Will Stimulus Money Spark Runaway Inflation?

in LeoFinance •  2 months ago 

This is what everyone in crypto likes to repeat. I'm not so sure.

Let's remind ourselves how money is created. When a commercial bank issues a loan, the principal is new money created out of thin air. When it is paid back, it is removed from circulation. When economic activity has slowed down like it has because of how societies and individuals are reacting to the coronavirus, fewer new loans are being issued and thus less new money enters circulation, that still leaves old loans to be serviced. When businesses are failing and workers are getting laid off, many find themselves having serious problems servicing their debts. The stimulus money is a welcome relief as it allows many individuals to avoid bankruptcy and having to sell their assets at prices well below normal market prices. Despite the stimulus money looking like very large sums of money, in most cases it will be spent on necessities like food or power or paying back existing debt.

Economies around the world are in such dire straights now that I'm predicting not even QE Infinity will spark out of control inflation. What it will do instead is disconnect asset valuations on the financial markets from fundamentals and that is why Bitcoin and most other cryptocurrencies will rally in the next 12-18 to months.

Authors get paid when people like you upvote their post.
If you enjoyed what you read here, create your account today and start earning FREE STEEM!
Sort Order:  

I agree with your findings and would add that the purpose of public spending has to be monitored: if it will stimulate any kind of activity that results in labour, we should not worry too much. However, we should restrict public spending as soon as inflation is caused by declining productivity. I understand that most of the COVID-related spending programs so far are intended to result in preserving productivity levels. In my opinion crypto is more likely to play a role in terms of fair distribution of wealth rather than as an alternative to inflation-prone fiat money.

I think it's misleading to call the corona relief money stimulus money. The idea is not to actually stimulate the economy but to keep all the tens of millions (in the US context) people laid off because of the lockdown orders from going bankrupt or starving. To oppose such relief money being paid directly to citizens who have lost their jobs and who have no hope of finding new jobs under the current situation, you'd have to be evil or stupid. And I don't see any reason why such small sums of money would cause consumer price inflation. What I do believe, however, is that the Fed's buying of corporate debt will worsen the already existing disconnect between the real economy and financial asset valuations. That is unavoidable to a degree but anyone in crypto should feel happy about it because it makes stocks equally speculative to crypto, crypto being the superior speculative asset, of course.

Yup! Terrible inflation! People will die of hunger and famine in some countries!

Cryptos should go to the moon soon!