Interest rate cut vs health policy - how are they consistent?

[Grinkle]

Cutting interest rates is intended to change people's behavior in favor of economic growth driving activity. In the main this necessarily involves an increased amount of leaving ones home and going to work.

The novel CV itself is not impacting the economy - it is the various policies to combat the spread of the virus that are impacting the economy - these necessarily involve keeping people at home and not working - or at least not being as productive as they otherwise would be.

Is there a perspective from which these two simultaneous responses are consistent with each other? I am really puzzled - it does not seem to be too deep a set of dots to connect that these responses are directly at odds with each other.

 

[russ_watters]

As of today, the Coronavirus is having very little impact on the US economy, since the number of cases is in the low hundreds (caveat: test kits are scarce). The primary impact has been supply chain issues for certain companies doing business with China.

Yet the US equity markets had one of their worst weeks ever last week. Why? Prediction of future problems...panicked predictions.

The fed rate cut was a direct response to market panic, to stop the outflow of money from the markets, which can on it's own cause a recession.

But for the larger point; China can do what it wants with its autocracy, but I do not agree that western democracies should be shutting down and quarantining themselves in response to the virus. This isn't the plague. It's not even the flu, at least yet.

The flu sickens up to 10% of the population and kills several tens of thousands of people per year (it varies). That costs around $11B directly and $90B indirectly, or about half a percent of annual gdp. If they economy shut down for a month, it would cost upwards of $1.5T; 8% and people would be living on the streets and starving en masse.

 

[lekh2003]

Technically speaking the virus should be having an impact on the economy if it persists, and in some countries it already is. The issue is that consumption is dropping in economies, for all goods and services, which is causing for a reduction in the total demand.

The government can incentivise spending and avoid people saving money if interest rates are cut. By doing this, money is kept from being leaked into savings, and people can continue spending and keeping money flowing in the economy.

In somewhere like Australia, the economy is taking a hit and the interest rate cuts are required to boost the economy. The policy should be fixing things, not making it worse. And the virus is definitely hitting consumption.

 

[BWV]

I was on the fence about booking that cruise next month, but now that I can expect the money I earn in my savings account to drop with no change in the interest rates I pay on my mortgage and credit cards, I pulled the trigger and even upgraded to a suite! ;)

 

[Grinkle]

people can continue spending and keeping money flowing in the economy.

This is where I see the conflict. Spending money means leaving ones home to do so, in general. It seems counter to the very policies that are causing the economic slowdowns to begin with.

I am not advocating either economic incentives or economy-damaging health improving measures, I am arguing that doing both at the same time is very inconsistent.

Keeping people at home will slow down the economy, live with the consequences, or don't try to keep people at home.

 

[russ_watters]

I am not advocating either economic incentives or economy-damaging health improving measures, I am arguing that doing both at the same time is very inconsistent.

Keeping people at home will slow down the economy, live with the consequences, or don't try to keep people at home.

As far as I know, the US has no such policy(I don't even think I've heard anyone suggest we consider it), so I see no inconsistency. That isn't to say it won't change in a month, but that would really surprise and disappoint me.

 

[Grinkle]

As far as I know, the US has no such policy,

Agreed in principle. Policies like travel restrictions to Iran I would not at all argue have an economic impact. I must admit I don't have an example of any formal policy that goes counter to lowering interest rates.