COVID-19 and Economic Depression – An Historical Parallel and the International Stage

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Regardless of where you sit on the political fence, COVID-19 was an accident waiting to happen. It goes without saying, not much has been learned from SARS, Swine Flu and MERS. From a UK perspective it makes you wonder what we have been doing since 2003 – especially as the government considers a nuclear attack and pandemic influenza as the largest threats to the UK. We’ve (rightfully) maintained Trident on that basis, been dangerously ignorant on the other. On top of that international bodies meant to bring nations together have been both woeful in advice and used as scapegoats by others to drive countries apart. Whilst China has not exactly covered itself in glory, our response to a once scientific curiosity has us imitating the regime we had previously considered beneath our perceived advanced society.

I’m more interested in what does this asymmetric shock mean in the wider context. Are there any historical parallels that we can draw from this experience? What is happening or could happen globally? To be clear, this is not looking at it from a strictly virulent angle, ultimately whilst Spanish Flu was devastating it was already on the back of World War 1, instead this is to look at what has and could happen with an economic depression along with wider problems not that may not be being considered.

Ultimately this lockdown must be lifted to avert cataclysmic damage to the economy – we simply cannot afford to shut down until a vaccine is found. Lifting the lockdown will cause extra suffering and there is no question about that, but it has to be lifted for our society to get back on its feet.

Stay Home, Save Lives, Protect the NHS
Image thanks to Cottobrbo at

Economic Depression – What is it?

When the word Depression is used, imagine the recession in 2008. That was pretty bad, but now imagine that, but much, much worse. The definition of a depression is:

“severe and prolonged downturn in economic activity. In economics, a depression is commonly defined as an extreme recession that lasts three or more years or which leads to a decline in real gross domestic product (GDP) of at least 10 percent. in a given year. Depressions are relatively less frequent than milder recessions, and tend to be accompanied by high unemployment and low inflation.”

Whilst its unlikely we’ll experience an extreme recession for 3 years, there is a very real chance that we will experience a 10% drop in GDP. Goldman Sachs predicts the US economy to depress by 34% in the second quarter of 2020, with a record rise of 19% in the third quarter. That might suggest a 15% downturn over 6 months in the world’s largest economy but its actually potentially much larger than that:

US Economy GDP start of Q1100
 -34% GDP in Q1-34
End of Q166
Start of Q266
 + 19% during Q213
GDP end of Q279
Start of Period100
End of 2 Quarters79
Overall Drop-21%
21% Forecast Contraction in US GDP per Goldman Sachs’ predictions over a 6 month period.

The recession of 2008 saw a dip of 8.4% as the largest fall in Q4, 4 times smaller than the projection listed for Q2 2020. This is echoed elsewhere, the UK could see a drop in GDP of 35%, France had already lost 6% in Q1 and could see a further 20% in Q2. Even China has seen their economy shrink. South Korea, despite its excellent response, could stand to lose anywhere between 1.3% to 3.7% in the first quarter.

The threat of an economic depression is very real, the consequences vast. Pensions are often held in securities and businesses tied to the performance of financial markets such as the FTSE. Some are held in real estate firms – as a primarily Real Estate auditor this could be devastating.

This shock will cause the value of these businesses to fall which will reduce savings dramatically. There are people who have worked all their lives, just retired, and could lose everything. Maintaining a strict lockdown will mean jobs are lost and not recover for a significant period of time, people could lose their homes. Its not economic Armageddon but it will be felt more significantly than 2008. Probably the most sobering point is that there is a connection between unemployment and deaths.

In the US it has been previously considered that there may be up to 37,000 deaths for every percentage point unemployed, as hinted by Harvard Macroeconomics Professor Gregory Mankiw. I managed to find one of his slide decks that appear to be from 2007. In fact the figure is quoted in 2015’s The Big Short. Whilst it does call in to question whether this is accurate for today’s US economy if we compare that to the figures that have been released by the Federal Government you begin to realise the relative scale of the problem.

Consider before the crisis US unemployment was roughly 3.5% and could now be 18%, a change of that magnitude could cause half a million deaths. Compare that to the US’ death toll of around 45,000 as of writing and you begin to see why some in the media (and indeed Trump himself) would rather the economy was opened up instead of continuing with lockdown. People die because of domestic abuse, assaults, alcoholism and suicide in these models – a cost we are just beginning to understand. Of course, to extrapolate to half a million deaths is hypothetical at this point, we have no idea how long these people will be unemployed for but there is some credence that the economic shock could actually kill more than the virus itself.

Historical Context – The 1929 Wall Street Crash

To further elaborate on the dangers of extended lockdown causing an economic depression we can turn to 1929 and the Wall Street Crash. One thing we do know is that times of economic crisis and political weakness can lead to extremist politics gaining ground in a country. The fall of the Weimar Republic was exacerbated by the crash of 1929. For those who are unaware of German history, the Weimar was Germany’s ruling government from the end of the First World War until 1933. Whilst it had suffered initially under the strain of reparations payments (and had always remained somewhat unpopular), the republic had a “Golden Era” between 1924 and 1929 which was largely due to American money through the Dawes and Young Plans. Of course, once the crash occurred, German unemployment skyrocketed and GDP continued to fall until 1932 by over 10%.

A major event occurred shortly after the crash in 1929 – the NSDAP secured 19% of the Reichstag. Who were the NSDAP? You’ve probably guessed, its Adolf Hitler’s Nazi Party. When he ruled by presidential decree from January 1933 Germany’s economy recovered. The rest, as they say, is history.

Now it would be fair to criticise the link between the fall of the Weimar and the current Coronavirus crisis. The Weimar was unpopular, the Germans were still smarting after defeat in World War 1 and the Treaty of Versailles was, on reflection, borderline insanity. However, this just shows what can happen when an economy tanks, that these conditions can lead to unpredictable events that are not always savoury. It is difficult to apply that to today’s modern era in Europe – if I could find a parallel I’d probably look to France.

Whilst Macron continues to defy everything we know about a French President lets not forget that Marine Le Pen won 33.9% of the Presidential Vote in 2017 – an alarmingly high number for a legitimately far-right candidate. Whilst we know that in the crisis itself incumbents generally do well, if the recovery and management of COVID-19 is handled poorly by Macron the conditions could, and I stress this as more of a hypothetical, cause a tightening of that gap. France’s banks have loans tied up in Italy, the much publicised coronabonds are just as big a necessity for the French as it is the Italians – if Italy is to fail, France’s banks fall, and publicly a President whom himself is from a banking background may not survive that sort of fall out.

It might seem hyperbolic, but just remember Viktor Orban in Hungary has been giving himself Presidential Powers that have no time limit because of this virus. As a contrast in the UK the bill for government to wield certain powers unilaterally during the crisis was amended by the Conservatives themselves to put a time limit review of every 6 months to ensure the executive was kept in check. Economic depression causes problems for us individually but has also historically been the catalyst for sweeping changes in governments globally. Sometimes it can be for the better – sometimes, and all too often, it has led to disaster. What is different now is the connected nature of our planet.

Other Issues Internationally

The CCP’s cover up, the WHO’s naivety along with the West not realising how much a massive red flag “One China” Taiwan’s and Hong Kong’s response was in relation to the words coming from Beijing, effectively ended any chance of a real International Response. Lack of coordinated wargaming, lack of realising just how lucky we have been with SARS and Ebola to name a few (the latter kills at an alarmingly high rate), just borderline ignorance from all of us that this could happen in the modern age. Now countries fight over PPE, which scheme for ventilators a nation is in and compare death rates to each other. The latter is a folly – we are handing out medals on the first lap of an 18 month race. The real tragedy is just beginning to stir in the poorer regions of the world.

The lack of a response that could of at least bought more time (shutting air travel on the 23rd January could have been a start) to prepare both the rich and the poor. Instead of oil the democratic West wages war for masks and gowns on the international market, unaware that its actions are driving the price of sparsely available gear up. There is no point sitting here and saying that our parliament should stop saving lives in our country by not buying this equipment in consideration of others, it’ll sink a government openly prioritising other people over its own, but the cost of our calamity internationally means we have reverted to a COVID-19 postcode lottery.

The WHO have published a list of all the nations it is supplying PPE to but just by looking at the WHO’s annual budget of around $4.8bn the organisation will simply not have the clout to give equipment to all who need it. If a surgical gown is worth something like $35 (£28 here), that’s 1.3bn gowns that could be paid for if the entire budget was simply to procure stocks. The UK uses 150,000 gowns a day, or 4.5m the past month alone. If you consider Pakistan’s population is 212m it doesn’t take a big leap of faith to suggest that 1.3bn gowns will not be enough for every country on that list.

That was also completely excluding all the other costs of running the WHO, paying Tedros, buying all the other equipment like ventilators along with funding all the other things that the WHO does. If you note one of those countries listed is Iran which is in complete disarray it makes you wonder what is coming for the rest of them. There are 2,000 ventilators for 41 nations in Africa, our lack of planning and cooperation is already a disaster here, it will be unimaginable there.

So what does this all mean?

I’m pretty convinced Foreign Secretary Dominic Raab’s favourite saying is “[Insert topic] that Britain will continue to lead in” – you’ll hear him say it or something like that quite frequently. Fortunately, the only thing we are actually leading in is the money put towards a vaccine (yes we don’t lead the way in terms of deaths per million, whilst we think Italy or Spain is the worst hit its actually Belgium). Most of the time I think he just throws that in because his Wikipedia crashed upon clicking “United Kingdom post World War 1” and he just assumed not much had changed from 1918. We did not lead the world in pandemic response, we don’t lead in pandemic mitigation, and we certainly were not calling for an international battleplan for if and when a pandemic of this scale occurs. If he wants to make a difference post COVID-19, I would hope he considers being one of a chorus of countries engaged in creating a stratagem for future outbreaks.

The cost of that lack of inaction will statistically barely affect us individually on a strictly virulent level – a probable death rate of below 1% and skewed heavily to the infirm somewhat confirms that for the young. But as noted above the economic consequences will be far more pronounced. In the West the best we can hope for is that each nation’s economic might can save as many livelihoods as possible. Historically we know what happens if we get it wrong.

On the world stage it could be far more catastrophic, costing thousands if not hundreds of thousands of lives and destabilising already troubled regions with further poverty, further pain. Donald Trump’s Leeroy Jenkins attitude to statesmanship just allows China to move into the power vacuum left at key institutions like the WHO. It has been playing Economic Colonialism in Africa, it will unashamedly play benevolent Doctor in a crisis created by its own failings, further denigrating the point of these international bodies (sounds somewhat familiar to the League of Nations post 1929).

We have to lift the lockdown enough to prevent an economic catastrophe. To many it will feel uncomfortably loose but as discussed above, we cannot stay locked down until a vaccine is here. We have to keep our nerve during this crisis when those restrictions are lifted as a second full lockdown could lead to irreparable damage to our society, lead to consequences we cannot control. Its a difficult balance that no one could envy the Boris’ and Angelas of the world in needing to make.

But a crisis is also an opportunity for the world to take a huge step forward. We can band together to help prevent another biological disaster of this scale if we are brave enough to learn from South Korea and apply new stratagems to fully account for the fact we are an interconnected world. In 1929 the US learned how connected it was to Europe – in 2020 the world is learning how connected it is to each other. Hopefully at the other side of this crisis our world can learn to focus on what truly matters. Until then, like a Forlorn Hope, we send our underpaid NHS unto the breach once more.


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