In just a few weeks, 36 million Americans applied for unemployment, the unemployment
rate reached almost 15 percent, it might not seem high, but during the 2008 crush, when
the world economy collapsed, unemployment peaked at 9.6 percent.
The upcoming crush is closer to the great depression of 1929.
To understand how we ended up screwing so badly that we are on our way to the greatest
financial crises humanity has ever faced, we have to understand a few things.
How does the economic machine work?
What role do the central banks play?
And what exactly we did wrong.
The elephant in the room
Before we get started, let's address the elephant in the room (Federal reserve).
When you need some extra cash, what do you do?
You probably give a visit to your local bank.
But what do the banks do when they don't have money to lend it to you.
They call the central bank, or the federal reserve in US.
The central bank's job is to protect the currency of that country and grow the economy by controlling
the supply of money and, most importantly, keeping inflation in check.
If the economy isn't growing, the central
bank will lower the interest rates so that borrowing money will be affordable.
More people and Businesses will borrow to expand, which will stimulate the growth and
will get back the economy on its knees.
Worst case scenario, the central bank will print trillions of dollars and throw it into
the economy as they did back in 2008.
If, on the other hand, inflation is rising too fast.
The central bank will increase the interest rates where borrowing will simply be too expensive
so that fewer people will borrow, and less money will be spent; therefore, inflation
slows down.
the machine that keeps the world running
You probably have heard that whatever rises will definitely fall.
And that is the case with the economy.
In fact, the US broke the record of the longest economic expansion in its history.
The economy has four main stages, and it starts with expansion.
It peaks somewhere at the top and plummets, which is also know as contraction, and once
it reaches the lowest point, it rises again.
During the expansion period, the economy is booming, the stock market is rising, and it
seems like the growth will be forever.
Interest rates are low and Businesses are borrowing and expanding as fast as they can.
Investors are throwing money at the stock market, and everyone is happy.
Unfortunately, it doesn't last forever.
At some point (peak), the central bank is going to say, "mmm, inflation is growing too
fast, lets slow it down."
So the central bank or the fed will increase interest rates to keep the inflation under
control.
The economy has reached its full potential; it stabilizes and grows just enough to cope
with inflation.
But investors are used to extraordinary returns.
For instance, in the last ten years, iPhone sales have been increasing, but this year
they didn't since the economy isn't growing that fast, that scares off investors, and
some of them slowly start pulling out their money.
Businesses like Apple will do their best to maximize their sales to keep investors interested;
however, at some point, the supply will outweigh the demand.
There are just so many people who want an iPhone.
So businesses slow down, that pushes away investors, which slows down further the market,
but businesses have somehow to survive, they will start cutting cost.
First, by firing the least important employees, so unemployment starts rising, which means
the demand starts falling in the market overall.
Businesses can't even take a loan since interest rates are too high since the fed increased
them because inflation was too high.
That's how the economy slides into a recession (contraction).
People start to save since they are afraid and uncertain about the future, which means
the demand in the market falls even further, which means more businesses suffer, which
means more unemployment.
It's a never-ending cycle that will keep drugging the economy down.
Usually, the fed intervenes by lowering interest rates to save the economy from the recession.
But it doesn't always work instantly, and the economy keeps declining.
At some point, the economy is going to reach its bottom line, which is also know as a depression
when the gdp declines by at least 10 percent or the recession lasts for more than 2 years.
Sooner or later, the fed is going to say, "enough is enough," we are going to rescue
the economy at all costs.
First, they will lower interest rates to zero, so businesses can borrow money for free.
But what if that doesn't help, well the European central bank, dropped the interests to negative
(-0.5%), which means, the central bank will pay you to borrow that money,
But sometimes even that doesn't help, people are afraid to borrow because the economy looks
so bad that they don't seem to be able to pay it back.
In that case, the central banks will head to their bunker and use their nuclear option,
which is "quantitative easing," that's just a fancy word for printing money.
Businesses will take that money and hire people.
Investors would see that the economy is slowly recovering and will start investing.
The economy will return to the expansion stage, and the same cycle will repeat over and over.
Where are we NOW?
Since we know how the economy works now, where exactly are we in this graph, have we reached
the peak?
Or are we in a recession?
Or are we still during the expansion period?
Well, its extremely difficult to know for sure since we don't have all the facts in
front of us, and there are a lot of factors that are influencing the economy, but based
on what we know, we can try to predict.
One of the best indicators is the interest rates, as we have discussed earlier.
We can see that the fed has increased interest rates from 1 percent in 2005 to 5.2 percent
by 2008 since the economy was reaching its peak, but then everything collapsed so the
fed lowered the interest rates to 0.25 percent within a year to stimulate the growth and
for the next seven years didn't change since the economy was at its expansion period.
But then in 2015, it started to increase; by 2018, interest rates were at 2.5 percent.
Which means we might have reached the peak In 2018, something different began to happen.
The fed lowered the interest rates (to 1.75%).
Other central banks, such as the European central bank, began lowering rates since 2014.
But they were already at a 0 parent, so they lowered them to -0.5 percent by 2019.
Other countries like China also decreased interest rates.
What does that mean?
The central banks knew that we have already reached the peak, and a recession was on a
horizon and tried to postpone it as long as possible by lowering interest rates.
Even the global GDP growth slowed down year
by year.
In 2017 it was 3.1 percent, but in 2019 even before the pandemic, it fell to 2.4 percent,
the lowest growth of the decade.
That didn't happen by accident.
In the last few years, a lot of things happened that slowed down the economy.
First we had a Brexit which scared off investors because the future of EU became unpredictable.
But you might think they shouldn't be worried because they can invest in the United States
or China?
Right?
But then suddenly the united states started a trade war with China and scared off more
investors and slowly drugging the economy into a recession.
- The final Knockout
Even with Brexit and the trade war, we still could somehow postpone the recession, but
then COVID-19 looked at our economy and said: "I am about to destroy this man's carrier
xD."
We live in a world where consumption drives the economy forward.
The more people earn, the more they spend, the faster the economic machine turns.
But right now, even if people are willing to spend, they simply can't, because restaurants,
malls, barbershops, airlines, offices all have to close down.
That's why almost every government in the
world is trying to put the money into people's hand, so that their spending doesn't fall
and the economy does not slide into a depression.
However, The problem is that there is just
so much money the government can raise or print, they can't keep distributing money
when the economy doesn't produce anything.
Millions of Americans have already applied
for unemployment benefits as of April 2020.
Its most likely the virus won't be gone for another few years, and it is very unlikely
that we will have a vaccine by the end of the year.
On top of that, since we are most likely already in a recession.
If we end up experiencing a second wave of this pandemic, then depression is inevitable.
That's one of the main reasons why the current
US president for example is trying to open the country as soon as possible since if the
country will slide to a depression under his watch, he will most likely lose the election
at the end of the year, whether that's good or bad, its up to you to decide.
By the time this video will be out, the country will probably be open.
- the change of the century
But not all businesses are going to suffer.
Online businesses like Zoom, for example, are growing tremendously, even amazon has
been growing.
But most businesses will be left with two options, they will earthier change their business
and adapt to the new realities by changing their business models, digitalizing their
products or services, or go bankrupt.
A lot of businesses will definitely won't make it, but as they say, every crisis presents
an opportunity.
Many new businesses will take their place.
This pandemic is literally pushing the world to go online completely.
It's difficult to say what will happen in the future since almost all predictions turn
out to be wrong, but base on what we know today, we are most likely going to depression,
the economy, together with the stock market will crush.
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