Covid-19 was an unforeseen event which shocked the economies and markets of all of the world’s countries. Based on new empirical research findings covering two prior economic shock events the collateral damage and side effects from the Coronavirus will be significant and long-lasting.
The two prior periods which caused significant damage to the US and global economies:
- Twin 1973 and 1979 oil embargos from 1973 to 1982
- Rolling bank failures for the decade ended 1940.
Everyone born on or before the year 1960 has lived through at least one of the two oil shocks which are well covered by Wikipedia in the item below.
The 1973 oil embargo caused shortages and resulted in the price of a gallon of gas increasing by 400%. The embargo and price spike changed the macroeconomic environment in the early 1970s according to the page below which resides on the Federal Reserve’s website.
The picture below from the Federal Reserve’s site illustrates the shock that the second 1979 oil embargo had on the US and global economy.
The shaded grey area in the chart below depicts the oil price spikes which resulted from the two oil embargos.
Not surprisingly the two oil embargos and resulting oil price spikes were the primary reason why the US had two significant recessions (1973-75, 1981-82) within six years apart. The chart below depicts the two recessions and the resulting declines of 41% and 27% for the Dow Jones 30 Industrials composite index.
The sudden shock to the US economy which is the most analogous to Covid-19 is the bank failures that occurred after the crash of 1929. The bank failures, unlike the two separate event oil embargo shocks, lingered throughout the decade which began in 1930.
The picture below was obtained from the Federal Reserve’s site. It indicates that economists had believed that the US economy was set to recover in the fourth quarter of 1930 from the 1929 crash.
Instead, ongoing waves of bank failures resulted in US economy entering into a depression.
The phrase “Only Thing We Have to Fear Is Fear Itself” in Franklin Delano Roosevelt’s (FDR) 1933 inauguration speech became famous. The phrase pertained to the public’s widespread fear of bank failures.
The common denominator of Presidents’ Roosevelt and Trump is that both treated their respective bank failure and Coronavirus crises as wars within the US. Borders.
FDR concluded his March 4, 1933 inaugural speech with:
“I shall ask the Congress for the one remaining instrument to meet the crisis—broad Executive power to wage a war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe.”
ABC News reported “Trump now calling coronavirus fight a ‘war’ with an ‘invisible enemy” on March 17, 2020.
FDR was able to overcome the fear of bank failures by establishing the FDIC (Federal Deposits Insurance Company) in 1933. Trump or Biden should he be elected as President will not have it that easy. To overcome the Coronavirus fears a vaccine must be developed and ingested by the world’s entire population.
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