It is no news that the larger part of the world is currently living under palpable fear, no thanks to the CONVID-19 virus that is ravaging all continents with over 6000 deaths and still counting. The manner in which the disease spreads is unprecedented, what seemed to be a local challenge in the city of Wuhan in China has now snowballed into a global threat.
CONVID-19 has effectively put a hold on a significant part of the global economy. Schools and factories are shut down, sporting events are being postponed or canceled outright. Governments have closed their borders to people from the worst-hit regions. Investments are being put on hold until the world has a good grasp of what is going on. However, it does not take much imagination to understand that the disease is going to create opportunities for wealth shift in the nearest term.
One of the first economic casualties of the outbreak was the crude oil price that tumbled from about $70 per barrel to an average of $30 per barrel at the moment. This is bad news for countries that depend on oil proceeds to run their economies. Stock markets everywhere do not like bad news, this explains that fact that several stocks have since lost half of their initial value since the disease broke out. This space is enough to talk about various mum and pop businesses that have shut down temporarily.
These events have initiated a phenomenon know in economics as a ‘vicious cycle’, which simply means poverty begets poverty. The concept speaks to how an adverse economic event causes another adverse event and the cycle continues until an external force is applied to stop the cycle. A typical cycle under the current situation could go as follows:
1. CONVID-19 led to many deaths.
2. People were forced to shut down their businesses to avoid further infections.
3. Business closures created fear that business will not do so well this year.
4. The stock market loses value in anticipation of reduced profit and dividends at the end of the year.
5. Households realize that their assets have gone down in value and they are inclined to save more and consume less in order to have more reserves to handle any eventuality.
6. Reduction in consumption causes a lot of businesses to struggle.
7. The struggling businesses embark on various cost-cutting measures to stay afloat, which typically includes staff lay-off.
8. The cost-cutting measures will result in loss of income to a supplier of goods or services somewhere.
9. The supplier will also embark on his or her own cost-cutting measures, which in turn affects the income for another supplier.
The path described above is just one out of many other paths that time and space will not allow us to talk about. The cycle continues until an external factor is brought to break the cycle, this is usually in the form of one government stimulus or the other. The result of such a stimulus usually takes a while to yield the desired result. Whilst the cycle continues, people tend to resort to selling their assets, whether financial assets (stocks, bonds, etc) or physical assets. This causes downward shifts in asset prices.
The silver lining in the current situation is that it creates opportunities for wealth transfer as individuals with the right information and resources can acquire assets cheaply. These assets can be held for value or sold at a huge profit after the economy makes a full recovery. There is also a need to manage our risks as we seek these opportunities. Therefore it is important to work with partners who understand the factors the lead to opportunities and threats in times of business uncertainties.
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