Why Printing Money May Not Create InflationLearn more about this firm
In a recent post, Brad discussed inflation and why he does not see an imminent risk of runaway inflation. Looking at the topic from the demand side of the equilibrium, he argued that demand collapses during a crisis and so does inflation. But, as we all know, there are two sides to any equation. Let’s now assess the supply side of this analysis. Could inflation come from there?
When the pandemic hit in early 2020 and the entire economy hunkered down, demand collapsed. We were not driving to work, going to restaurants, or taking vacations and business trips. Suddenly, there was gasoline at the gas stations with no takers, perishables that restaurants were not buying, and theme parks and malls shut down and then reopened to few visitors. Supply chains started getting disrupted and prices spiked for goods in high demand (think Clorox wipes, toilet paper, and hand sanitizer). With job losses in the millions and no data on how long the pandemic would last, consumers cut spending on nonessentials.
You’ve Got Delivery—a Stimulus Package
The central bank and government sprang into action quickly, having learned their lesson from the great financial crisis. The Fed cut the federal funds rate to nearly zero. With bipartisan support, the government passed the CARES Act in record time. The hope was that these measures would cushion the blow for consumers and businesses, helping them get to the other side of the pandemic. They were also intended to stimulate economic activity.
Now that we’re almost one year into the crisis, the Fed has indicated it will keep rates near zero for the foreseeable future. Our newly elected government is in the process of passing another massive COVID-19 relief bill. With all this money being printed and dropping into the system, the economy is apparently on the road to recovery. But some people are concerned that the vast sums of helicopter money will lead to inflation roaring back. That’s a fair concern. To get to the answer, we need to ask a question. Where did all the 2020 stimulus money go—or not go?