Scenario of the Great Depression 2020


Dear friends,

More and more people are starting to speak of a real economic crisis, but it’s not what we should be frightened of. What we should really fear is an economic depression.  

Economic cycles

Every economist knows about the theory of economic cycles.

https://www.tradingview.com/x/jvNZonFX/

I’ve tried to represent these cycles in a schematic way in the chart above.

We see 4 main stages there:

  1. Growth, yellow stage
  2. Peak, green stage
  3. Crisis, red stage
  4. Depression, black stage

This cyclic recurrence is a natural economic process, which can’t be avoided because of both regular economic processes and exterior factors. There can be many reasons for these cycles’ formation, starting with bursting debt bubbles and finishing with wars, revolutions and epidemics.

The main thing common to all these reasons is a demand shock, i.e. the moment when the number of buyers falls sharply.

As a result, goods production is no longer demanded, producers make less profits and can’t pay wages, people have less money for buying goods.  This is a vicious circle.

This picture is very simplified, of course, but it shows the main mechanism of crisis development and the measures that developed countries take in order to avoid severe consequences.

I described the measures taken by the US government to combat the economic crisis in my previous analytical article (check it here). Now you understand why those $2 trillion were directly or indirectly aimed at supporting consumers. Because consumers are the engine of market economy.

Let’s get back to the cycles. We’re currently at the beginning of the crisis stage triggered by COVID-19. A demand shock is now present all across the globe as people have to isolate themselves or they are under quarantine.  The depth of the crisis depends on the duration of the quarantine. The longer people stay jobless, the more the load on households and simple consumers will be, the more savings will be spent on food.

The more time the consumer doesn’t buy goods, the higher the debt load on businesses is. The higher the debt load on businesses, the more bankruptcies and credit arrears. The more credit arrears, the more load on banks and the higher likelihood of their bankruptcy.  This is a vicious circle! Bank failures mean that investors lose their deposits. Lost deposits result in a demand cut. Demand cuts lead to businesses going bankrupt.

Finally, we have a huge number of the unemployed, of bankrupt businesses and banks. In essence, this process is the active crisis stage.  The state that follows this shock is called “a depression”, when people can’t find a new job and earn their living for a long time.

The good news is that after all these terrible times, people are retrained, find a job, set new businesses or reorganize previous ones. In other words, the economy starts reviving and developing. The cycle gets into the growth stage and then reaches a new historical peak.

Development cycles of COVID19 and economic crisis scenario

https://www.tradingview.com/x/LJJZVaqe/

The chart above shows the number of coronavirus cases and a future development forecast. As of March 31, the number of cases reached 800,000 worldwide. According to various experts, the peak is expected in May, with a total of 2-3 million cases (bold dotted line). Then the dynamics will slow down through global quarantine measures and the population’s natural immunization.

Once the percentage of cases decreases, many countries will eagerly lift lockdowns and restrictions on movement. As a consequence, another wave of coronavirus may take place and last till September. This is the time by which clinical trials of a COVID-19 vaccine are expected to have been completed and then the vaccine will be launched into a series production.

Thus, the active crisis stage may last till the end of September, based on this scenario. Obviously, not only businesses, but also many governments don’t have enough safety margin to endure such a long crisis.

Considering a high level of globalization and interdependency of consumer-producer chains worldwide, even one country’s default may start a chain reaction.

Just remember the Greek economic crisis of 2015 which caused fever in whole Europe. It’s after that case Great Britain got in turmoil, which led to the Brexit referendum in 2016.  

Evidently, the seats of economic crisis will mainly be commodity-dependent countries, because besides the demand shock related to the pandemic, they will suffer budget deficits caused by a sharp slump of commodity prices, oil prices above all (check this article for my long-term oil forecast). 

I estimate that low oil prices are a global trend. It’s very likely that commodity prices won’t be growing until the end of 2020, based on the scenarios of pandemic development and its economic consequences.

https://www.tradingview.com/x/D6H80QMS/

If the worst scenario is realized (red wavy arrow), the Brent price may fall to 9-10 USD a barrel (the support level of 1998).

The victims of this double strike will apparently be Gulf countries (Saudi Arabia, UAE, Oman, Kuwait, Qatar), CIS countries (Russia, Kazakhstan, Azerbaijan, Turkmenistan) and South America (Bolivia, Columbia).  Without even mentioning Venezuela with its long-lasting economic crisis.

Start of the Great Depression 2020

https://www.tradingview.com/x/yUSlNSzF/

The scenario looks quite disturbing.

To forecast the length and the depth of the economic crisis, let’s get back to history. A similar economic crash was in 1930, in the times of the Great Depression. The reasons of that crisis were the First World War and the Spanish flu pandemic. The consequences were the US agricultural crisis and the crash of the whole banking system, because the main borrowers were bankrupt farmers.

The chart above shows the 12-month time frame for Dow Jones where 1 candlestick equals 1 year.

According to the theory of economic cycles, we see:

  • Short-term cycles (2-3 years) – pink arrows
  • Medium-term cycles (7-10 years) – violet arrows
  • Long-term cycles (70-100 years) – red arrows.

Surprisingly, the stages of the three cycles coincided in 2020.  

The last recession year was 2014 when many countries were going through economic stagnation and some countries (Greece with its debt crisis and Russia with its currency crisis) were on the edge of a large-scale crash. That period refers to short-term cycles.  Six years have passed since then and a new recession within a new short-term cycle seems natural. 

The well-known mortgage crisis of 2008 that affected the whole world refers to medium-term cycles. Twelve years have passed since then and again, a new slump looks regular. Ninety years have passed since the beginning of the Great Depression, which perfectly fits into long-term economic cycles. So, we may expect the beginning of the Great Depression no. 2.

Conclusion

The unfavorable development scenario is confirmed by the theory of economic cycles, so we all should get prepared for the worst. 

The global crisis, which may result from the Great Depression 2020, may last for up to 4 years and reformat our lifestyles the next 5 years.  I’d like to hope this scenario won’t be realized, but obviously, this pandemic is an epoch-making event which affects the whole world and will leave its trace for sure.

Anyway, time will tell whether this scenario is true, but I’d like to remind you about a famous Chinese proverb: When the winds of change blow, some people build walls and others build windmills. So, let’s cheer up and think about how to benefit from the situation.

Take care of yourself and your money!

Subscribe and keep in touch!

Best regards,

Michael @Hyipov

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