Massive Stimulus May Boost Inflation the Wrong Way: Stagflation
Packs of freshly printed $20 notes are processed for bundling and packaging at the U.S. Treasury's Bureau of Engraving and Printing in Washington on July 20, 2018. Eva Hawbach/AFP via Getty Images
All over the world, governments and central banks are addressing the pandemic crisis with three main sets of measures:
Massive liquidity injections and rate cuts to support markets and credit.
Unprecedented fiscal programs aimed at providing loans and grants for the real economy.
Large public spending programs, fundamentally in current spending and relief measures.
However, as well-intentioned as these measures may be, they may cause deeper problems than they aim to solve. When governments try to artificially boost debt and demand in a supply shock, the risk is to create a massive deflationary spiral driven by debt saturation that’s followed by stagflation when supply chains start to be insufficiently flexible.
