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

Commentary

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.