Pandemic, Payments, And Price Increases

We are paying for the pandemic by printing money fast. Should we worry about price increases soon?

Photo by Viacheslav Bublyk on Unsplash

Recently, I came across the term “the big state” from The Economist and other publications. The big state refers to a government intervening in many aspects of private life. In order to combat the pandemic, governments all over the world have instructed their citizens to limit movement. They have ordered shut down of businesses and closing of borders. Furthermore, states have subsidised salaries and tracked citizens' whereabouts. This was largely welcomed in order to mitigate the spread of the virus. However, this also comes at an economic cost. How are the big economies paying for emergency spending during this crisis? They do this by printing more money.

Money-printing has not happened this much this fast before. The Federal Reserve´s spending ballooned to almost USD 1trillion in April 2020 alone and a part of this is to pay for Americans´ incomes (refer to Chart 1). The Bank of Japan has set USD 83 bn for emergency spending due to Covid-19. The European Central Bank has announced a “Pandemic Emergency Purchase Programme” (PEPP) amounting to EUR 1.35 trillion. All over the world, central banks are raising money and buying assets.

Chart 1: Monthly Outlays of US Government. Source: May 2020 Report of Bureau of Fiscal Service

Should we worry about prices increasing fast?

Printing money is associated with a consequent increase in prices of goods and services. In economics, this is referred to as inflation. A simple way to think about it is, the more money there is circulating in the economy, the more people and firms tend to buy, increasing overall demand, which then tends to result in increases in prices. With the speed at which central banks are printing money, it is natural for economists to think inflation might be worrisome. Some however, argue that this worry may not be as big as it may seem.

Unlike past economic crises, the increase in money base went largely to individuals’ accounts. Since loss of work was also coupled by receiving income from the state, people have more time on their hands and some spare cash to spend. Are people then buying more? Not necessarily.

Firstly, it is hard to imagine people spending more if many shops are still closed. Secondly, there is huge uncertainty on when employment will go back to pre-Covid 19 period. Some jobs might never return. This naturally causes people to hold back on spending and save more for more rainy days. A case in point is that Americans were reported to have record-level savings rates in April. Thirdly, a lot of firms right now are borrowing money to keep afloat and will carefully rethink their spending strategies drastically going forward.

Governments may have had record speed at money-printing during this crisis. People may also be getting more state subsidies than they have before. However, we find ourselves in uncharted territory where job creation is uncertain and employment may not yet go back to pre-pandemic levels. How long will the government keep subsidising industries and incomes is also uncertain. It is unlikely that a spending spree is happening soon. It looks like fast price increases is something we can worry about later.

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