• UCD Student Managed Fund

Lockdowns: What are their effects and are they sustainable?

Updated: Oct 10, 2020


By Eoin Beecham, Sector Manager, UCD Student Managed Fund


We are experiencing what can only be described as a second wave of Covid-19. The possibility of a second lockdown of the world’s economies looms. Ever since the world went into lockdown the first time, many have questioned what economic ramifications will come of such decisions. There has been a collapse in consumer demand almost overnight. Despite that, this economic crisis differs from those of the past. In 2008, it was a collapse in demand led by the sub-prime loan crisis. It is important to note that this is a collapse in supply. David McWilliam’s deftly put it as the decimation of the “Craic Economy”, i.e. the economic decline of the hospitality and entertainment industries. A recent US Federal Reserve report shows that households net worth grew to its highest in history. So why is the economy in freefall yet the consumer is proportionally wealthier now than they were six months ago? And why have the markets increased 50% in the time the world economies have shrunk by often double digits? There has been extensive monetary and fiscal action. The US Federal Reserve’s balance sheet has almost doubled since March 2020. Governments around the world have gone into huge budget deficits. It has been the preponderant driving force behind the market bounce back from its March lows; the question is, are lockdowns sustainable? Lockdowns have had detrimental effects on the world economies. There seems to be a correlation between the severity of a lockdown and the fall in GDP.


New Zealand was often the poster boy of the response to Covid-19. But its economy has shrunk 12.2% in the second quarter, compared to the 9.1% of the US which favoured a more liberal approach. Despite this, the US Dow Jones has climbed 50% since its March lows, a time in which the very same country experienced unprecedented economic woe. The question is whether the measures to sustain the economy can continue. The Federal Reserve has already indicated that they will take an inflation-led approach, tapering their supply of credit and repurchasing programs once the economy achieves an average of 2% inflation. They have adopted a Friedman monetarist approach to the economic slump, plugging the hole left by lost demand through the printing of US dollars. Many EU states do not hold the same luxury as the US. All countries with the Eurozone relinquished control of their monetary policy when entering into a centrally controlled currency. The ECB have been less proactive than the US as each country requires a different approach, a difficulty not experienced by the US on the most part. Many EU member states have instead opted for fiscal intervention through stimulus. But this has resulted in many nations taking on extra debt, something the US once again avoids. This can also be viewed as a Keynesian vs Friedman approach for those who are familiar with macroeconomics.


The question is whether, if another lockdown were to happen, could these financial instruments be used to keep the respective economies afloat. Most of the world’s central banks and governments have observed that a second lockdown would be disastrous. There also cannot be the continuous issuing of credit of which we have already seen. The Fed has said that monetary policy cannot get the US economy out of its deep hole. They have already displayed their unwillingness to move to negative interest rates. The problem now is the bounce back: if they overdo the monetary action will it lead to hyperinflation, or will they have the opposite problem and be scrambling to control inflation through high interest rates? The Irish government have already come out and said that the supply of money is not endless, who’s finances are curtailed by the ECB’s policies, not having the monetary liberties of the US. The view now is that these policies cannot stop the economic drop, but rather have to soften the fall. The most economically viable approach would be to keep the economies open, it would be the most expedient approach, but not the morally righteous one. A balance must be struck. It is indubitable that an economic decline is coming, it is inevitable. The effect this has on the markets is to be decided but the markets are wavering already with the reality that the virus is not as ephemeral as previously thought, but rather is here to stay. There has been a dysphoric disconnect between the markets and the economy, but this can only last so long. The macro outlook for the future looks pessimistic at best. The monetary and fiscal instruments can only do so much to prolong the inevitable. The first lockdown was costly, but a second one could be disastrous, and it must be avoided at all costs.


This article was first published in the UCD Student Managed Fund's 'This Month in Macro' magazine in early October 2020.


What do you think? Let us know in the comment section below!

Interested in writing for us? Click on the 'Write For Us' button at the top of the page!

0 comments