Increased spending from measures to combat the coronavirus pandemic could generate long-term inflation, according to an article by Financial Times’ editor Martin Wolf. The argument is closely linked to the increase in the public debt of countries to finance measures to combat coronavirus.
The article recalls that the measures taken by Germany after World War I led to hyperinflation in 1923. After World War II, the UK used inflation to finance its public debt of 250% of GDP.
The journalist recalls that, unlike the scenario of the two wars, the crisis already begins with countries with very high public debt, very low (and even negative) interest rates and low inflation. Japan had a pre-crisis debt of 154% of GDP and Italy had 121%. This scenario can be an aggravating factor.
Although the impact of the crisis in the short term is deflationary, the trend is that it follows in the opposite direction in the long run. Indices that measure demand, savings and other components already show strong growth at the beginning of the crisis. The combination of some of these components with rapid monetary expansion – currency issuance – leads to inflation growth.
However, it is also possible that the pandemic should slow the speed of movement of money. That is to say, people will not spend that money too much. According to the article, the result is still a little unpredictable, but it remembers that inflation of the 1970s arose unexpectedly.
Reasons in the pandemic that can lead to long-term inflation
According to Olivier Blanchard of the Peterson Institute of International Economics, three are the reasons that can lead to inflation that may surprise: higher spending increases than those seen today, a big jump in interest rates needed to keep economies operating close to potential output and tying central banks to the need for cheap financing.
Moreover, according to the article, there are profound structural changes underway. The deflationary environment created by China’s increased exports no longer exists. The pressure on wages will increase. When increased spending results in inflation, it will be seen as temporary, or even welcome, as the debt burden is eroded by it. And the population won’t want further cuts. So governments will need cheap funding for their spending.
Increase in public debt is foreseen in Transfero’s thesis
The performance of central banks in the crisis, which can generate inflation in the long term, is one of the pillars of Transfero’s investment thesis. In the short term, as a consequence of such an injection of money into the economy, there will be inflation in asset prices, but without the proper recovery of the real economy. In the long run, however, the very fundamentals of global economies will deteriorate with the unbridled currency printing. It is in this scenario that digital assets are placed as an instrument to protect against inflation, with a high potential for appreciation.