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RE: This is a problem

in #investing5 months ago

The thing about this "recession" is that it seems very temporary. The coronavirus disruption will go away in a month or two as quickly as it came and everything will go back to normal. Companies can start producing revenue again just like before. Unlike previous recessions that were caused by actual issues affecting companies' revenues, here it's just a temporary forced shutdown. So it seems that if the govt just provides enough money for everyone to get through the shutdown period then everything will go right back to normal afterwards.

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"The thing about this "recession" is that it seems very temporary. " This seems to be consensus. But I don't believe it to be so. If the economy was not leveraged this certainly would be true. But because everyone has bills and costs to cover the reality is different.

Even a very short term falling of GDP combined with massive lay-offs will lead to a deflation which will render many companies and people insolvent.

All that should also not be in issue normally, but there is this financial system that makes it so that everyone has debts that need to be serviced.

Think about the guys that buys a few apartments on mortgages and rents them out via R&B. If he would own the property there would be no problem: he makes no money for a few months, big deal. But now because he has to pay 10 mortgages he will be broke right away. He probably has a safety net to deal with 3 of his 10 places to be empty. Sure the gov could bail him out.
This is also a problem for his bank as they will also go broke. Since they can only deal with one of is mortgages defaulting not all of them etc.....

This is an extreme example, but effectively most of our economy is leveraged like this. And so many companies won't be able to deal with this sort of disruption. And if they can it will lead to lay-offs. Which will lead to less economic activity ..... its a snowball that just started rolling off.

After looking at this comment a few weeks later, it seems now that you were right. Thought I am not sure the last words have been said.

I certainly hope you were and are right, even though I had placed my bets a bit differently.

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