Drastic Coronavirus Economic Actions Can Lead to Drastic Consequences!
- Governments are softening the economic blow of COVID-19 by throwing a lot of money at it.
- This increase in Quantitative Easing (QE) could release inflationary pressures that have been building for several years.
- Inflation will require increases in interest rates, which in turn can trigger the dreaded Debt Spiral
On March 27, the President 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.
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 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.
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.
In my previous article on hyperinflation I offer the following suggestions:
Inflation is a tax on dollar-denominated savings, so a sensible protection is to save in other forms like a basket of:
- Treasury Inflation Protection Securities (OTC: TIPS)
- Precious metals
- And real estate.
Take the 40-year-old investor who could live to be 100. A lot can happen in 60 years. A question for this investor: What do you think is going to happen to your retirement if the government doesn’t get its act together?
We’ll 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. It’s unlikely that the election year has nothing to do with this decision. When election day comes it will be “All about the economy stupid.”
Half a million people have been infected by the virus so far. Seven billion people are being affected by its financial impacts. It’s a big deal.