“It is not speed that kills, it is the sudden stop”

Sudden stop: a term coined in 1995 that is suitable today

written with Adamantios Koumpis

Photo by DDP on Unsplash

One watches the global developments of the coronavirus pandemic and grows concerns for what will happen next. Sometimes the past teaches us more about the future — so there may be some good reasons to ‘read the classics’ than expect to predict the future by reading the crystal ball of big data and artificial intelligence.

Rüdiger (Rudi) Dornbusch (died in 2002), Ilan Goldfajn and Rodrigo Valdés published in 1995 a paper that for some of us holds a special place in the altar of theoretical works in the discipline of economics that emerge from practice and have direct relevance and value for uptake by practitioners in the daily battlefields of the economy.

Their paper entitled ‘Currency Crises and Collapses’ inspired a term that is now used widely in economics — called sudden stop. Though not quite the case, one may regard as a sudden stop a sudden slowdown in capital flows into a market economy. Such a stop is expected to be followed by decreases of outputs, even steeper decreases in private spending and credit to the private sector.

At that time the three economists were sharing their thoughts and ideas about the 1994 economic crisis in Mexico. The term sudden stop is attributed to an anonymous banker’s adage, according to whom “it is not speed that kills, it is the sudden stop”.

It might be good to see how Mexico and at a greater extent also the United States economy was saved (answer: by a generous and unimaginably huge and high risk bailout signed by then President Clinton) and try find similarities with the current crisis, however we would like today to focus on this anonymous banker’s adage: it is not speed that kills, it is the sudden stop.

So each time you hear, you read or you think about the dramatic consequences and the potentially tragic implications that the coronavirus outbreak shall have on global, national or individual economies, think about the banker’s wisdom: it is not speed that kills, it is the sudden stop.

Since 1994, things have changed. But in this hyper-optimized, globalized economy the quote looks even more suited. With many employees living paycheck to paycheck, SMEs month by month and large corps quarter to quarter, a sudden stop equals a sudden “death”. There is a high possibility that the coronavirus pandemic will not be the end of worldwide crisis scenarios. Thus, at the expense of producing less, winning less, travelling less and probably working more, we should strive to create more robust and distributed clusters of supply-demand chains and economies that will defend better against future sudden stops.

References

Rudiger Dornbusch, Ilan Goldfajn, Rodrigo O. Valdés, Currency Crises and Collapses, Brookings Papers on Economic Activity, Vol. 1995, №2 (1995), pp. 219–293

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