Similarities Between The Economic Crisis And The Flu

Increasingly, I’m feeling the need to state the obvious. Partly, that’s because others aren’t doing it because it is obvious, and, partly, because it isn’t obvious to everyone. Enough people miss it to matter.

The obvious thing I have in mind right now is the similarity between the way the flu spreads and the way the financial crisis spread. They both reflect the interactions of a global community. Contact or proximity is the beginning of the spread of both, but the health of the public and their institutions also help determine the severity and duration of the impact. It remains to be seen whether the current flu reaches pandemic proportions, but the financial crisis already has, partly because of the spread of the subprime slime and partly because of the vulnerability of financial institutions made fragile by too much debt.

One practical implication of this line of thinking is the oft heard conclusion, that rarely receives rebuttal, that the United States went into the recession first so it is likely to come out of it first. First in first out may be a logical way to manage perishable inventories, but it’s transference to the timing of recessions hardly seems plausible. It will depend largely on the health of different countries institutions and the appropriateness of its policies.

Many countries ended up with tainted assets that will remain illiquid for some time to come. Many of those were also impacted by weak foreign demand through their export sector. The severity of that impact will depend in part on how export-dependent their economies are. The more open the economy, the larger the impact originating abroad. Some countries had minimal exposure through their financial system and suffer only from a weakening of export demand. They have more ability to stimulate aggregate demand as a remedy, substituting domestic demand for lost foreign demand. This might be a boon to domestic consumers, but their policymakers may find it hard to give up on their export-oriented economic model.

The basic and simple conclusion here is just that how quickly each country recovers will have to do with whether their financial system was healthy enough to give them strong “immunity” and not the timing of when the recession hit.

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