Patrick Watson of Mauldin Economics looks at a potential worst case economic scenario caused by the coronavirus outbreak

Patrick Watson of Mauldin Economics looks at a potential worst case economic scenario caused by the coronavirus outbreak

By Patrick Watson*

The COVID-19 virus is pushing an economy that was already approaching a cliff. Will it go over the edge?

Probably. And the Federal Reserve lifeline is wearing thin.

I have to admit, I didn’t foresee this. Six weeks ago, I said 2020 would probably bring continued low growth. Then I noted several brewing crises that could cause major problems. A pandemic wasn’t on my list.

But then, using the impeachment trial as an example, I added…

This Ukraine/Biden thing came out of nowhere just a few months ago. Something else could, too. And it might not be in Washington.

That’s kind of what happened. COVID was just a Chinese problem at the time. Now it is our problem, too.

And it may be a big one.

Photo: Pixabay.

Lost quarter

Right now everyone is worried about protecting their own health. We also see lower stock prices. This is not coincidence.

To understand why, we need to observe how the dominoes are falling.

The Chinese government responded to the initial Wuhan outbreak with containment measures that shut down many businesses. Production and economic activity dropped hard. Ships that normally export goods to the West never left.

That was a problem, and still is. Many US businesses depend on Chinese parts and components. If they can’t find substitutes, they may have to shut down, too. But that’s happening slowly, so far.

This wasn’t the only impact, though.

Millions of Chinese small businesses (and some large ones) have gone weeks with little or no incoming cash flow.

Some won’t be able to make up for the lost time. An unrented hotel room is a permanently lost opportunity. Same for a restaurant table, theater chair, or taxi seat.

So these businesses lost sales they can’t recover, even as their bills continued: mortgages, maintenance, sometimes payroll.

And if they were able to stop payroll, that doesn’t eliminate the problem. They just shifted it to workers, who didn’t get paid but still have their own bills.

In due course, China will get back to business, but only after losing an entire quarter’s activity, or close to it. That is a serious problem in highly leveraged economies, of which China is not the only one. This affects corporate earnings, so stock prices fall.

Photo: Flickr.

School closures

Now, let’s talk about the US. Changes are happening fast so forgive me if this is out of date.

As I write this, we have outbreaks on both the East and West coasts. Many more are likely infected. We don’t know because testing has been quite limited so far.

  • People who think they may become homebound are flocking to stores for essential items.
  • Some large companies are telling workers to cancel nonessential travel.
  • Unlucky folks who simply came in contact with a COVID-positive person are in isolation, essentially removed from the economy.
  • At least one school has been closed due to an infected staff member exposing everyone.

In Japan, they’ve closed all schools for at least a month. This ties down working parents, meaning either they or their employers will lose money. And making up the lost instructional time when this is over will disrupt other plans.

Japan is an advanced economy with modern health care, sanitation, and disease control. And COVID is still hitting it hard.

I see no reason to think the US will fare any better. The virus is here and spreading. Even if few people die, controlling it could still close many businesses.

My best guess is we’re a couple of weeks behind Japan on this. If so, the debt that propelled much of our growth will go in reverse.

Note, all this is on top of the China-related supply chain problems, which would seriously affect the US even if the virus hadn’t reached here.

Which brings us to the banks.

Photo: Pixabay.

Eating losses

As the old saying goes, you can’t get blood from a turnip. What happens when millions of debtors suddenly can’t make their loan payments?

That’s not a crazy idea. It’s entirely possible if the US has as much trouble controlling the coronavirus as China did, putting people out of work for weeks.

Keep in mind, about 40% of US adults can’t handle a $400 unexpected expense. If you are, say, a restaurant worker or flight attendant who gets laid off because people are staying home and not travelling, you’ll lose that much income pretty fast. Many of those affected will fall behind on their debts.

Banks assume a certain number of loans will default. They have reserves for that purpose. But because the banks themselves are also in debt, too many defaults in a short time can burn through the reserves. Then what?

In China, the government is allowing (or perhaps ordering) banks to ignore the problem, and stop recognizing bad loans.

Could that happen here? Maybe. I can imagine regulators giving banks more “flexibility” to manage their loan portfolios. The Federal Reserve can also loan money to banks that need it.

But such measures won’t change reality. The debt will still be there. Someone will eat the losses. Who?

China will do it the Communist way: collectivize the pain.

The rest of us may be headed toward something like the 2008 financial crisis, with a highly leveraged bank industry holding mass numbers of nonperforming consumer and business loans. But this time…

  • The Fed can’t cut rates much unless it wants to go negative.
  • Any fiscal stimulus will add to an already-gargantuan federal deficit.
  • Everyone may be dealing with a giant healthcare crisis, on top of a recession.
  • People of all political persuasions dislike bank bailouts and won’t want to do it again.

And all this will unfold in an already-contentious election year.

I don’t know where this is going. Maybe the Fed will pull a rabbit from its hat. Maybe the virus fears are overblown and this will all pass quickly.

But if it doesn’t, we are going to have a problem.

*Patrick Watson is senior economic analyst at Mauldin Economics. This article is from a regular Mauldin Economics series called Connecting the DotsIt first appeared here and is used by with permission.

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Time for the globe to work as a truely united nation.

stop trade war immediately

central planning on a global distribution of medical resources

coordinate any bans on global person and cargo travel

immediately increase the share of RENMINBI in IMF's special drawing rights basket

Stay together;
Stand closer;
We share prevail.


Sorry, xingmowang, there's no true working together with a deceitful, unaccountable tyranny. Even the WHO can't manage it. Working together depends on trust and trustworthiness. The PRC fails on both counts.

Finally, if anyone wanted RENMINBI, they'd have it. It's a tiny percentage of global liquidity for good reason.

Yes Comrad


Time to ratchet up the trade war and force China to play fair! Penalties for IP theft, human rights violations and all the other abhorrent crap the CCP get up to.

Careful there Mrs. the Mr. was sleep right now on money bed, rolling/pillow money.. deep asleep right now. Shhh...


Stand with corrupt murderers and kidnappers and await reprogramming.... what a joke

You forgot to chuck "Glorious Five Year Plan" in there, bot.


It's great to have a regular comedic contribution on this website. Not enough humour in this world.

It’s all my fault. Told him he needed to read and understand Catch-22. Now he has morphed into Milo Minderbinder.



I had my suspicions that you were a parody account.
You've blown your cover completely now.

There's no doubt, this is Grade A satire.

Yeah, starting to look that way eh.

Either that or the Xingmowang worm has turned on the CCP.

Xingmoworm perhaps? ;-)

I'm looking forward to shares prevailing after the market bottoms out

"Stand closer" as long as you don't cough or sneeze on me..

Xing - IMO your country (CHINA) has deliberately released this virus to firstly mortally damage Trump's administration, and secondly in the hope that it will bring America to it’s knees. Your country (China) cannot accept or stomach another 4 years of a Trump Administration due to the hard-line America First policies undertaken against China to stop it from stealing US intellectual property and undermining the whole US economy.
Of course, the protesters would say - "they would never allow a number of their own people to die". RUBBISH!! Mao Tse-tung is credited (if that's the correct spelling) with causing directly and indirectly the deaths of 70 MILLION of his own people during his brutal regime. Good luck to the Socialists/Communists!! And CHINA is now at it again with the Muslim Uighur people. Companies such as Nike are using Uighur slave labour in China right now. And they aren't the only ones.
The Chinese Communist Party has absolutely NO SCRUPLES or concern for anyone's welfare except their own and the inexorable advance of the Party's interests. NZ and Australia should remember this in their on-going trade relationships with China.

Agreed comrade, the globe nations need to be individually resilience, bartering fairly, share (means take & give)
Stop trade imbalances/manipulative trade/silent subsidy/govt protectionism, stop excessive profit to be made (tui ads on that one)
The true strength of Nations? actually lies on it's Healthcare systems.. not from nukes, dirty weapons etc. I'd rather choose independent distributions.
Again isolations, who wants that? at what cost? - how do we ban? when even the detection is unclear, right?
IMF, Chinese money.. no one mind about - but how long ago? when CCP started/partially float the currency? and why is it?
Stay together, hmn okay.. then what? sing kumbaya..? - Can it be less much less than 10-15mins?
Stand closer; hmn okay.. - Can it be minimum 1m? ensure both parties following those ethics of current precautions
We share prevail - we would choose hope future praying mechanism.. shall it be, as we believe share is never the forte of China/CCP

if its true that in the US you have to pay for any tests that turn out negative? and also pay for quarantine,then maybe that financial penalty would prevent you seeking help.

yes and the CDC in the US just stop releasing numbers on COVID-19, as announced by Mr Pompeo for national security excuse.

what a sucker!

And we would be suckers to believe the "official" COVID-19 figures issued from China

NZ is actually the sucker right now with 3 confirmed cases from countries that should have been put on travel ban 2 weeks ago.

there will be more human to human case as well as cases flying into NZ from South Korea, EU, AUS, UK, and the US.


You're seriously off message here, xingy. Your PRC ambassador has been telling NZ we shouldn't have a travel ban.

She's quite sexy, in an authoritarian kind of way....

Indeed. Hope the the organ transfer snatch quad didnt just targeted you.

(the bot can only come back with "no u")

If we apply that logic to China, then why hasn't China shut it's borders? Particularly in terms of it's own citizens exiting to other countries?

Japan is an advanced economy with modern health care, sanitation, and disease control. And COVID is still hitting it hard.................. Not to forget minus interest rate

Japan also has a population heavily weighted to the older end of the spectrum, high population density in the cities. Those rush-hour Toyko subway sardine cans would be the best way to spread an infection ever... And are the Japanese heavy smokers like the Chinese?


How about making China pay the world as this bug got released from the Wuhan bio lab

Wait, we do not know for sure, Scientists from western countries eg USA, Europe etc may be able to tell if this virus is genetically engineered.
Maybe the Governments do know but are not saying anything to prevent a panic and feel its not helping the contain situation.

We will never know, however,there is a book Eyes of Darkness published 1981 see below videos and decide for yourself, look at the book pages

The bug bears no markings on obvious genetic engineering.

CCP scientists released the gene code, if they made this weapon why would they share the recipe?

Don't believe in absurd conspiracies.

Good idea. Make them pay, like Mexico is paying for the wall!

Great opinion piece and something I've been thinking about. We all know debt and leverage is huge, but what most people don't really understand is how long people can keep the balls juggling (for ex, as the article alludes to, 40% of Americans couldn't handle a $400 unexpected expense). That is true for individuals, h'holds, businesses (and even institutions like universities). But what about commercial banks? Things get a whole lot more complicated. But if the repo action is any indicator, we should probably take more notice.

I have written before about this. There are two sides to the $400 expense.
40% can't handle an unexpected $400 expense. But that is based on continued income.

Isolation, reduced demand, and companies going under (i.e. redundancy) mean the loss of income is likely to be the bigger issue.

40% can't handle an unexpected $400 expense. But that is based on continued income

Yes. What we need to understand is that this situation runs the gauntlet, from low to high socio-economic classes. It's not simply the downtrodden. The paycheck to paycheck syndrome.

$400 isn't going to get far when this hits. $4000 still isn't.

Agreed, good piece. There is no doubt that there is an out of control printed money binge post GFC. If this is the straw that shatters the camels back then great. Next twelve months will be very interesting as this progresses/unfolds. The key question is will the everything bubble deflate. No doubt a few major bank failures could unravel it all.

There is no doubt that there is an out of control printed money binge post GFC.

The GFC has never really ended IMO. Cracks were covered and the binge was amped up.

Not to mention Auto Loans as at January-

Over seven million Americans are more than three months behind on their loan payments. Some owe much more than the asset is actually worth. And many of those loans are “subprime,” taken out by borrowers with poor credit.

No need to worry, both the DOW and NZ50 up today.

One great big mess...

Didn't you hear? Rate cuts cured Corona virus.

So long as we all keep washing our hands 50 times a day, it's smooth sailing to DOW 30,000 next weeks! /s

I know you’re saying that in jest NM46... but it just might....

Great articial. It is starting to get to how extreme this is going to get. Ot will not be a 1st quarter thing, at least two untillvthis is back on track on the Sth part of the world and then otll reinfect the Nth. The world will not be the same for a very long time, no V shaped rebound!

Yes agreed, Trumps blundering has already caused a lot of damage. California has just declared a state of emergency after announcing its first coronavirus death, bringing the US death toll from the disease to 11. With Trumps dismantling of their affordable healthcare, it's now costing uninsured Americans upwards of $1,000 for a virus test. BBC article:

Covid19 is quite simply the pin that has pricked the inflated debt market balloon and let some air out. There is quite simply too much debt in the system that has inflated all asset prices. The virus is the fall guy.... it just happened to come along and upset the balance. But don’t worry, the FED is going to solve the problem by issuing even more debt. $101 billion dollars overnight when into the repo market. Keep you eye on the US 10 year bond. As long as it stays above 1% the markets will be happy for now. If it goes below 1% then it’s back on the financial rollercoaster again. And while Many are being distracted by Covid19 something else could happen which could send all assets into freefall

Not long now till a lot of over inflated bubbles pop all over the world...


The country has changed so much over the last 10 years and it seems that the main change has been the amount of selfishness and greed. Selling out to China has not made NZ a better place that's for sure.

Depends what you mean by "selling out". Providing value-added products and services is not necessarily bad. Selling sub-standard and/or over-priced education is definitely bad. Selling NZ as a money laundering destination also has limited benefits to the wider public.

Selling farms, housing and political seats.

Yeah I know a few people who have returned recently after 10 years plus away. They comment that some things have changed for the better, but many for the worse.

COVID-19 is just a ploy while the people navy is scouting for more islands..

Corona Virus (or COVID-19) impacts are there to see with bare eyes and it's not going to get back to the normal terms anytime soon. The China's growth to be one of the world's business powers was hitting greatly on an international level when the outbreak happened in China, but as the things getting worse with virus reaching to new and new nations, the situation gets unexpected twists and turns that will deeply impact the economy on a high.

Anna Mike
Trainer at

Ok so the virus has now mutated and it has 2 strains. I think we need to be up front this is not a first quarter 2020 thing this just wiped out the whole of 2020. It has not even got started yet and will not end until a vacation arrives in volume and thats at least 12 months away and what if it keeps mutating? This virus is so perfect you couldn't engineer something better in a lab.

Was that last sentence tongue in cheek

When you cannot connect Flybes and get from A to collect your flybys.....cos of a simple virus...then you just learnt that a virus is not to be sneezed at...even in a country of 65 million......and only a 87 contaminated......but many more cases ...not delivered ...along with their owners....

Whatever next. ??

Bank bailouts?
Again already?

Lordy Noooooo, it's about a very dangerous & global virus flu emergency , haven't you heard?
Everyone's talking about it!

'''s for urgently beefing up the emerging market countries health service capacity so lives are saved, and suffering is reduced. And secondly, to use it for fiscal measures that are well targeted to households, businesses that are most directly impacted by the crisis," IMF MD Georgieva said.

Not at all bank bailout again, no no no, making these 50billion available immediately to emerging markets .... has nothing, I repeat nothing at all to do with maintaining interest payments on unrepayable loans to the Wall St. businesses most directly impacted by the crisis, no no no siree, it's about poor poor people and a virus.....

Fool me once....
Pass the popcorn

The US has a Debt/GDP ratio of around 106% and rising. If the Reinhart-Rogoff hypothesis is broadly correct, and it has support from both the BIS and ECB, then at the very least, further increases will see ever lower long-term growth rates.