Wednesday, April 29, 2020

The Potential for Accelerating Price Inflation After the Lockdown

At the post, How the Federal Reserve is Transferring Wealth From the Middle Class to the Wealthy, Q.E.D. argues in the comments that there will be no price inflation.

Below are his comments with my replies under each section:
I think there are serious questions whether prices will actually increase, for several reasons:

1. Aside from the massive 20 - 40% decrease in GDP for several quarters or longer, there will be tens of thousands of bankruptcies, wold-wide. In short, massive waste / liquidation of prior "productive" assets.
A massive decline in GDP means much less product being produced. This is price inflationary. The comment, "liquidation of prior 'productive' assets," hints that Q.E.D.  is thinking of this downturn as a typical business cycle downturn. It is no such thing. It is a lockdown of the economy, not a typical reversal of a central bank manipulated boom. Also, the idea that "tens of thousands of bankruptcies" will limit price inflation has no foundation. It is the denial that weaknesses in some parts of the economy can lead to price inflation in other parts. In short, it is a denial that stagflation can exist.
2. Not only will entire industries, have to write-down / dismantle, etc., assets, including air planes, cruise ships, hotels, but those & many other businesses will be far less productive. Still not clear how restaurants, and many other businesses can survive if social distancing results in 1/2 occupancy.
I have stated from my first analysis of what to expect in the post-lockdown period that I did not expect prices to climb in areas that we don't want to buy. such as cruise ships travel, hotels etc. The price inflation will be in the products and services that we want to buy.

"Still not clear how restaurants, and many other businesses can survive if social distancing results in 1/2 occupancy," Q.E.D. writes, but this will not bring deflation but accelerating price inflation because of less supply of goods and services.
3. Basically, most individuals, & businesses will place a much higher preference for holding cash balances. With 70% of U.S. economy due to consumer buyer, I would expect such buying to be reduced sharply. The savings rate will skyrocket from the current small percentage. The working story that many Americans don't have $400 for an emergency, will change. This attitude will likely continue for at least several years.
So what is the deal? Are these people broke or now saving?

Saving means more money into the capital goods sector, which means a faster pick up in plane and hotel business. You can't just look at one limited part of the equation. With much more money in the economy, it will mean more money is going to be spent somewhere (unless it is put under the mattress).

"This attitude will likely continue for at least several years." What is the basis for this comment? Polls are now even showing record, yes record, optimism by consumers.

As I reported in Tuesday's EPJ Daily Alert:

[The Conference Board's index of]  consumers’ short-term outlook for income, business and labor market conditions, rose by seven points to 93.8. The shares of respondents expecting better business conditions and more jobs in six months came in at at 40% and 41% respectively These are extremely high numbers, indeed, both were record highs. 
4. I suspect the above factors will be far greater than the say 10+ Trillion created by central banks, much of which is being wasted anyway.
"Wasted anyway"? What does this have to do with price inflation and money being in the system or not? Wasted money tends to be easy money spent quickly. And where does it say anywhere that we can just brush aside 10 trillion in newly printed dollars as a nothing burger that will not impact prices?
5. Austrian theory does NOT say that money printing will result in higher prices. It says prices will be higher than they would have been, without the printing. Conditions re capital closing / destruction, & unemployment will likely approach depression event, so the deflation tendencies may overwhelm the money printing.
Again, this denies the possibility of stagflation and seems to imply again that we are in a typical boom-bust cycle, which we are not.
6. Not being much considered yet, is the November election. Not only have Trump numbers been dropping dramatically, but story floated that Michelle Obama may be Biden VP running mate, could put White House & House & Senate in Democratic hands. That will likely bring higher taxes, more restrictions, etc., etc.
If the Democrats gain control, it will mean more restrictions on business, which means a decline in productivity, and even more money printing.  This would be a lock for more price inflation.
7. The game changer will be a vaccine, or at least vastly improved care, that might change much of above.
Vaccine or no vaccine, you can't print trillions upon trillions of new dollars without serious price inflationary repercussions. The vaccine has nothing to do with it.



  1. QED here: I agree with most of your analysis. I never tried to present a full case, & much of my point re wasted trillions; lost productive assets; businesses that may no longer have a viable business plan, was going back to essentials: supply creates demand

    I agree with you productivity will be way down, which also means incomes will be lower, as will true wealth, which all should play into low demand and lack of business investments.

    Not yet, but the pushing on a string by Central Banks will likely kick-in.

    Regardless of the causes, if people & businesses sharply change their desire for cash balances, then purchases, investments, and spending changes will be significantly lower.

    Consumer confidence numbers generally just follow the stock market the past few years -- which is why Fed & Gov't have directed so much at financial mts & listed corps. Such consumer numbers have little predictive properties.

    My intent was to proffer an argument that a general rise in prices -- nominal prices -- is not a guarantee. That some prices will rise; others fall, is not interesting from theoretical perspective.

    An economic shock, is a shock, regardless of the cause. Covid is not the same as a hurricane, which goes away, unless there is a medical breakthrough. We don't know enough about covid yet: there are diseases where vaccines are not possible, and/ or a 10+ year struggle.

    If White House + both houses go Democratic, I can only image all above will become much worse. Taxes & restrictions will increase, etc. But just how/where money will be spent is unknown, as are those implications.

    IMO, while covid itself does not generate the Austrian business cycle, the conditions for past at least 2 decades, have created those conditions: massive money printing; leverage; mal / unnecessary investments / businesses; etc. Covid has identified the Emperor does not have clothes.

    Just as covid is a white swan (Nassim Taleb recently also called it white,) rather than a black one, the financial implications IMO is also a white swan, as it is conceptually predictable. ("White" swan because this type of pandemic has been predicted for at least 20 years when I first read about it, including likely to begin in open food mkts in Asia.)

    Per Austrian economics, all is dependent upon how individuals/businesses behave, and of course productive business changes, so I can't be locked into above predictions.

    Again, I just wanted to present some alternatives to the money printing = massive higher nominal prices. I also agree re Stagflation. But I think we've been in that condition for number of years, partly explaining the split economy, with many in a recession, vs high asset prices, & increased wealth for small per cent As in other periods both the inflation part, & even the "stag" half, have been masked by Central Bank actions prior to covid.

  2. Just want to add: I appreciate you responded in detail to my original post.

  3. While this financial crisis for businesses was not kicked off in the usual Austrian way, could the effects not be similar absent a lot of helicopter money (which is what most of the aid to small business seems to be)? A business that has made plans that cannot be realized is in the same sort of bind either way. To borrow a little from Warren Buffet, hasn't a tide gone out and revealed which businesses are not prepared to survive in the new, greatly uncertain, and rapidly changing environment?