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Liquidity will be key to weathering COVID-19 slowdown
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As businesses around the world grapple with the fallout of the COVID-19 pandemic, the health of the economy could come down to liquidity.
Companies have all kinds of assets, from tangible real estate to intangible patents. Liquidity is how quickly those assets can be turned into something you can spend, said economist Joseph Haslag at the University of Missouri.
Businesses need enough cash on hand to keep the lights on and pay employees, especially when faced with huge disruptions to revenue streams as they are right now.
“It’s really just a giant smoothing process in the face of some bumpy rides,” said Haslag.
On the last bumpy ride for the U.S. auto industry during the financial crisis, Ford was the only “Big 3” automaker that wasn’t pushed to bankruptcy and bailed out by the government — in part because the company had a lot of cash on hand.
Years before the crash, Ford was already facing plummeting sales. “They put everything they owned up as collateral, including the brand, Ford,” said Kristin Dziczek at the Center for Automotive Research.
Leveraging all their assets for cash loans early helped the company weather the downturn. General Motors and Chrysler, on the other hand, had to borrow from the government because by then credit within financial markets had dried up — which in itself made the crisis worse.
“Credit is the mother’s milk of economic activity,” said Mark Zandi, chief economist at Moody’s Analytics. “When there’s not enough credit that’s lethal to the real economy.”
Today, big tech firms like Microsoft and Apple have tens of billions of dollars on hand. But smaller companies in many other sectors could find their cash streams quickly drying up.
COVID-19 Economy FAQs
Are states ready to roll out COVID-19 vaccines?
Claire Hannan, executive director of the nonprofit Association of Immunization Managers, which represents state health officials, said states have been making good progress in their preparations. And we could have several vaccines pretty soon. But states still need more funding, she said. Hannan doesn’t think a lack of additional funding would hold up distribution initially, but it could cause problems down the road. “It’s really worrisome that Congress may not pass funding or that there’s information circulating saying that states don’t need additional funding,” she said.
How is the service industry dealing with the return of coronavirus restrictions?
Without another round of something like the Paycheck Protection Program, which kept a lot of businesses afloat during the pandemic’s early stages, the outlook is bleak for places like restaurants. Some in the San Francisco Bay Area, for example, only got one week of indoor dining back before cases rose and restrictions went back into effect. Restaurant owners are revamping their business models in an effort to survive while waiting to see if they’ll be able to get more aid.
How are hospitals handling the nationwide surge in COVID-19 cases?
As the pandemic surges and more medical professionals themselves are coming down with COVID, nearly 1 in 5 hospitals in the country report having a critical shortage of staff, according to data from the Department of Health and Human Services. One of the knock-on effects of staff shortages is that people who have other medical needs are being asked to wait.
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