Possible Inflation Outcome due to Government Assistance | General financial discussion | Discussion forum

I raise a similar question before

I will say that inflation (price level) is more of a factor of how fast money is changing hand in an economic system via lending, consumption, or investment. If people refuses to do the above mention behavior (due to sentiment), the new money printed by central bank will simply sit in people's safe, instead of chasing goods, services, or investment target which leads to inflation.

When government spend money in this types of economic climate, it is borrowing and spending when others are not, so it will neither push up inflation nor interest rate, as factors of production (Land, labor, equipment, and entrepreneurship) are not being utilize completely, and lots of money are available to be borrow (to an endanger species call "good debtor" that is).

My big concern, and your big concern is, what happen when the economy become normalized, and the velocity of money goes back to normal level? Some may argue it may trigger serious inflation. However, as most society have aging population (reduction in labor supply), unless people suddenly see their money as a worthless piece of paper, which compel them to spend/ invest all of it ASAP. Inflation maybe very subdue in the long as lending by financial institutions remains low, and investment in economy is uncommon due to relatively poor economic fundamentals, implying that the velocity of money is permanently stuck at low gear.

However, if the supply chain is very severely disrupted, inflation is still going to be a problem in the medium term, as there are less goods to be chase after by money. That being said, as China, and other East Asia countries (which produce most goods in the world) are restarting its economy, I change my mind and believe inflation in the medium term is unlikely.

Jon said
Added to my previous point, when a country have aging population, the overall consumption in the economy will also stagnate, as people that retire have less income, and henceforth, will spend less money.

P.S : I hope people can actually understand what I am saying, consider Loonie was really baffle by what I was saying last time.....  

I don't understand a lot of economists' jargon - and consider a lot of it to be obfuscating jibberish as successive Nobel prize winners in economics disprove the previous ones.
I do understand that seniors spend less. It is often because they have less income but it is also because they have fewer needs after they give up travelling, until the last year or two of life. Consider too the massive wealth transfer currently underway between generations.
We need immigration to boost our younger population. Often the same people who complain about sluggish economy also oppose immigration, however.

I don't see how the current government spending to partially replace lost employment income and lost business income would cause inflation.

There isn't any extra demand to increase prices. People and businesses don't end up with extra money to buy more stuff than they had been buying before. Business aren't able to hire more people than they had hired before.

The government isn't using the money to buy stuff and reduce the supply available to everyone else.

Without increased demand or reduced supply, where would the runaway inflation come from that would propel interest rates to 10%?

Last time that happened in Canada, it was from an oil price shock. But, if oil prices were to triple today, then oil prices would go from $20 a barrel to $60. $60 a barrel was where oil prices were about in January.

The fact that tons of people were only one paycheque away from a negative balance has been known for a very long time and no government has ever done anything about it. So, when a catastrophic situation comes along, it's entirely predictable that they will have to have help , at least in the short term.

As I see it, inflation is an issue because our dollar is falling, making imports, such as food on which we depend, more expensive. It might be balanced off, however, by lower cost of oil.

There was an article in the paper the other day about how people are now, not surprisingly, having to take money out of savings to pay expenses. This will only leave them in a weaker position after this crisis subsides., so that even more people will be one paycheque away from insolvency.

I do think that it is fair for a government to say, under the circumstances, that they are not in a worse situation than other governments. All governments are experiencing unexpected costs due to the virus. Didn't the US spend a trillion? I think I read that not long ago.
I would imagine that after this is over there will have to be some kind of international agreement to deal with every country's debt, as was done after WW2 with the Marshall Plan and Germany's debt. Wars always create massive expenses and debt, and this is a kind of war. I'm not suggesting the same plan, but something will have to be arranged. Otherwise, you get a lot of economic and political instability, which is not good for anybody in the long run.

Thank you Norman, for summarizing most of my points without using much technical jargon.

Bill, you are talking about sentiment, which is something difficult to predict if not impossible. But fiat currency does have history of going belly up because government print too much money in order to pay for its debt. This happen recently in Zimbabwe, but going back in time, this have happen during the Weimar Republic in Germany, and during the the Republic of China under Chiang Kai-shek (twice!!), and during the end of the Song dynasty in China, just before the Mongolian conquer China.

Loonie, lots of public debt doesn't always mean a country's currency is going to become belly up, is all about faith and confidence. However, I personally have little confident as most countries unfunded liabilities positions is only going to deteriorate as pension and healthcare cost soar.

Aging population really is the one thing that may destroy our financial system. It reduce growth in tax revenue due to slow growth in economy, while causing government to have rising unfunded liabilities. Both of these points make fiat currency that rely on confidence of a government sounds rather shaky.

Jon, one positive of folks having fewer if any kids and adults devoting themselves to making money: lots of money being spent so lots of consumption tax revenue (except if it's spent on travel elsewhere) or else it's saved and thus very few (including dogs, which for many today are their "children") are going to inherit a whack of money, and the government will figure out how to get its cut.

Jon, I don't have any more confidence or faith in any other currency than I do in Cdn. How about you?

Canadian 100, I do have some ideas about what gov'ts could have done, but my main point is that I don't think they ever even considered it. They have always been content to let it ride because people who live marginally are good for the GDP in the short run since they spend all their money, more or less.
I don't want to get into specific suggestions as that will just bring out the trollish actors. But, think about it. Govt has a lot of power and can do a lot of things if there is a will to do so. I think the will has been absent.

Loonie said
Canadian 100, I do have some ideas about what gov'ts could have done, but my main point is that I don't think they ever even considered it. They have always been content to let it ride because people who live marginally are good for the GDP in the short run since they spend all their money, more or less.
I don't want to get into specific suggestions as that will just bring out the trollish actors. But, think about it. Govt has a lot of power and can do a lot of things if there is a will to do so. I think the will has been absent.  

I certainly do not want the Govt to exert that kind of "power" as you would like. I do not want my life more regulated by big Govt telling me what to spend and save etc. Quite likely such ideas have been considered by Govt (and political parties) but it was recognized as unacceptable to the majority of Canadians.