Sunday, May 3, 2020

What The 1929 Great Depression, 1918 Spanish Flu and COVID-19 Have In Common?

The great depression was the worst economic downtown in history till today. It was said to be caused by the October 29 stock market crash but in actual fact, a failure in the government system played a part to it. The US central bank caused the money supply to contract by 25%, the US government increased taxes by more than 50% and resulted in world trade to collapse.

The impact of COVID-19 is now being linked to the 1929 great depression. But, will we really see a repeat of it? I would not think so unless some major economy in the world messed up their economic policy which is similar to the 1929 great depression. How about the Spanish Flu in 1918 which is known as one of the worst pandemic in human history, how is it similar to the COVID-19?

The 1918 Spanish flu lasted till 1920. During that time, lock down was also implemented in several cities and countries and social distancing was implemented. Despite infecting 500 Million and killing 50 Million people worldwide, we do not hear of any economic impact as great as the well known 1929 great depression or even the 1997 Asia Financial crisis or the 2009 global financial crisis. This shows that although pandemics will cause the economy to come to a standstill, it does not necessary lead to a major financial crisis.

Sign during the great depression

What Can We Expect Moving Forward?

If you're investing, you'll probably be worried about whether your investments will do well moving forward and what kind of impact will we expect to have on the economy? One thing for sure is that this pandemic may last 1-2 years and it will certainly have an effect on the economy and business activities. Let me list down several possibilities which we will see moving forward:
  1. Some businesses will collapse. Many companies are having trouble surviving due to weak cashflow. 
  2. There will be increased unemployment and more wage cuts in several sectors. Even Grab and deliveroo has announced wage cuts and retrenchments. Big companies like SATS, Genting, SIA, SMRT, ComfortDelgro, Singtel have also all announced wage cuts previously. 
  3. Lockdown cannot be forever but social distancing is here to stay. 
  4. Investments will take months and even years to recover. 
For our personal lives, times like this requires even more prudent financial planning. 6 months of emergency fund may not be enough now as many of us may lose our jobs and not able to find another one so soon. If you're working in non essential services sectors, its better to tighten your belt and save up more emergency funds. This is because some jobs may be lost completely and workers in these areas will need to retrain themselves to get new skills. Due to depressed economic activity, companies will get hit in their top line and they will definitely cut wages or retrench to protect their bottom line. It doesn't make sense for businesses in the tourism sector to keep their headcount when borders are likely to be closed for a prolong period of time. 

After the circuit breaker period on 1st June, it remains to see what other businesses will still remain shut. Night spots, tourist attractions may remain closed till further notice. Social distancing will continue so restaurants and F&B outlets will continue to face decline profits due to lesser patrons. Conferences and events will also require social distancing or may not be able to continue so these sectors will also be affected.

Nevertheless, the economy have to reopen at some point in time. Its a balance between controlling the pandemic and saving the economy. There are talks on the strategies moving forward to balance this but I would not think this is going to be easy. There will definitely be sacrifices. Studies have shown that adults below 50 years old do not get much affected by COVID-19 as many of them show little to no symptoms. The moving forward strategy may be to let adults below 50 years old to continue their daily lives but there needs to be a way to prevent them from spreading to their older parents or grandparents. Another report in the US said that this pandemic may take 2 years for most of the population to get herd immunity then the pandemic can end. Hopefully, there's a drug or vaccine which comes out soon so that the virus can be stopped.

The good news now is several countries have started to relax their lockdown measures and slowly opening up their economy. Although what we experience now is unprecedented, the world economy will definitely pick up again as always. In crisis, it is always the best time to pick up stocks for investment when prices are depressed. As long as the companies we invest in survives, it will definitely do well again in future. The economy will surely be different after this pandemic. Some companies will no longer be around and new companies will emerge. The question is are we able to spot the opportunities amidst this crisis?

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  1. Hi SGYI, the increase in tax and contract in Money Supply is not the root reason for the Great Depression. If you delve more years before GD, you will realise that the reason of increase tax and contract in MS is just surface reasons.

    The root cause is because of during WW1, Europe was in war, but not USA for most part. Hence, EU is busy creating war machines, but all essentials imported from USA. US became so rich after the war with so much gold. And then came Instalments and all the new household technological appliance and automobiles boom. Wall Street also boom! Everyone is spending and spending taking on debts thinking that economy will get better and better. Stock market euphoria. And debts mounting.

    Finally, there will always be up cycle and down cycle due to debts. The good times in 1920s leading to late 1929, eventually created a stock market crash, because you just cannot keep on spend on stock prices and creating supply when the real economy demand in USA is no longer as strong after the WW1 ended, bcos EU started to produce for themselves unlike during wartime.

    With demand drop, and excess supply and debts mounting due to instalment spendings, eventually banks are to collapse, and many more. All the savings of people gone into nothing! Demand continue to fall as people spend less, and it led to more job losses. Stocks continue to crash. It is a vicious cycle down. Due to banks collapse, people do not believe in holding money anymore, they hold essentials. That is when there is a hyperinflation.

    Government have no choice, and hence have to contract Money Supply. US$ is peg to gold back then, they cannot like now FIAT currency just print and print! And government is poor themselves and have to increase Tax. This led to worst of the worst in the economy.

    Hence, the root cause of depression is not contraction of MS nor increase of tax. It is the human nature of optimism in life (with more and more pleasures) and the Euphoria due to greed to earn more and more money in Wall Street, and taking higher risks and higher bets, that led to the fall!

    Therefore there is a quite de

    1. Hi RS,

      Thanks for sharing. Hope we are not seeing this kind of situation now which I don't think we are in the same situation as the GD back then.

    2. I do not think this pandemic will lead to GD as of current situation. But I say current situation. Unless there is a second wave and world continue to have up to few months of lockdown. And if there is war either in the Arab region or US-China starts to increase tension to the brink of firing missiles. The world will probably print so much money after this crisis and if few years down the road there will be a currency crisis where dollars will eventually depreciate, then it will be scary

    3. Yes fully agree with you. Hope we do not reach the stage which you described. Will be really scary for us to live through that.