The Economics of Bird Flu

It’s greatly to his credit that Health Minister Tony Abbot has recently been upfront about Australian preparations to deal with the local consequences of a global bird flu epidemic.
The challenge posed by this small but significant risk are not, however, only be in health. A flu epidemic would strike at the connexions on which the whole global economy depends. It would hit trade, travel, all face to face communications, employment, shopping '” the lot.

Anticipating this, news of a flu epidemic would trigger a rapid global sell-off of bonds and equities and a flight into cash. Because low cash rates and increasing global confidence have driven up asset prices and encouraged more business and household leverage in recent years, the financial impact of a flight into cash could be catastrophic.

It might well require immediate, coordinated and vast intervention by central banks to slow the collapse in asset prices, and it would have to include the purchase of bonds and equities as well as the provision of liquidity to major institutions which would otherwise fail.

Health authorities are thinking about the small but perceptible threat that bird flu becomes contagious between human beings. Are central banks and finance ministries? The chance of a flu epidemic is quite small, but as Mr. Abbot correctly remarks the consequences of it would be very much greater than almost any conceivable act of terrorism.