General idea
In recent days we have been observing here in Europe how the European Central Bank is going to provide a fund of 1.35 trillion euros to reactivate the economy, which is very positive for all the countries in the Eurozone. But why isn’t this massive increase in money generating fear?
Future scenario
It may seem contradictory, but in the midst of a sharp contraction of any country’s GDP, the money supply grows very disproportionately, all of it driven by operations within central banks.
The intervention of governments, in order to support the economy, by providing guarantees to banks to lend money to households, growing all monetary aggregates, such as M2 or M3, means that, as we have said, the increase in capital is very accelerated.
However, this is a very good sign, because although, in the past, it might have led to very high inflation expectations, it has gradually become clear that there is a strong correlation between the growth of the money supply and inflation.
According to economist Jefferies, this time it is different. “What causes inflation is not money, but the demand for credit that is channelled into the purchase of goods and services. Not all the money in the world would cause inflation if it is hidden under the mattress or sitting idle in current accounts.
As a rule, crises are accompanied by a credit crunch, people spend less and less. However, in this crisis, credit is flowing, as is the money supply. However, inflation expectations, although they have risen in the latest surveys by the Fed or the German ZEW, are still not picking up.
It has even been said (according to several experts) that there is a possibility of reaching a deflationary scenario rather than an inflationary one.
In the current situation we find ourselves in, the growth in supply will not generate an increase in demand for goods, but will be used for household savings (e.g. to pay mortgages) and in the case of companies, it will be used to survive, rather than to invest and achieve growth.
All this then, rather than boosting inflation, is used to prevent, for example, house prices from correcting, as money flows into assets as well, leaving inflation fully intact (i.e. not into goods or services).
Credit is not soaring, as households are not using such loans to buy cars or other consumer goods, or because companies are thinking of opening new spaces. In crisis situations, credit is survival.
Conclusion:
It is true that over time, we may see a little more inflation due to the reorganisation of production and supply chains, as companies seek to diversify their suppliers, but nothing beyond the merely “normal”.
