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Old 03-26-2020, 06:56 PM
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$2 trillion stimulus to a locked-down economy - will it be inflationary?


On the one hand, major parts of the US economy have been shut down, and unemployment is projected soon to reach at least 20%.

On the other hand, $2 trillion will be flying off the Treasury's printing presses, to be handed out to corporations and workers alike.

Do you think the potentially inflationary effects of the stimulus will be canceled out by the economic lockdown? (And... is $2 trillion even enough?)
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Old 03-26-2020, 07:01 PM
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It should be inflationary, for sure. But the harm of not taking stimulus measures would be even worse.
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Old 03-27-2020, 06:44 AM
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It won't be inflationary if the lock down contracts the economy more than the stimulus, right? The stimulus during the Obama administration (which was much, much too small) wasn't inflationary, and neither were the stimulative level of rates that we've had now since 2008.

For example, if banks lend drastically less and business go under, much more that $2 trillion of value could be destroyed, cancelling out the inflationary effects.
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Old 03-27-2020, 07:00 AM
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Quote:
Originally Posted by Chad Sudan View Post
On the one hand, major parts of the US economy have been shut down, and unemployment is projected soon to reach at least 20%.

On the other hand, $2 trillion will be flying off the Treasury's printing presses, to be handed out to corporations and workers alike.
The money being spent by Congress isn't printed for this purpose. It is borrowed. They're selling bonds to raise it.
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Old 03-27-2020, 07:22 AM
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Quote:
Originally Posted by Chad Sudan View Post
On the one hand, major parts of the US economy have been shut down, and unemployment is projected soon to reach at least 20%.

On the other hand, $2 trillion will be flying off the Treasury's printing presses, to be handed out to corporations and workers alike.

Do you think the potentially inflationary effects of the stimulus will be canceled out by the economic lockdown? (And... is $2 trillion even enough?)
Absolutely no risk of this being inflationary.

Zero.
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Old 03-27-2020, 11:58 AM
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What makes inflation is upward pressure on prices. If this were just "extra" money that for most people would be discretionary income, then it might result in that pressure as folks went out and bought stuff they would not otherwise normally buy because it was too expensive or at least they thought it was.

Mind-set is important, among other things. The current mind-set is mostly hunkering down and getting by, and I think people with that mind-set are going to be spending that money on necessities.

Considering shortages, the prices of necessities could go up when there is money to pay for them, so it will be important that price gouging is kept under control. Currently this seems to be in the hands of retailers, but there are some regulations in place to help.

There may be a brief spurt of spending when the restrictions are lifted and people start to feel safe and free again. I don't think this will last long enough, nor have enough fuel behind it, to generate much if any inflation.
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Old 03-27-2020, 01:02 PM
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My understanding is that velocity slows down during periods of economic uncertainty so more base money is needed to keep the same total level of money. Thus inflation for the time being is probably not a concern.
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Old 03-27-2020, 01:43 PM
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I suppose the answer to the OPs question is really yes, in that it will likely be inflationary relative to the state of the economy if there were no stimulus. That economy may experience extreme deflation, so if inflation is modest (or deflation is not too severe), you could argue that it was inflationary relative to the baseline expectation, even if the inflation number is not large in an absolute sense.
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Old 03-27-2020, 04:35 PM
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Inflation is the result of money supply growth. Money supply is determined by both the quantity of money, and its velocity, or how quickly it moves through the economy.

When the lockdowns began, the velocity of money plummeted. This means the biggest immediate threat is deflation.

But what happens when you try to 'stimulate' an economy while you are actively taking steps to STOP it? It makes no sense. If the stimulus incentivizes people to run out and buy things they otherwise wouldn't buy right now, it's working at cross-purposes to what we are trying to achieve. 'Stimulus' at this time is a stupid notion. What the various government bills should be are 'immediate relief' relief bills - not to stimulate the economy, but to make sure businesses don't collapse, that people can make the rent for the next month or two, that people don't run out of money for food, medication, etc.

I doubt any of this will 'stimulate' the economy. But it shouldn't. We have no idea what will happen after the threat is gone. Maybe the economy will stay depressed and we'll need a stimulus THEN to wake people up and get them out and spending. But maybe we'll get the response we got after WWII and we will see a huge surge of spending and investment as we make up for lost time in the productive economy. Supply chains need to be rebuilt, stockpiles and warehouses replenished, stalled projects accelerated, etc.

The nightmare scenario is that we pump huge amounts of liquidity into the monetary system, which does nothing because velocity is low. Then the economy overheats during the reconstruction phase, driving up global inflation. And because governments borrowed themselves to the gills previously, we will no longer have the ability to use interest rates to fight it off. The result could be anything from stagflation to hyperinflation. Nobody knows. Or maybe velocity will stay low, interest rates will stay low, and the economy will just muddle along. But if the global economy roars back hard, inflation could then be in the cards.

BTW, that $2 trillion dollars, at 3% interest, is now going to cost you $60 billion per year in debt payments, pretty much forever since the U.S. has no prospects for paying it back any time in the forsee-able future. This stuff isn't free. The debt next year will be around $25-26 trillion dollars. That means for every point in interest that the debt is subject to, debt servicing costs go up by $250 billion dollars. It wouldn't happen instantly, but every time portions of the debt need to be rolled over at new interest rates debt servicing costs will go up. And lots of U.S. debt is in short-term instruments.

The U.S. government (among many others) absolutely needs low interest rates to be maintained indefinitely, regardless of whether the rest of the economy would be better off with higher rates. It's a bad situation. If interest rates went to 10% to fight off inflation, there would soon be sovereign bankruptcies around the world. Along with corporate and personal bankruptcies since the low interest rates of the past 10 years have encouraged everyone to borrow and spend like drunken sailors.
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Old 03-27-2020, 07:02 PM
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I wish people would stop calling this a stimulus bill. If think of it as disaster relief it comes much closer to reality.
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Old Yesterday, 12:14 AM
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The least of our worries now is inflation. Keeping the economy afloat, individuals afloat, small and medium businesses that employ the bulk of the economy afloat is the priority. Elementary Keynesian economics is that the government steps in during economic contractions to smooth out the downturn.

When the new president is elected, should immediately enact a Marshall type plan to rebuild US infrastructure and put people back to work.

We are years away from needing to worry about inflation. Unless of course it happens to be a democratic party president, and then Republicans will rediscover fiscal responsibility and do their best to destroy what's left of the economy after Covid-19 finishes it's work.
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Old Yesterday, 12:32 AM
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Quote:
Originally Posted by Sam Stone View Post
Inflation is the result of money supply growth. Money supply is determined by both the quantity of money, and its velocity, or how quickly it moves through the economy.

When the lockdowns began, the velocity of money plummeted. This means the biggest immediate threat is deflation.
I'm glad someone said this.
Quote:
But what happens when you try to 'stimulate' an economy while you are actively taking steps to STOP it? It makes no sense. If the stimulus incentivizes people to run out and buy things they otherwise wouldn't buy right now, it's working at cross-purposes to what we are trying to achieve. 'Stimulus' at this time is a stupid notion. What the various government bills should be are 'immediate relief' relief bills - not to stimulate the economy, but to make sure businesses don't collapse, that people can make the rent for the next month or two, that people don't run out of money for food, medication, etc.

I doubt any of this will 'stimulate' the economy. But it shouldn't. We have no idea what will happen after the threat is gone. Maybe the economy will stay depressed and we'll need a stimulus THEN to wake people up and get them out and spending. But maybe we'll get the response we got after WWII and we will see a huge surge of spending and investment as we make up for lost time in the productive economy. Supply chains need to be rebuilt, stockpiles and warehouses replenished, stalled projects accelerated, etc.
The stimulus (or disaster relief) bill has many facets, only one of which is cash payments. You don't have to worry about people running off to the mall to spend it because the malls are closed. It might have been done to make the bill politically feasible, or to tide people over, or to get money to that subset of people in big trouble now.
The more useful things are enhanced unemployment compensation and loans to small businesses which will be forgiven if they reduce or eliminate layoffs. Many states and cities are forbidding foreclosures and evictions, and most banks have agreed to postpone mortgage payments. Those are keep alive measures.

Quote:
BTW, that $2 trillion dollars, at 3% interest, is now going to cost you $60 billion per year in debt payments, pretty much forever since the U.S. has no prospects for paying it back any time in the forsee-able future. This stuff isn't free. The debt next year will be around $25-26 trillion dollars. That means for every point in interest that the debt is subject to, debt servicing costs go up by $250 billion dollars. It wouldn't happen instantly, but every time portions of the debt need to be rolled over at new interest rates debt servicing costs will go up. And lots of U.S. debt is in short-term instruments.
3% interest? Here are the current and year ago rates.

Treasury securities
This week Year ago
One-Year Treasury Constant Maturity 0.25 2.44
91-day T-bill auction avg disc rate 0.00 2.41
182-day T-bill auction avg disc rate 0.08 2.42
Two-Year Treasury Constant Maturity 0.38 2.24

The Fed has every reason to keep these low for a long time. Arguably letting unemployment go to 20% would hurt the economy worse than this.
Quote:
The U.S. government (among many others) absolutely needs low interest rates to be maintained indefinitely, regardless of whether the rest of the economy would be better off with higher rates. It's a bad situation. If interest rates went to 10% to fight off inflation, there would soon be sovereign bankruptcies around the world. Along with corporate and personal bankruptcies since the low interest rates of the past 10 years have encouraged everyone to borrow and spend like drunken sailors.
As you so rightly said, deflation is more of an issue now. If the government did a similar amount of spending when the economy improves, then I agree there would be a problem. But with luck we'll kick the Republicans out.
Remember, Herbert Hoover stood for fiscal responsibility, and look where it got him.
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Old Yesterday, 02:39 PM
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BTW, that $2 trillion dollars, at 3% interest, is now going to cost you $60 billion per year in debt payments, pretty much forever since the U.S. has no prospects for paying it back any time in the forsee-able future.
Real Question:

Who are they borrowing from? Who do they have to pay back?
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Old Yesterday, 03:32 PM
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Here is a column by Neil Irwin in the Times on how not spending now would increase the debt more than spending. This is a one time expense - it does not add to the deficit in a continuing way like the tax cut did.
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Old Yesterday, 04:06 PM
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US is borrowing from the world, but majority of the debt is held by US taxpayers. Here's a pretty good article: https://www.thebalance.com/who-owns-...l-debt-3306124

US dollar and US government sovereign debt is the global safe haven with the most liquid and longest tenure of investment grade choices. In times of trouble, assets get shifted to the greenback.
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Old Yesterday, 04:34 PM
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Originally Posted by Whack-a-Mole View Post
Real Question:

Who are they borrowing from? Who do they have to pay back?
They are us. Securities called generically Treasury Bonds are being created. They are purchased by various groups as spelled out in that The Balance article with the guarantee that they will be paid back with x amount of interest over a y time frame. That money from the purchases comes into the government to be used. The only payback the Treasury does is the interest on the bonds. The Neil Irwin column estimates that would be $29 billion for $2 trillion worth. That will not go on forever since each bond has a guaranteed time for payment. Nor will future increases in interest affect current interest payments, since they are fixed. Right now is about the best time in history to be issuing these bonds, because they might never again be cheaper for us.
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Old Yesterday, 05:24 PM
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What the others have said about who holds the debt. In recent years, China has been a major holder of U.S. debt, as has Japan. The debt is also held in pension funds, retirement accounts, etc. It's a real thing, it imposes real costs on the economy, and you can't default on it without hurting a lot of people including mostly your own citizens.

The problem with borrowing lots simply because 'it's the best time to borrow' is that eventually interest rates go up. If you borrow up to the gills to buy a big house because you can afford it when the mortgage is 3.5%, you're going to lose the house if mortgage rates climb. That's what happened in 2008 to a lot of people holding huge mortgages on low incomes.

What I worry about when we start talking about the government disbursing 2 trillion dollars is that the opportunities for waste, fraud, abuse and pork go WAY up. If the money were all being spent effectively where it matters most it might be a good thing and in the end cost us less than doing nothing. If instead the money goes to making cronies even richer and local funds get snapped up by corrupt developers or doled out to political friends, not so much. When you are trying to pump out money rapidly in this quantity, some of that is going to be unavoidable.
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Old Yesterday, 10:47 PM
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The problem with borrowing lots simply because 'it's the best time to borrow' is that eventually interest rates go up. If you borrow up to the gills to buy a big house because you can afford it when the mortgage is 3.5%, you're going to lose the house if mortgage rates climb. That's what happened in 2008 to a lot of people holding huge mortgages on low incomes.
Those apples are in no way comparable to these oranges.

If you have a mortgage whose rate is 3.5% for 30 years, you pay 3.5% over the entire life of the mortgage, unless you sell the house or refinance at an even lower rate. What happens to interest rates over those thirty years is totally irrelevant to you.

The reason that so many people got hurt in the Great Recession (thanks, Bush) is that idiots thought that housing prices were destined to continually rise. So they took out sucker-bait mortgages that required them to pay interest only for the first few years, thereby lowering their payments. Their logic was that they would be selling their house at a higher price by the time these payments ended so the fact that a huge "balloon" payment would be due at that time to catch up with the payments against equity that they hadn't been making meant nothing to them. But the recession hit, housing prices fell, they either couldn't sell their house at all or could do so only at a huge loss. That wiped them out and took the short-sighted fraudsters in the mortgage business who were operating without regulation (thanks, Bush) out along with them.

None of that can happen to Treasury bonds. Not one aspect of it. Applying the mortgage crisis as an analogy to what is happening now is economic ignorance at best. It's no more true than anything that comes out of Trump's mouth, and we all should know by now how removed from reality those utterances are. You keep saying it for some reason, though, so I'll keep swatting it down every time I see it because it really is that frighteningly wrong.
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Old Today, 01:02 AM
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What the others have said about who holds the debt. In recent years, China has been a major holder of U.S. debt, as has Japan. The debt is also held in pension funds, retirement accounts, etc. It's a real thing, it imposes real costs on the economy, and you can't default on it without hurting a lot of people including mostly your own citizens.

The problem with borrowing lots simply because 'it's the best time to borrow' is that eventually interest rates go up. If you borrow up to the gills to buy a big house because you can afford it when the mortgage is 3.5%, you're going to lose the house if mortgage rates climb. That's what happened in 2008 to a lot of people holding huge mortgages on low incomes.
Variable rate mortgages were a big thing in the early '80s when interest rates were high and going down. I had a couple. I haven't seen one even advertised in 10 years. Are they the thing in Canada?
Interest rates on treasuries change - for the government - when they get rolled over. But since this is a one-time thing, that isn't that much of a concern. The interest rates change in the market, but that affects investors, not the government.
Quote:
What I worry about when we start talking about the government disbursing 2 trillion dollars is that the opportunities for waste, fraud, abuse and pork go WAY up. If the money were all being spent effectively where it matters most it might be a good thing and in the end cost us less than doing nothing. If instead the money goes to making cronies even richer and local funds get snapped up by corrupt developers or doled out to political friends, not so much. When you are trying to pump out money rapidly in this quantity, some of that is going to be unavoidable.
Have you bothered to look at the bill, or are your objections knee-jerk conservatism? I'm sure a few people will get money they don't deserve, I'm sure a few businesses will go bankrupt before paying back the loan. Small price to pay to avoid another depression.

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