It may seem quite extreme to mention a recession as the markets are continuing to rise, but there is enough evidence to support this claim, maybe not to a 100% guarantee, but to a point where it could be seriously considered.
But before we start explaining how this recession will take place once everything has calmed down and the world beats the virus, let’s take a look at what it has already caused to the United States economy and what it continues to do even today.
Layoffs and market slumps
The very first thing we need to focus on with this virus is the market slump of course. The main reason behind this is that lockdowns hadn’t even started being issued across the United States when markets started to crumble heavily. This has mostly to do with the international visage of US-based companies. As Europe and the majority of Asia were in the middle of lockdowns, US companies were finding it quite difficult to survive on just the US market revenue alone.
The moment that talks started springing up about locking down the economy, we saw markets take an even larger hit, falling by 33% according to most metrics. The biggest hits, however, started when we knew that people were going to lose their jobs.
A new look at market values
The most important lesson that this pandemic has taught investors is that the real-estate, the state of the economy and all these other reasons don’t really have as much effect on the value of a company as they thought it would. The fact that people were simply not going to come to work and continue manufacturing goods despite the fact that demand was running low, is what absolutely gutted thousands of corporations all over the world.
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Because the real estate was still there, nothing was destroyed or anything, and the goods themselves were also waiting to be shipped. The anticipation of things getting worse really took a toll on global markets and especially the US market.
The moment we knew that people would not have the disposable income to throw at random manufactured goods, is when we saw the US markets really tumble to its core.
Why may there be another recession?
The main reason behind this anticipation for a recession is the lengths that the US government went to, in order to make it seem like the markets were doing great. It must be noted that trillions of dollars were spent on bailing out the companies from financial issues as well as billions more being printed by the federal government.
Here are the main issues with this. Even though most companies are now relatively stable in terms of income to last them before the virus is beaten, it does not mean that they are sustainable with this. Why? Because the revenue they are currently generating is nowhere near enough to keep all locations open and even keep paying the staff they did not lay off.
The trillions of dollars given to companies in support could prove to be for naught as it seemed to be a very temporary solution. Like a bandaid slapped on an open wound. But if the bandaid is not replaced soon enough, or actual attention directed to the wound, it’s sure to not be enough.
Another issue that could potentially bring the US markets back down where they were in April 2020, is the inflation that we will all see once the virus has been relatively dealt with. Over just 3 months, the Federal Reserve printed around $3 trillion. Sure, this is going to help with the current situation, but once we are out of this situation, that $3 trillion needs to be strengthened by the actual US economy, otherwise it’s going to weigh down the international capabilities of US companies.
FX traders have already noticed the USD’s relative weakness in regards to other major currencies like the EUR and the GBP. And don’t forget that these currencies were taking the same hits as the USD due to the pandemic, and were dealing with Brexit on top of that.
Traders from one of the most popular platforms were extra vocal. Professionals from the Mirror Trade forex platform outlined that the performance of the USD in the FX market was absolutely gut-wrenching considering how many people were using it in their daily strategies. The USD was basically the go-to currency to pair up any other exotic or major currency and gains were pretty much guaranteed if the traders played their cards right.
Now, however, the USD is in the gutter, struggling to keep up with the recovery that other currencies are seeing, thus being relatively left behind the schedule for final vaccine introduction all over the world.
Should the USD be in this situation once COVID has subsided, it’s very likely that most US-based companies will have to raise prices on their products to accommodate the inflation.
Due to the fact that salaries have notoriously never kept up with inflation in the United States, it’s likely tens of millions of people will find themselves under the poverty line within the next 1-2 years.
What could stop this from happening?
The most important thing the US government needs to do is ensure that all of this “extra” money so to say, is supported by the strength of the US economy. If there is no physical value justifying the USD’s exchange rate in the future, there will be very little preventing from it dropping.
However, all of this is still just a possibility and not necessarily an unavoidable reality. There is still time for US companies to pick themselves up in the coming months. And in the very worst-case scenario, it could actually play out well for the US economy as exports will be much easier to justify with even developing countries.