Meanderings of a curious mind #2,496.
Classic economics says printing money leads to inflation, therefore the government should not be giving away money during the pandemic. But in this particular case, I wonder if that will be inflationary.
Let me tell you what I'm thinking. Then please feel free to jump in.
Why does more money in circulation cause inflation? Put (too) simply, because sellers know buyers can pay more, so they charge more. They bring more in, they pay employees more, employees as consumers can pay more for goods, around and around until it gets out of control. That's the recipe for unbridled inflation.
In this case, though, the money being "printed" is not in addition to money people are already earning - it replaces that money. While there might, overall, be more value in currency floating around, most buyers won't have more money. The aid is going to people who are sitting at home, wondering how they're going to pay the rent, or the mortgage, or the grocery bill. Where does the inflationary pressure come from if there isn't more money flowing through the economy?
Additionally, while increased currency might increase inflationary pressures, the risk on the other side, of foreclosures and evictions, is even stronger. If people can't pay the mortgage or the rent we will see a massive increase in empty real estate. That will lead to a gross drop in value, leading to negative equity, creating huge deflationary pressure. Imagine the 2008 mortgage crisis plus the 1918 Flu.
Do the inflationary and deflationary risks balance out? Probably, particularly since the goal is to avoid both. Also, the government has already passed out billions of dollars and prices are falling. The huge decrease in oil costs echoes throughout the economy, as it reduces transportation costs. The reduction in demand as people sit at home decreases costs, too. With all that happening, the risk of inflation from injecting money into the economy seems low compared to the recession or depression risks of not doing so.
I know some people are spitting by now, ready to scream, "JUST OPEN IT UP ALREADY AND WE DON'T NEED TO TALK ABOUT THIS SHIT!!!" But that's not right. Even if we opened up everything tomorrow, how many of us are going to the restaurants, even if they're open? To concerts, to plays, to movies, or even to the office? And when we do, we'll see another spike and we'll be right back where we are. But the point of this isn't to argue open or closed. Let's avoid that. The point, rather, is to argue that the general economic rule that more money => inflation is likely not accurate at this exact moment in history, because there are so many other factors pushing in the opposite direction.
What do you think?