<p>It creates losses. </p>

<p>First, many businesses don’t own their own building/land/equipment. It’s very common to lease these things. Moreover, many business take out insurance that again has to be paid on monthly basis. In Europe in many countries you need to pay workers certain portion of wages even when you can’t call worker to work or even if they stay home sick. </p>

<p>The list here is not exclusive. The point is many business have non-trivial fixed costs that have to be payed whether business operates or it doesn’t. Furthermore, in short run even some variable costs - like wages to employees on production line are fixed (and in many countries this can be up to several months). Hence, it’s not like a dormant business have no costs. </p>

<p>You might ask why then we don’t suspend for example these leases etc. but that just moves the problem to the different parties and does not eliminate this issue. </p>

<p>Moreover, very large business might have enough financial cushion to absorb losses for few months, but there are many small-medium size business that can’t do that. For example, consider a sole trader (a form of business organization where one person embodies a business) who has a repair shop with no employees just living month to month. That kind of businessman can not afford to go on hiatus for very long.</p>

<p>Furthermore, if by long you mean not just weeks but several months or even year that would be issue even for the best cushioned business.</p>

<p>So yes the impact could be catastrophic. For example according to <a href="https://voxeu.org/article/economics-time-covid-19-new-ebook" rel="nofollow noreferrer">this</a> VOX blog the impact under some scenarios could be worse than recent 2008 crisis.</p>

<p><a href="https://i.sstatic.net/b99Qu.jpg" rel="nofollow noreferrer"><img src="https://i.sstatic.net/b99Qu.jpg" alt="enter image description here"></a></p>

CC BY-SA 4.0
2020-03-26T12:39:47.903Z
Households also matter. Not every household has the savings to meet obligations (bills, interest) if their income source is cut off. This causes them to default on their obligations, most of which are owned to businesses. This cascades through the system.
Brian Romanchuk
CC BY-SA 4.0
2020-03-26T12:44:19.457Z
@BrianRomanchuk I 100% agree but OP was talking about business so I thought his question was only about business. Maybe I misunderstood it.
1muflon1
CC BY-SA 4.0
2020-03-26T13:14:16.870Z
Well, businesses will fail as a result of cascading defaults, and households are probably more vulnerable than businesses, and thus be at the beginning of cascades.
Brian Romanchuk
CC BY-SA 4.0
2020-03-26T14:51:17.173Z
Thanks, nice answer! But suspending rent and leasing means that neither the business nor the landowner makes a loss... landowners don't lose their land, equipment is idle, and mortgages are suspended. Business leases should obviously have a 50% -75% reduction. Insurances can also be minimized for idle businesses, the liability is less.
bandybabboon
CC BY-SA 4.0
2020-03-28T00:29:47.657Z
@com.prehensible: "nor the landowner makes a loss" only if the property tax is suspend as well, and AFAIK no country has done that during this outbreak.
fantastic peace and prosperity
CC BY-SA 4.0
2020-03-28T00:36:48.520Z
@com.prehensible that’s not entirely true apart from taxes as Fizz pointed out most of land has to be maintained. If you have a field and you don’t maintain it it will get overgrown with weeds, if you have some sort of utility there that also usually requires maintenance. For some types of property maintenance is required by law. In some European countries you can get fine for not properly maintaining your own property etc. Moreover, aside from monetary costs there are opportunity costs that are economically very relevant
1muflon1
CC BY-SA 4.0
2020-03-28T00:39:29.510Z
I didn't mention agriculture because people still need to eat, so most agriculture won't be suspended. But property tax is highest per unit area in cities...
fantastic peace and prosperity
CC BY-SA 4.0
2020-03-28T00:44:27.553Z
@Fizz I just used that as an example because it came easily to mind. But I think you will agree that there is almost no property that would have absolutely 0 maintenance costs. In the end as long as you are not running a wildlife preserve you will have to run some maintenance and it can often be non trivial
1muflon1
CC BY-SA 4.0
2020-03-28T03:19:22.377Z
Property tax is 80-90% less than yearly rental. Maintenane is for old buildings, leases can be halted for 6 months without loss to landowners. They still profit with 6 months lost rental! i'll write that in the query.
bandybabboon
CC BY-SA 4.0
2020-03-26T12:30:58.757Z
2020-03-26T12:30:58.757Z
1muflon1
<p>Your idea that unmaintend equipment costs nothing is also unrealistic. The major industry included in the \$2T bailout/stimulus is the airline industry. Planes left on the ground still <a href="https://www.latimes.com/business/story/2020-03-24/where-airlines-are-parking-grounded-planes" rel="nofollow noreferrer">require maintenance or preparation for longer-term mothballing</a>.</p>
<blockquote>
<p>Because of the steep drop in demand for air travel and flight restrictions to international destinations, Delta and American Airlines, two of the world’s largest carriers, have announced plans to ground more than 1,000 planes combined. Southwest Airlines said it parked two dozen 737-700 planes over the weekend. [...]</p>
<p>The biggest aircraft storage operations are in desert facilities in places such as Victorville, Roswell, N.M., and Tucson, where humidity is low and the runways and taxiways are long enough to accommodate any size of commercial plane.</p>
</blockquote>
<p>European carriers may not even have such desert conditions available to them. But even in the nice desert conditions:</p>
<blockquote>
<p>Grounding a 130,000-pound plane involves more than just a big stretch of pavement.</p>
<p>Aircraft storage facilities typically charge a base rate simply for parking a plane. <strong>The biggest expense is the cost of the aircraft services to keep the plane maintained and ready to return to operation.</strong></p>
<p>In addition to the cost of parking, a facility may charge maintenance costs that begin at about $2,000 per plane a month, depending on the services required, according to published reports.</p>
<p>A commercial passenger plane can’t sit indefinitely on a desert tarmac if the airline hopes to quickly return the aircraft to service, said Henry Harteveldt, an airline analyst with Atmosphere Research Group.</p>
<p>“It’s a lot more involved,” he said. “It’s a lot more than simply parking your car on a lot when you go on a trip.”</p>
<p>The amount and type of maintenance that must be done to an idle plane depends on how soon the airline hopes to return the aircraft to operation, Harteveldt said.</p>
<p>An aircraft’s avionics, hydraulics, electronics and other operating systems must be regularly checked and tested. Maintenance manuals typically spell out how often such services must be performed.</p>
<p>If a plane is going to be stored for several months, the aircraft will be put into an “airplane coma,” which involves draining or replacing all liquids and sealing the doors and the engines, Harteveldt said.</p>
</blockquote>
<p>And doing that is not free of costs either.</p>

CC BY-SA 4.0
2020-03-28T03:47:47.343Z
Indeed! Airlines spend 10% yearly cost is maintenance paired with 95% reduction in income makes air-travel very specific. depreciation and mainenance costs the airline = 15% of their yearly revenue. https://i2.wp.com/crankyflier.com/wp-content/uploads/2014_04_27-wncosts.jpg it's the worst affected industry, and it affects hotels and other tourism... Hotels are low maintenance(3-4%) All things included leasure flying boosts the world economy by 8% every year, so halting for 90 days can shrink the economy by 1-2 percent, 0.5% is planes and 1.5% is hotel profits.
bandybabboon
CC BY-SA 4.0
2020-03-28T03:28:29.313Z
2020-03-28T03:28:29.313Z
2020-06-17T09:40:54.643Z
fantastic peace and prosperity
<p>Covid-19 has forced a suspension of at least 50% of financial transactions and business activities. </p>

<p>Materially, not much has been lost: consumables have been spared, equipment is dormant, maintenance is mostly inexpensive. Why is the health crisis expected to bankrupt many businesses? Is most of the loss speculative?</p>

<p>Propery tax + land rental = 20-25% of yearly rent, so a landlord can waive rent for 6 months and still make profit! enough to pay 2 years of tax and maintenance. </p>

<p>I naively imagine that using government moratoriums on bank-debt-interest rates and fees, It is possible for companies to organize a state of dormancy and maintenance for an extended period, without incurring significant loss. </p>

<p>Can you give a summary of why it is not so simple, and why the losses are a lot worse than a financial and material dormancy? </p>

<interest-rate><business-cycles><loss-aversion><covid-19-crisis>
Why does global suspension of economic activity result in catastrophic loss/debt?
bandybabboon
# Why does global suspension of economic activity result in catastrophic loss/debt?

(Asked by: username_0 on 2020-03-26)

Covid-19 has forced a suspension of at least 50% of financial transactions and business activities.

Materially, not much has been lost: consumables have been spared, equipment is dormant, maintenance is mostly inexpensive. Why is the health crisis expected to bankrupt many businesses? Is most of the loss speculative?

Propery tax + land rental = 20-25% of yearly rent, so a landlord can waive rent for 6 months and still make profit! enough to pay 2 years of tax and maintenance.

I naively imagine that using government moratoriums on bank-debt-interest rates and fees, It is possible for companies to organize a state of dormancy and maintenance for an extended period, without incurring significant loss.

Can you give a summary of why it is not so simple, and why the losses are a lot worse than a financial and material dormancy?

**Tags:** interest-rate, business-cycles, loss-aversion, covid-19-crisis


---

## 2 answers

### Answer by username_1 on 2020-03-26. Score: 2

It creates losses.

First, many businesses don’t own their own building/land/equipment. It’s very common to lease these things. Moreover, many business take out insurance that again has to be paid on monthly basis. In Europe in many countries you need to pay workers certain portion of wages even when you can’t call worker to work or even if they stay home sick.

The list here is not exclusive. The point is many business have non-trivial fixed costs that have to be payed whether business operates or it doesn’t. Furthermore, in short run even some variable costs - like wages to employees on production line are fixed (and in many countries this can be up to several months). Hence, it’s not like a dormant business have no costs.

You might ask why then we don’t suspend for example these leases etc. but that just moves the problem to the different parties and does not eliminate this issue.

Moreover, very large business might have enough financial cushion to absorb losses for few months, but there are many small-medium size business that can’t do that. For example, consider a sole trader (a form of business organization where one person embodies a business) who has a repair shop with no employees just living month to month. That kind of businessman can not afford to go on hiatus for very long.

Furthermore, if by long you mean not just weeks but several months or even year that would be issue even for the best cushioned business.

So yes the impact could be catastrophic. For example according to [this](https://voxeu.org/article/economics-time-covid-19-new-ebook) VOX blog the impact under some scenarios could be worse than recent 2008 crisis.

[![enter image description here](https://i.sstatic.net/b99Qu.jpg)](https://i.sstatic.net/b99Qu.jpg)

> **Comments:**
> **username_2**: Households also matter. Not every household has the savings to meet obligations (bills, interest) if their income source is cut off. This causes them to default on their obligations, most of which are owned to businesses. This cascades through the system.  
> **username_1**: @username_2 I 100% agree but OP was talking about business so I thought his question was only about business. Maybe I misunderstood it.  
> **username_2**: Well, businesses will fail as a result of cascading defaults, and households are probably more vulnerable than businesses, and thus be at the beginning of cascades.  
> **username_0**: Thanks, nice answer! But suspending rent and leasing means that neither the business nor the landowner makes a loss... landowners don't lose their land, equipment is idle, and mortgages are suspended. Business leases should obviously have a 50% -75% reduction. Insurances can also be minimized for idle businesses, the liability is less.  
> **username_3**: @com.prehensible: "nor the landowner makes a loss" only if the property tax is suspend as well, and AFAIK no country has done that during this outbreak.  
> **username_1**: @com.prehensible that’s not entirely true apart from taxes as Fizz pointed out most of land has to be maintained. If you have a field and you don’t maintain it it will get overgrown with weeds, if you have some sort of utility there that also usually requires maintenance. For some types of property maintenance is required by law. In some European countries you can get fine for not properly maintaining your own property etc. Moreover, aside from monetary costs there are opportunity costs that are economically very relevant  
> **username_3**: I didn't mention agriculture because people still need to eat, so most agriculture won't be suspended. But property tax is highest per unit area in cities...  
> **username_1**: @Fizz I just used that as an example because it came easily to mind. But I think you will agree that there is almost no property that would have absolutely 0 maintenance costs. In the end as long as you are not running a wildlife preserve you will have to run some maintenance and it can often be non trivial  
> **username_0**: Property tax is 80-90% less than yearly rental. Maintenane is for old buildings, leases can be halted for 6 months without loss to landowners. They still profit with 6 months lost rental! i'll write that in the query.  

---

### Answer by username_3 on 2020-03-28. Score: 1

Your idea that unmaintend equipment costs nothing is also unrealistic. The major industry included in the \$2T bailout/stimulus is the airline industry. Planes left on the ground still [require maintenance or preparation for longer-term mothballing](https://www.latimes.com/business/story/2020-03-24/where-airlines-are-parking-grounded-planes).

> Because of the steep drop in demand for air travel and flight restrictions to international destinations, Delta and American Airlines, two of the world’s largest carriers, have announced plans to ground more than 1,000 planes combined. Southwest Airlines said it parked two dozen 737-700 planes over the weekend. [...]
>
> The biggest aircraft storage operations are in desert facilities in places such as Victorville, Roswell, N.M., and Tucson, where humidity is low and the runways and taxiways are long enough to accommodate any size of commercial plane.

European carriers may not even have such desert conditions available to them. But even in the nice desert conditions:

> Grounding a 130,000-pound plane involves more than just a big stretch of pavement.
>
> Aircraft storage facilities typically charge a base rate simply for parking a plane. **The biggest expense is the cost of the aircraft services to keep the plane maintained and ready to return to operation.**
>
> In addition to the cost of parking, a facility may charge maintenance costs that begin at about $2,000 per plane a month, depending on the services required, according to published reports.
>
> A commercial passenger plane can’t sit indefinitely on a desert tarmac if the airline hopes to quickly return the aircraft to service, said Henry Harteveldt, an airline analyst with Atmosphere Research Group.
>
> “It’s a lot more involved,” he said. “It’s a lot more than simply parking your car on a lot when you go on a trip.”
>
> The amount and type of maintenance that must be done to an idle plane depends on how soon the airline hopes to return the aircraft to operation, Harteveldt said.
>
> An aircraft’s avionics, hydraulics, electronics and other operating systems must be regularly checked and tested. Maintenance manuals typically spell out how often such services must be performed.
>
> If a plane is going to be stored for several months, the aircraft will be put into an “airplane coma,” which involves draining or replacing all liquids and sealing the doors and the engines, Harteveldt said.

And doing that is not free of costs either.

> **Comments:**
> **username_0**: Indeed! Airlines spend 10% yearly cost is maintenance paired with 95% reduction in income makes air-travel very specific. depreciation and mainenance costs the airline = 15% of their yearly revenue. https://i2.wp.com/crankyflier.com/wp-content/uploads/2014_04_27-wncosts.jpg it's the worst affected industry, and it affects hotels and other tourism... Hotels are low maintenance(3-4%) All things included leasure flying boosts the world economy by 8% every year, so halting for 90 days can shrink the economy by 1-2 percent, 0.5% is planes and 1.5% is hotel profits.  

---

