economics
Post-COVID, A Large Increase in Inflation May Be Coming
Economist, Political Analyst
Economist, University of Buckingham
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Genesis
Response
Penultimate
Finale
May 20th, 2020
When the U.S. financial markets came to the brink of disaster, the Fed came to the rescue. The monetary base expanded to 2 trillion dollars, from a little less than one, over the last quarter of 2008. Then, it doubled again over the following years, reaching 4 trillion by 2014. Although there was some reduction over the last two years, it is now a bit under 7 trillion dollars. From March to the beginning of May 2020, it has increased by more than 2 trillion dollars, in an effort to reduce the economic effects of Covid-19 and the lockdown.
A debate about the impact of the Fed decisions is emerging. Is it possible that these huge increases in monetary supply could cause a bout of inflation? Or, as we’ve seen over the last decade, could it be that even multiplying the money supply by four has no effect on inflation, leading us to wonder about the possibility of an underground tendency to deflation?
It’s not an idle discussion. Understanding what we have to face is of utmost importance. The race between inflation and interest rates will harm debtors and creditors in an important way. And this would happen in a world that is accustomed to very low interest rates, where all kinds of projects have been funded no matter how absurd, and where there has been bad misallocation of resources.
Trevor Jackson believes we are in a deflationary period, and that were it not for the efforts of the Fed back in 2008, there would have been larger deflationary effects. However, since the fiscal effort in those years was insufficient, deflationary trends continue now. This is why he fears that the pandemic and the lockdown could unleash deflation in all its power, repeating what the world saw almost one hundred years ago.
Tim Congdon, on the contrary, thinks that this discussion is another episode of Monetarist vs Keynesian economics, and that the large increases of money supply will lead to an inflationary future.
Let me start with some questions: First, if Congdon is right, why have we not seen inflationary pressure over the last ten years, whether in the US or the EU? Second, if Jackson is correct, how much can the money supply grow before deflation is doomed? Third, over the last decade, we’ve had almost zero interest rate for several years, and that has not led to more investment. Is it possible that we face a completely different economic period, in which older populations make investment less attractive?
I find the discussion of inflationary/deflationary future really interesting, but I think that we have to include a larger perspective to find out which path we on. Certainly, money supply is important, but the reallocation of production, population aging, and digital service growth may be also relevant.
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