severed right now by life

  • savings stay-at-home orders recession is

  • inevitable but what kind of recession it

  • will be and what recovery might look

  • like is still unclear to help imagine

  • what could happen authors from Boston

  • Consulting Group point out that

  • recessions and their recoveries come in

  • various shock shapes these are

  • determined by how hard a crisis hits the

  • supply side of an economy that's an

  • economy's inputs capital like machinery

  • factories software labor or workers plus

  • productivity or how we use labor and

  • capital productively the heart of the

  • supply side is hit the more credit is

  • interrupted meaning less money is

  • injected in the form of loans to

  • businesses and individuals to fuel

  • investment and the more difficult it is

  • for productivity to recover from best to

  • worst we have V U and L recession shock

  • shapes the V shape is a one-time dip if

  • credit can continue to flow productivity

  • and labor are less affected you can see

  • that growth dips but recovers to its

  • pre-crisis level and rate B U shape is

  • much more costly credit flow is

  • disrupted and growth drops precipitously

  • never rebounding to its pre-crisis path

  • the rate of growth recovers see how the

  • slopes are the same but a large gap

  • between the old and new paths represents

  • one-off damage to the economy

  • supply-side the L shape is the worst

  • credit is severely disrupted not once

  • but perpetually and there is very little

  • new investment this economy never

  • recovers its prior output path and the

  • rate of growth also declines the crisis

  • leaves permanent structural damage to

  • the economy supply-side

  • these examples represent crises that

  • started in the financial sector

  • disrupting credit flow in this capital

  • growth we have some off-the-shelf

  • policies for dealing with these however

  • we are now in uncharted territory with a

  • double risk of a financial system shock

  • and an epic freeze of the real economy

  • the households firms and government that

  • deliver real physical goods and services

  • countries have no existing playbook for

  • dealing with this double shock months of

  • necessary social distancing raises the

  • risk of both types of problems which can

  • feed off each other in dangerous ways

  • for example a prolonged crisis can drive

  • up real economy bankruptcies of everyday

  • people in firms making it harder for

  • financial systems to manage and a

  • financial system crisis would starve the

  • real economy of credit which could

  • cripple investment and ultimately growth

  • in this combined crisis capital does not

  • grow pushing the economy towards a

  • u-shape not good however we can head off

  • a you or l-shaped recovery and lessen

  • the intensity of the crisis how

  • primarily innovation on the medical side

  • vaccines treatments and capacity

  • innovations are needed to save lives and

  • end the economic damage caused by social

  • distancing on the economic side in

  • addition to a vigorous and efficient

  • policy response we will need policy

  • innovations for example in the u.s. the

  • 2 trillion dollar stimulus bill is just

  • a start we will need innovative ways to

  • deliver that money to those who need it

  • since never before have policymakers had

  • to help such large numbers of firms and

  • households for example the so called

  • discount windows that allow unlimited

  • access to funding for the financial

  • sector could be replicated for

  • households and firms in the real economy

  • so that they can stay afloat

  • zero-interest bridge loans to households

  • and firms a moratorium on mortgage

  • payments for residential and commercial

  • borrowers these are potential solutions

  • that could help make a real difference

  • the economic goal is to keep our shocks

  • shape closer to a V and further away

  • from a u or an L

  • speedy well-executed medical and policy

  • innovations are our best hope to save

  • the most lives and avoid permanent

  • economic damage

If you're worried about the economic

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B1 US economy crisis flow credit economic growth

Understanding the Economic Shock of the Covid-19 Crisis

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    Seraya posted on 2020/05/25
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