(Controlled Economic) Shutdown in the Context of a Pandemic: From Social Distancing Necessities to Consequences


Right from the beginning of the 2020 situation, the ChinaFund.com team has made it clear that it specializes in matters pertaining to economics and most definitely not the medical dimension. As such, the rational and ultimately only approach worth embracing is listening to medical professionals when it comes to measures through which the spread of the virus can be kept under control.

And among medical experts, there was a quasi-consensus that social distancing needs to be a universally chosen solution, not the only one of course but let’s call it one of the select few core variables. Our team most definitely agrees with the fact that social distancing is a “necessary evil” and therefore, we would never suggest disregarding the status quo medical advice dimension.

With that stated, we have the less than pleasant task of informing readers as well as clients that as far as the economic dimension is concerned (the one we do specialize in), it matters little whether or not social distancing was medically justified or not. To put it in plain terms, the economy simply does not care about this aspect at all, the only thing it “notices” is that economic activity was essentially shut down globally when it comes to a wide range of key sectors, in a manner which can be considered unprecedented in a globalization context.

Therefore, medically justified or not, the consequences will be the same.

As time passes and the dust settles, the attention of the average citizen inevitably switches from the medical emergency dimension (physical survival, if you will) to the economic one (financial survival), as the general public realizes that once the medical problem has been taken care of (or is on at least on a somewhat predictable/controlled path), it’s time to focus on saving as much as possible economically-speaking.

And, unfortunately, the economic effects are nothing short of devastating.

In a nutshell, many companies which were experiencing an excellent year had no choice but to stand by and notice that economic activity ceased altogether when referring to sectors such as the airline or cruise industry and even if that was not the case, local as well as global supply chain disruptions became a major issue.

Let us imagine a utopic autarky scenario, one which revolves around each nation being able to sustain itself economically without relying in imports for key products/services. Again, this is a utopic scenario and in the real world, things stand quite a bit differently… but for the sake of this example, let us envision the scenario in question.

In such a scenario, for better or worse, recovering after a major economic shutdown situation would be far more straightforward, with the various endogenous factors of production simply switching back to “business mode” after the social distancing measures become thing of the past, in a synchronized effort which leads to a relatively predictable recovery.

But what if the exact opposite is true?

What if, in our current globalization paradigm with extremely complex supply chains, companies from Country A depend on raw materials from Country B, key components from Country C and services from Country D?

As a more practical example, China was the first nation to experience an economic shutdown (especially the Wuhan region) and as economic activity was halted in certain key sectors, businesses from other countries that were dependent on Chinese imports had no choice but to accept the fact that their activity is disrupted as well.

That perhaps only one component they were dependent on China for was, in many cases, enough to make delivering the final product impossible. To make matters worse, perhaps a company from yet another country depends on the final product in question for the production of another good. Needless to say, effects keep reverberating in this manner and to sum it all up, when a major exporter coughs, the entire planet catches a cold.

Adding even more gasoline to an already problematic fire, the other countries themselves ended up experiencing COVID-19 problems of their own, in many cases far worse than those experienced by China (analyzing the reasons behind this is beyond the scope of this article, however) and needless to say, the worldwide economy experienced a shock it was in no way ready for.

The long-term effects of this state of affairs will be keeping economists busy for quite a while and, again: when it comes to the economic implication analysis, medical dimension-related reasoning tops being important altogether. Why or how things unfolded from a medical perspective is of little importance to economists who are analyzing the economic effects of it all because as stated on numerous occasions here at ChinaFund.com: the market is amoral rather than immoral.

To put it differently, the marker is neither inherently good nor bad. Not ethical but not unethical either. Not reasonable but not unreasonable either and the list could go on and on. As such, to be blunt, it simply does not care whether or not extreme measures were necessary from a medical perspective (for what it’s worth, we believe they were)… the consequences are what they are.

And, broadly speaking, these consequences paint the picture of precisely the nightmare scenario our globalized and over-leveraged world would have wanted to avoid. A worldwide economic system which needs perpetual and inevitably credit-fueled growth to maintain the status quo is not exactly “designed” to withstand shocks which lead to a serious cessation of economic activity altogether.

What would happen in the event of an extremely violent global recession or perhaps even depression? Unfortunately, nobody knows and history books offer little in the way of “clues” in light of the fact that never before have conditions similar to today’s presented themselves. As such, while there are without a doubt charlatans who claim they can predict the future, the only thing reasonable and intellectually honest market observers can do is keep their ear to the ground and adapt based on the information the market will continuously provide. Here at ChinaFund.com, we help readers and especially (potential) clients do just that.

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