The Economy: Drastic Actions Can Lead to Drastic Consequences

Could the tremendous influx of quantitative easing aimed at shoring up the economy during the pandemic unleash pent-up inflation or even lead to a dreaded debt spiral?

President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which is aimed at providing financial relief for the economic downturn caused by the coronavirus pandemic. Through a variety of means, CARES injects more than $2 trillion into the U.S. economy.

These drastic actions could backfire. Most economists see a decrease in economic activity as a current irreversible reality, which means we’re already in a recession.

Throwing money at the problem could exacerbate matters, leading to inflation, and even worse. We learned a lesson in the 1970s that has since been forgotten. But the 2020s could be much worse.

Stagflation
The world experienced stagflation in the 1970s when inflation spiked during a recession; throwing money at the problem backfired back then. This time central banks have responded to the coronavirus by injecting trillions of dollars into their economies, which could generate demand-pull inflation because “too many dollars will be chasing too few goods.”

Until now, such “quantitative easing” did not generate inflation because most of the money went into stock and bond markets rather than consumer goods, so “velocity” was low. But this new money will be spent on food and other necessities.

Debt spiral
Inflation could trigger the debt spiral that economists have worried about for decades. It could get very ugly.

Inflation will require higher yields on bonds. In particular, zero interest and below zero interest bonds simply will not sell. Investors will seek other ways to invest, and fiat money, pieces of paper, will decline in their ability to buy stuff. Most governments can just barely afford to pay the interest on their current debt. Increases in interest rates will lead to defaults and panic.

Imagine a world where Treasury bond interest cannot be paid.

WE WILL get through this pandemic, as we have previous pandemics. Some say that we just let it run its course, but governments have decided to ease the current pain and run the risk of dire consequences in the aftermath.

Half a million people have been infected by the virus so far.

Seven billion people are being affected by its financial impacts.

This is a HUGE deal economically!