Economies won’t be able to recover after shutdowns

Citizens seem to be clamoring for shutdowns to prevent the spread of COVID-19. There is one major difficulty, however. Once an economy has been shut down, it is extremely difficult for the economy to recover back to the level it had reached previously. In fact, the longer the shutdown lasts, the more critical the problem is likely to be. China can shut down its economy for two weeks over the Chinese New Year, each year, without much damage. But, if the outage is longer and more widespread, damaging effects are likely.

A major reason why economies around the world will have difficulty restarting is because the world economy was in very poor shape before COVID-19 hit; shutting down major parts of the economy for a time leads to even more people with low wages or without any job. It will be very difficult and time-consuming to replace the failed businesses that provided these jobs.

When an outbreak of COVID-19 hit, epidemiologists recommended social distancing approaches that seemed to be helpful back in 1918-1919. The issue, however, is that the world economy has changed. Social distancing rules have a much more adverse impact on today’s economy than on the economy of 100 years ago.

Governments that wanted to push back found themselves up against a wall of citizen expectations. A common belief, even among economists, was that any shutdown would be short, and the recovery would be V-shaped. False information (really propaganda) published by China tended to reinforce the expectation that shutdowns could truly be helpful. But if we look at the real situation, Chinese workers are finding themselves newly laid off as they attempt to return to work. This is leading to protests in the Hubei area.

My analysis indicates that now, in 2020, the world economy cannot withstand long shutdowns. One very serious problem is the fact that the prices of many commodities (including oil, copper and lithium) will fall far too low for producers, leading to disruption in supplies. Broken supply chains can be expected to lead to the loss of many products previously available. Ultimately, the world economy may be headed for collapse.

In this post, I explain some of the reasons for my concerns.

[1] An economy is a self-organizing system that can grow only under the right conditions. Removing a large number of businesses and the corresponding jobs for an extended shutdown will clearly have a detrimental effect on the economy. 

Figure 1. Chart by author, using photo of building toy “Leonardo Sticks,” with notes showing a few types of elements the world economy.

An economy is a self-organizing networked system that grows, under the right circumstances. I have attempted to give an idea of how this happens in Figure 1. This is an image of a child’s building toy. The growth of an economy is somewhat like building a structure with many layers using such a toy.

The precise makeup of the economy is constantly changing. New businesses are formed, and new consumers grow up and take jobs. Governments enact laws, partly to collect taxes, and partly to ensure fair treatment of all. Consumers decide which products to buy based on a combination of factors, including their level of wages, the prices being charged for the available goods, the availability of debt, and the interest rate on that debt. Resources of various kinds are used in producing goods and services.

At the same time, some deletions are taking place. Big businesses buy smaller businesses; some customers die or move away. Products that become obsolete are discontinued. The inside of the dome becomes hollow from the deletions.

If a large number of businesses are closed for an extended period, this will have many adverse impacts on the economy:

  • Fewer goods and services, in total, will be made for the economy during the period of the shutdown.
  • Many workers will be laid off, either temporarily or permanently. Goods and services will suddenly be less affordable for these former workers. Many will fall behind on their rent and other obligations.
  • The laid off workers will be unable to pay much in taxes. In the US, state and local governments will need to cut back the size of their programs to match lower revenue because they cannot borrow to offset the deficit.
  • If fewer goods and services are made, demand for commodities will fall. This will push the prices of commodities, such as oil and copper, very low.
  • Commodity producers, airlines and the travel industry are likely to head toward permanent contraction, further adding to layoffs.
  • Broken supply lines become problems. For example:
    • A lack of parts from China has led to the closing of many automobile factories around the world.
    • There is not enough cargo capacity on airplanes because much cargo was carried on passenger flights previously, and passenger flights have been cut back.

These adverse impacts become increasingly destabilizing for the economy, the longer the shutdowns go on. It is as if a huge number of deletions are made simultaneously in Figure 1. Temporary margins, such as storage of spare parts in warehouses, can provide only a temporary buffer. The remaining portions of the economy become less and less able to support themselves. If the economy was already in poor shape, the economy may collapse.

[2] The world economy was approaching resource limits even before the coronavirus epidemic appeared. This is not too different a situation than many earlier economies faced before they collapsed. Coronavirus pushes the world economy further toward collapse. 

Reaching resource limits is sometimes described as, “The population outgrew the carrying capacity of the land.” The group of people living in the area could not grow enough food and firewood using the resources available at the time (such as arable land, energy from the sun, draft animals, and technology of the day) for their expanding populations.

Collapses have been studied by many researchers. The book Secular Cycles by Peter Turchin and Sergey Nefedov analyze eight agricultural economies that collapsed. Figure 2 is a chart I prepared, based on my analysis of the economies described in that book:

Figure 2. Chart by author based on Turchin and Nefedov’s Secular Cycles.

Economies tend to grow for many years before the population becomes high enough that the carrying capacity of the land they occupy is approached. Once the carrying capacity is hit, they enter a stagflation stage, during which population and GDP growth slow. Growing debt becomes an issue, as do both wage and wealth disparity.

Eventually, a crisis period is reached. The problems of the stagflation period become worse (wage and wealth disparity; need for debt by those with inadequate income) during the crisis period. Changes tend to take place during the crisis period that lead to substantial drops in GDP and population. For example, we read about some economies entering into wars during the crisis period in the attempt to gain more land and other resources. We also read about economies being attacked from outside in their weakened state.

Also, during the crisis period, with the high level of wage and wealth disparity, it becomes increasingly difficult for governments to collect enough taxes. This problem can lead to governments being overthrown because of unhappiness with high taxes and wage disparity. In some cases, as in the 1991 collapse of the central government of the Soviet Union, the top level government simply collapses, leaving the next lower level of government.

Strangely enough, epidemics also seem to occur within collapse periods. The rising population leads to people living closer to each other, increasing the risk of transmission. People with low wages often find it increasingly difficult to eat an adequate diet. As a result, their immune systems easily succumb to new communicable diseases. Part of the collapse process is often the loss of a significant share of the population to a communicable disease.

Looking back at Figure 2, I believe that the current economic cycle started with the use of fossil fuels back in the 1800s. The world economy hit the stagflation period in the 1970s, when oil supply first became constrained. The Great Recession of 2008-2009 seems to be a marker for the beginning of the crisis period in the current cycle. If I am right in this assessment, the world economy is in the period in which we should expect crises, such as pandemics or wars, to occur.

The world was already pushing up against resource limits before all of the shutdowns took place. The shutdowns can be expected to push the world economy toward a more rapid decline in output per capita. They also appear to increase the likelihood that citizens will try to overthrow their governments, once the quarantine restrictions are removed.

[3] The carrying capacity of the world today is augmented by the world’s energy supply. A major issue since 2014 is that oil prices have been too low for oil producers. The coronavirus problem is pushing oil prices even lower yet.

Strangely enough, the world economy is facing a resource shortage problem, but it manifests itself as low commodity prices and excessive wage and wealth disparity.

Most economists have not figured out that economies are, in physics terms, dissipative structures. These are self-organizing systems that grow, at least for a time. Hurricanes (powered by energy from warm water) and ecosystems (powered by sunlight) are other examples of dissipative structures. Humans are dissipative structures, as well; we are powered by the energy content of foods. Economies require energy for all of the processes that we associate with generating GDP, such as refining metals and transporting goods. Electricity is a form of energy.

Energy can be used to work around shortages of almost any kind of resource. For example, if fresh water is a problem, energy products can be used to build desalination plants. If lack of phosphate rocks is an issue for adequate fertilization, energy products can be used to extract these rocks from less accessible locations. If pollution is a problem, fossil fuels can be used to build so-called renewable energy devices such as wind turbines and solar panels, to try to reduce future CO2 pollution.

The growth in energy consumption correlates quite well with the growth of the world economy. In fact, increases in energy consumption seem to precede growth in GDP, suggesting that it is energy consumption growth that allows the growth of GDP.

Figure 3. World GDP Growth versus Energy Consumption Growth, based on data of 2018 BP Statistical Review of World Energy and GDP data in 2010$ amounts, from the World Bank.

The thing that economists tend to miss is the fact that extracting enough fossil fuels (or commodities of any type) is a two-sided price problem. Prices must be both:

  1. High enough for companies extracting the resources to make an after tax profit.
  2. Low enough for consumers to afford finished goods made with these resources.

Most economists believe that an inadequate supply of energy products will be marked by high prices. In fact, the situation seems to be almost “upside down” in a networked economy. Inadequate energy supplies seem to be marked by excessive wage and wealth disparity. This wage and wealth disparity leads to commodity prices that are too low for producers. Current WTI oil prices are about $20 per barrel, for example (Figure 4).

Figure 4. Daily spot price of West Texas Intermediate oil, based on EIA data.

The low-price commodity price issue is really an affordability problem. The many people with low wages cannot afford goods such as cars, homes with heating and air conditioning, and vacation travel. In fact, they may even have difficulty affording food. Spending by rich people does not make up for the shortfall in spending by the poor because the rich tend to spend their wealth differently. They tend to buy services such as tax planning and expensive private college educations for their children. These services require proportionately less commodity use than goods purchased by the poor.

The problem of low commodity prices becomes especially acute in countries that produce commodities for export. Producers find it difficult to pay workers adequate wages to live on. Also, governments are not able to collect enough taxes for the services workers expect, such as public transit. The combination is likely to lead to protests by citizens whenever the opportunity arises. Once shutdowns end, these countries are especially in danger of having their governments overthrown.

[4] There are limits to what governments and central banks can fix. 

Governments can give citizens checks so that they have enough funds to buy groceries. This may, indeed, keep the price of food products high enough for food producers. There may still be problems with broken supply lines, so there may still be shortages of some products. For example, if there are eggs but no egg cartons, there may be no eggs for sale in grocery stores.

Central banks can act as buyers for many kinds of assets such as bonds and even shares of stock. In this way, they can perhaps keep stock market prices reasonably high. If enough gimmicks are used, perhaps they can even keep the prices of homes and farms reasonably high.

Central banks can also keep interest rates paid by governments low. In fact, interest rates can even be negative, especially for the short term. Businesses whose profitability has been reduced and workers who have been laid off are likely to discover that their credit ratings have been downgraded. This is likely to lead to higher interest costs for these borrowers, even if interest rates for the most creditworthy are kept low.

One area where governments and central banks seem to be fairly helpless is with respect to low prices for commodities used by industry, such as oil, natural gas, coal, copper and lithium. These commodities are traded internationally, so it is not just their own producers that need to be propped up; the market intervention needs to affect the entire world market.

One approach to raising world commodity prices would be to buy up large quantities of the commodities and store them somewhere. This is impractical, because no one has adequate storage for the huge quantities involved.

Another approach for raising world commodity prices would be to try to raise worldwide demand for finished goods and services. (Making more finished goods and services will use more commodities, and thus will tend to raise commodity prices.) To do this, checks would somehow need to go to the many poor people in the world, including those in India, Bangladesh and Nigeria, allowing these people to buy cars, homes, and other finished goods. Sending out checks only to people in one’s own economy would not be sufficient. It is unlikely that the US or the European Union would undertake a task such as this.

A major problem after many people have been out of work for a quite a while is the fact that many of these people will be behind on their regular payments, such as rent and car payments. They will be in no mood to buy a new vehicle or a new cell phone, simply because they have been offered a check that covers groceries and not much more. They will remain in a mode of cutting back on purchases, not adding more. Demand for most kinds of goods will remain low.

This lack of demand will make it difficult for business to have enough sales to make it profitable to reopen at the level of output that they had previously. Thus, employment and sales are likely to remain depressed even after the economy seems to be reopening. China seems to be having this problem. The Wall Street Journal reports China Is Open for Business, but the Postcoronavirus Reboot Looks Slow and Rocky. It also reports, Another Shortage in China’s Virus-Hit Economy: Jobs for College Grads.

[5] There is a significant likelihood that the COVID-19 problem is not going away, even if economies can “bend the trend line” with respect to new cases.

Bending the trend line has to do with trying to keep hospitals and medical providers from being overwhelmed. It is likely to mean that herd immunity is built up slowly, making repeat outbreaks more likely. Thus, if social isolation is stopped, COVID-19 illnesses can be expected to revisit prior locations. We know that this has been an issue in the past. The Spanish Flu epidemic came in three waves, over the years 1918-1919. The second wave was the most deadly.

A recent study by members of the Harvard School of Public Health says that the COVID-19 epidemic may appear in waves until into 2022. In fact, it could be back on a seasonal basis thereafter. It also indicates that more than one period of social distancing is likely to be required:

“A single period of social distancing will not be sufficient to prevent critical care capacities from being overwhelmed by the COVID-19 epidemic, because under any scenario considered it leaves enough of the population susceptible that a rebound in transmission after the end of the period will lead to an epidemic that exceeds this capacity.”

Thus, even if the COVID-19 problem seems to be fixed in a few weeks, it likely will be back again within a few months. With this level of uncertainty, businesses will not be willing to set up new operations. They will not hire many additional employees. The retired population will not run out and buy more tickets on cruise ships for next year. In fact, citizens are likely to continue to be worried about airplane flights being a place for transmitting illnesses, making the longer term prospects for the airline industry less optimistic.


The economy was already near the edge before COVID-19 hit. Wage and wealth disparity were big problems. Local populations of many areas objected to immigrants, fearing that the added population would reduce job opportunities for people who already lived there, among other things. As a result, many areas were experiencing protests because of unhappiness with the current economic situation.

The shutdowns temporarily cut back the protests, but they certainly do not fix the underlying situations. Instead, the shutdowns add to the number of people with very low wages or no income at all. The shutdowns also reduce the total quantity of goods and services available to purchase, regardless of how much money is added to the system. Many people will end up poorer, in some real sense.

As soon as the shutdowns end, it will be obvious that the world economy is in worse condition than it was before the shutdown. The longer the shutdowns last, the worse shape the world economy will be in. Thus, when businesses are restarted, we can expect even more protests and more divisive politics. Some governments may be overthrown, or they may collapse without being pushed. I fear that the world economy will be further down the road toward overall collapse.




About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.
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4,744 Responses to Economies won’t be able to recover after shutdowns

  1. Lastcall says:

    This whole Covid thing looks like ars.on; its that thing you do to cover a crime scene. You name the financial/political/ etc. crime, its now going to go unpunished (and in many cases, unrecognised).
    Use Covid to cause hysteria, use as cover to get out of Dodge. Job done.

    ‘Stanford Team Finds Evidence COVID-19 Mortality Rate Is As Low as .2% (17 Times Lower Than WHO’s Estimate)’

    ‘Either way, the dominant narrative that exposure equates to a near death experience, requiring immediate quarantine and/or forced medication or future mandatory vaccination when it becomes available, is decimated. At the least, the lockdown of most of the country’s population, and the majority of the developed world, would not be justified given the widespread prevalence and relative harmlessness of the virus revealed in this study.’

    From WSJ:
    That may sound scary, but it’s great news. It suggests that the large majority of people who contract Covid-19 recover without ever knowing they were infected, and that the U.S. infection fatality rate may be more than an order of magnitude lower than authorities had assumed. Based on this seroprevalence data, the authors estimate that in Santa Clara County the true infection fatality rate is somewhere in the range of 0.12% to 0.2%—far closer to seasonal influenza than to the original, case-based estimates.

    • Arson to cover up a crime scene is a good analogy.

      Perhaps leaders everywhere figure out how much power fear of this newly found virus gives to them. This is the fuel needed to keep the idea spreading around the world.

  2. Z says:

    Oil Guy: Yo Jerome…..we need you to fire up that printer dude…..we got big problems over here with Oil dude…..can you print us up a cool couple trillion to keep the ponzi going dude? You know we are good for it.

    Jerome: Dude my hands are getting tired from printing up all these federal reserve notes…..alright I guess…..I know why old yeller didn’t want to be FED chair….printing all these notes with arthiritis really blows….and my earing aid is messed up from hearing Brrrrrrr all day long.

  3. Fast Eddy says:

    We start with front page SCMP — these are repeat headlines that have appeared on the SCMP in recent weeks…. repeat enough times and the lie is believed:

    Coronavirus’s ability to mutate ‘has been vastly underestimated’

    Scientists had to bring temperature to almost boiling to kill virus

  4. Yoshua says:

    Oil is getting expensive again at minus $24

  5. Jason says:

    Does that mean I will get free gas and a couple of 20s to boot every time I fill up the old truckster?

  6. Jonzo says:

    The “Shale Oil Economy” was the biggest scam of all time in this country. That oil should have come out of the ground sometime on the future when SA peaked and would soon begin its decline. Shale oil was like holding on to a long-term investment. But most of it was wasted to enrich the very few at the cost of many.

  7. Tango Oscar says:

    Oil at -$40 a barrel for May contracts. I would say BAU is going to end by June/July for sure. This is game over. No one can make money in this environment, particularly when demand has fallen off of a cliff.

    • Covidinamonthorayearoradecade says:

      OPEC+ is seeing what we are seeing…

      and all of them are thinking the same thing…

      wholly camel crapp! … while they thought (hoped) at their last meeting that their cuts would stabilize prices, they now are seeing that they all will be FORCED to cut their production by half…

      at least…

      it will be “game over” for some countries sooner than for others…

      it could be the OPEC countries by July…

      I have a (weak) hope that my country will have an essentials-only bAU into next year…

  8. Covidinamonthorayearoradecade says:

    Happy Weed Day, everybody!

    and something else to look forward to:

    Earth Day is on Wednesday…

    life is good!

  9. Yoshua says:

    WTI USD -17.00 (minus 17)

  10. Jason says:

    Does it matter? Everybody is losing money unless they are being directly bailed out.

    • Ed says:

      When the looses from continuing for a month are greater than the shutdown startup cost then it matters.

    • People who kept cash at home do not lose any money

      • Not in today’s world. But they might in some future world.

      • Money(cash) hoarders as anybody else will be punished, expropriated as well.. eventually.. Either via inflation or nowadays most likely by some “shock and awe” overnight gov decree money reform, which could be ~3:1 (10:1;30:1)? value swap for newly issued gov-CBs e-coin with limited expiration, i.e. must spent (only on something pre-allowed) to date xy or tough luck buddy..

        This has been discussed in expertly circles for decades, and occasionally to lesser degree also put into practice (tested) already.

        Besides, most people don’t have savings, so upheaval would subside..

  11. Ed says:

    How much does it cost to shutdown and restart a refinery????

    • A lot and usually there is no staff on the site (even same country) to perform such complex task.. It must be meticulously pre-planned and executed..

      • Dennis L. says:

        Intersting, never though of that, never had any idea except it is a complicated plant that probably runs closer to disaster by necessity than one might like.

        Dennis L.

      • Covidinamonthorayearoradecade says:

        since shutdown/restart is so problematic, the obvious scenario is to permanently shut down about half of the refineries right now…

        and shut in half the oil production too…

        good luck, OPEC+… ha ha…

        this might be hilarious if it wasn’t for the fact that we are all headed for an impoverished and much more dangerous world later this year…

        no more BAU today, baby!

  12. Jason says:

    WTI .15 Duncan?

  13. Ed says:

    How many think the governor of NJ will not open the beaches for the summer tourist trade? Massachusetts open Cape Cod? The Bahamas open for winter tourists? Florida is already open. Can Georgia, South Carolina and North Carolina be far behind?

    • Ed says:

      Keep in mind nothing is happening. The oil wells are still there, the refineries are still there, the roads are still there, the cars are still there. This is just refiners do not like to shutdown. But they will.

  14. Rodster says:

    WTI drops to $2.75 at 1:38pm

    • Oh my goodness!

    • On another board, a poster was pointing out that May contracts close tomorrow, so this represents speculators having to get out of their positions before they’re on the hook to buy storage (which is normal). But storage is almost gone, and is selling at a premium, so this is a last ditch effort to get out of their positions before the last ditch (above ground storage, i.e. spilling it). Prices should recover tomorrow, so it was explained.

    • They banned (phased out) the leveraged oil shorting ETN/ETFs around the time of this virus bailout for Wall St. activities. That was strange and somewhat predictive of incoming change. Most likely the oil markets as any other markets will be now (or very shortly) turned into range bound simulacrum only. The market is dead parrot now. Welcome to the fully nationalized-authoritarian economic order, long emergency turning long ICU..

      • Daniel says:

        This is what they are reporting on CNBC

        When I look the author of the Story she is a young girl that graduated from Princeton with a degree in the Classics…. Wonder how she got a job reporting on oil and the economy….

        • Connections. And she is probably reading something someone else wrote anyways.

        • Each market (in overall growing system) is signified, confined by inner bust&boom cycle, i.e. violent up and down swings. We had three big ones in just few recent decades (and many dozens in recent practical historical record), that’s 6x ~25baggers (~90 000% min ROI via leverage) if your are blessed lunatic gambler or have access to insider info scoop each time. Obviously and realistically speaking, already moneyed classes are mostly about earning solid rent on (pre)existing loot and go way easier, so lets say only getting few thousand (to low dozens) %gain in past decades.

          Most likely, that bimbo at CNBC is precisely hired not to understand or talk about even this basic 101 lesson.. and or she makes sure (by access) marrying into first Wall st./City bloke around, who is very much versed in the above, lolz.

  15. timl2k11 says:

    Ha. WTI (May) at $4.77! I think it will expire worthless.

  16. As of 12:23 EST, WTI hangs on at $8.00.

  17. Marco Bruciati says:

    Today we should not do the funeral of the economy its true , but meanwhile the funeral of shale Oil certainly. And It means peak of all oil convenzionale and not Is passed.

  18. Dennis L. says:

    Meat most likely to cost more.

    Food workers in IA getting a raise, $4/hour. Increased safety standards cost more, for the most part OSHA is a plus for our nation as is EPA even with all our grumbling. Yes some of the ideas are nutz, but clean air, water and safe working conditions are important and they benefit the whole of the country not just the Hampton crowd.

    An interesting experiment would be to lock down finance for a month, see if there is any difference. We are doing it for the entire nation, why not the group that trades blips on a screen all day?

    Now, if we could get back to putting more ethanol in gasoline it would be an even more beautiful, sunny MN day.

    Dennis L.

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