The Coronavirus Crash

After several weeks of complacency, markets this week have been making up for lost time with extraordinarily sharp moves.  Stocks are down double digits since last Friday’s close, and US Treasury bonds have soared in price.  Gold at first rose in its traditional flight to safety mode but then sold off as if it were a risk asset.

The latter action in this context implies that the pricing unit – dollars – has been itself rising in value.  Not only have stocks declined in market value, but dollars have risen, adding to the nominal declines in stocks.  Thus far this week has had a strong deflationary cast to it.  Demand for liquidity exceeds supply.

Some analysts have suggested there isn’t much central banks can do, pointing out that the Fed can’t print a vaccine or restore broken supply chains.  Patently true.  It can’t make stocks worth more, but it can counter the dollar’s rise in value by increasing supply in response to increasing demand.  The challenge is in distribution … its traditional mode of channeling newly created dollars by lending into the financial system is not only inequitable but losing effectiveness.  Some means of distributing cash equitably to citizens directly or via Treasury could be considered.  Just adding to the stock of debt only enlarges the pile of deflationary tinder.

Too little is known about the coronavirus to predict the cost in human lives or economic well being.  But the cost to the financial system can be ameliorated.

I don’t know what’s going to happen, least of all in the short term.  But given the sharply oversold state of stocks and commodities, I wouldn’t be surprised to see a rally next week.  The bigger question would be whether further reports of spreading infections and closures would cut it short.