As markets get roiled from the outbreak of the coronavirus, central banks across the world are cutting rates to shore up markets. But can monetary easing really help to boost the global economy? Or will it simply increase the attractiveness of alternative assets?
In a quiet, leafy suburb of Houston, Texas, James Calundra is using a hydraulic lift to haul pallets of 100-pound drums of clean drinking water down to his subterranean bunker, tucked below the foundations of his white stucco house.
From the street, Calundra’s house looks like any one of the dozens of other suburban homes in this upper middle class suburb in Houston and except for the large double doors at the side of the house that lead down a concrete stairwell to the basement bunker, there’s little to distinguish his home from that of anyone else’s.
Down below however is an entirely different story.
Neatly stacked on row after row of steel racks is drinking water, MREs (military rations) and what looks to be a year’s supply of canned food and toilet paper.
According to Calundra,
“I don’t like beans, but they have a long shelf life, over five years. I’ve got the usual canned meats and sausages as well, but beans are a good source of fiber and the canned variety lasts.”
Upon closer inspection, everything in Calundra’s basement fortress seems to be prepared for a long-drawn out doomsday scenario, with the expiry dates on most of the supplies stocked, well beyond five years.
“What you’re seeing here is about a year and a half, maybe two years’ worth of supplies. It’s basically an insurance policy against chaos.”
Calundra, a financial analyst originally from Irvine, California, is a self-professed survivalist and doomsday prepper and he’s been that way ever since the last financial crisis of 2008.
“Ever since the global financial crisis hit, it was a wake-up call to me that I need to be prepared.”
Coincidentally, the 2008 global financial crisis also provided the fertile soil that germinated the seed of Bitcoin and cryptocurrencies, something which Calundra also subscribes to.
“When I saw the near-collapse of the global economy in 2008, I genuinely questioned the sustainability of our debt-driven financial system.”
“So while I do believe that there is some degree of “bubble-pricing” inherent in Bitcoin, I still believe it’s better to be prepared.”
But when asked why he’s stocking up doomsday supplies now,
“My immediate concern is not so much getting the coronavirus, it’s more of the economic collapse caused in the wake of the outbreak. I believe everyone should be prepared.”
Judging by the store shelves which have been emptied of toilet paper, canned goods, cleaning supplies and other basic necessities from Melbourne to Milan, it appears that almost overnight, everyone has become a doomsday prepper.
And it’s not just basic necessities — Bitcoin has shown extraordinary resilience in the face of plunging markets.
Cryptocurrency & The Coronavirus
Yet markets have continued to slide despite U.S. Federal Reserve chairman Jerome Powell’s pledge to do the “appropriate” thing to ease market reaction to the coronavirus.
This past week, the Fed revealed that the “appropriate” thing to do was to cut rates.
Because when all you have is a hammer, everything looks like a nail.
And instead of rallying, markets fell further last week after the Fed delivered an unscheduled rate cut.
That’s because the coronavirus isn’t a financial issue, it’s an existential one.
No amount of cheap money or rate cuts will cure a single coronavirus patient.
And even if the coronavirus doesn’t kill us, the fear that it imbibes may well do so — at least economically.
No one buys a house, a car or even a night out at a restaurant from a mindset of fear.
Yet, people who are fearful cling to doomsday assets, from gold to Bitcoin.
It’s Like Ten Thousand Spoons When All You Need Is A Knife
Part of the reason why central banks are ill-equipped to combat market jitters from the coronavirus is that all they have are financial tools, but the coronavirus outbreak is not financial.
The coronavirus is a biomedical risk that is followed by the risks of contagion — literally — for the entire supply side of the manufacturing and service sectors.
Part of the reason that markets soared late last month was (misplaced) confidence that China had managed to place the coronavirus under control. Then Italy reported soaring numbers of infected, along with South Korea. Then Americans started dying along the Pacific Northwest — and as we all know, American panic only really starts to set in when Americans start dying.
Overnight shelves were emptied and Bitcoin rallied.
To be sure, Bitcoin still stays well below US$10,000, a level of resistance that it has struggled to breakthrough in as many months, despite testing it on many occasions this year alone.
But while last month’s rally for stocks may have been predicated on nothing more than speculation — that the world will control the coronavirus — central bank easing will do little more than to rescue these speculators — which promotes reckless market behavior.
Depending on what one’s view of the stock market is — whether as a casino or a place to help profitable companies grow and reward the investors who invest in such companies — will color one’s opinion on what the role of a central bank is.
Should the central bank really be rescuing speculators?
And while it may be true that the consequences of the coronavirus are genuinely becoming macroeconomic, justifying some degree of central bank intervention, belief that the Fed or any other central bank for that matter, can counter genuine supply side disruptions purely through the mechanism of rate cuts is pure hubris.
Central bank intervention in the 2008 financial crisis was timely and necessary because as its name suggested — it was a “financial crisis.”
But when large swathes of the population become doomsday preppers, no amount of accommodative policy moves can coax them out from their bunkers.
To make matters worse, when central banks intervene to cushion disruptions to supply chains, they no longer act as central banks, but in essence become fiscal policy tsars — a role that are ill-equipped and ill-suited for.
The real macroeconomic risk from the coronavirus lies not so much in the lack of money, but the lack of a treatment and cure for the disease.
The coronavirus has also laid bare the vulnerabilities of supply-chain disruption — something which has nothing to do with the lack of availability of cheap funds.
Low Interest Rates Can’t Contain Fear
Mirroring the equity markets, bond and commodity markets have been hard hit as well, with benchmark industrials commodities such as oil and copper diving sharply. Central banks which think that they can alter sentiment through a rate cut have really drunk their own Koolaid.
If nothing else, such moves by central banks to make more money available will fuel an already nascent rally in doomsday assets such as Bitcoin.
Empirically, fiscal policy recognizes that fear of supply-chain shortages is best solved with supply-chain infusions.
And historically, nation states have solved panic-driven commodity shortages with the release of sovereign stockpiles, such as the U.S. Strategic Petroleum Reserve, which was tapped into during periods of oil crises.
But the coronavirus is an altogether different animal. Whereas past commodity crises may have been artificially created, the coronavirus (one hopes) is an Act of God — for which human intervention is not a matter of diplomatic wrangling and horse trading.
And while China may make or assemble the bulk of the world’s manufactures, it isn’t a net exporter of raw materials or commodities, depending on other countries for such necessities as oil and industrial metals.
Which means that the supply-side shock from the coronavirus will affect the very underbelly of rich world economies — manufactured goods and the services that surround their sale and distribution.
There are no strategic reserves to compensate for empty hotel rooms and airliners, missing car parts and essential medicines, and no amount of central bank policy stimulus can change that.
But the Federal Reserve doesn’t just have the power to ease rates, as demonstrated by the last financial crisis, it can backstop failing businesses by providing bailouts — should the Fed bailout hotels and airlines? Cruise ships and shopping malls?
If the 2008 financial crisis presented a moral hazard, what more pandemic quantitative easing?
While the Fed could buy more bonds, which would lower borrowing rates, and may stimulate the economy, an economy in quarantine won’t come out.
When people adopt a siege-mentality, they’re not about to head out to the nearest Target and shop just because everything’s on sale.
Part of The Problem
Which is why no amount of rate cuts, a new style of quantitative easing or any manner of central bank intervention is no cure for markets plagued by the coronavirus crisis and if nothing else, it creates more problems.
First, the effect of loose monetary policy eases fairly quickly and if the coronavirus lingers, with all signs suggesting that this is likely to be the case, the efficacy of such policies starts to wane.
Second, even if the Fed finds a way of putting a lasting floor under equity prices that restores market confidence, there is no backstop for fear and U.S. stock markets will have been irreparably changed for the worse.
After the 2008 financial crisis, central banks talked up a good game about ending “too-big-to-fail” financial institutions.
Yet because the Fed has exercised its willingness to place an equity-pricing put yet again, it has validated the belief that moral hazard is the policy du jour of this century — and it is this belief that warps asset pricing — because there’s no longer such a thing as a risky bet.
Too-big-to-fail financial institutions will be replaced by equity prices that are too high to fall — a sure fire way to create novel economic crises the same way the coronavirus created a novel pandemic.
Considering that Bitcoin was created in response to excess liquidity in the system, re-introducing more liquidity into the financial system would validate Bitcoin’s raison d’être.
In such a novel investment landscape, what qualifies as an asset will be rewritten over and over again.
Just consider that up to two months ago, toilet paper, hand sanitizer and face masks were not the valuable commodities that they are considered today.
But when you’re the Fed, every crises can be solved by throwing money at it.
The only issue is that some problems can’t be solved by money and that’s when you know that they’re real problems.