Posted on 2020-02-04 18:44:00
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The comparison between medical pandemics and financial panics is more than a metaphor.
Disease contagion and financial contagion both work the same way. The nonlinear mathematics and system dynamics are identical in the two cases even though the “virus” is financial distress rather than a biological virus.
But what happens when these two dynamic functions interact? What happens when a biological virus turns into a financial virus?
We’re seeing it happen in China.
It’s the time of the Lunar New Year holiday in China, China’s most important public holiday. It’s traditionally a time of widespread celebration.
But, for many Chinese cities, not this year.
Many major Chinese cities have been shut down, with no citizens allowed to leave, and their transportation systems have been closed.
Retails sales are also suffering as consumers remain home instead of risking contagion with trips to the store.
The disease is causing financial panic in China at a time when it can least afford it. GDP growth has hit a wall and investors have curtailed new investment.
Could it unleash a global financial panic that ultimately results in a lockdown of the banking system?
It’s possible, but it’s far too soon to say. This is the type of catalyst that could take a year to build.
But it definitely bears watching...