Many will scorn and say I don’t understand how crises work. “Don’t you remember it was deflation we feared the last time? Aren’t frightened people cutting on spending? Don’t they hold to their savings in situations like that? Isn’t credit shrinking now? What about growing unemployment? What about reduced wages pressure? And asset prices? Aren’t all these factors deflationary?”
All this is true, but I call for you to be very cautious. When you decide to discard the risk of hyperinflation, you may turn out to be somewhat right, or very wrong. Consequences of the later are far graver.
In short-term the shortages will be decisive. That’s the one factor that drives masses to run to stores before the others buy the goods. Developed economies are no immune to this kind of panic-buying.
The risk of this is the higher the longer the crisis persists, but the panic (especially mass panic) is rarely rational. At the beginning, the imminent threat makes people save. But if the production is down, the supply chains damaged, and if this becomes new normal, risk of panic buying grows.
The risk of inflation by overprint and over-debt is there too, but it is little different. It depends on how deep and persistent the damage turns out to be. It is a matter of scale. If tax base shrinks and expenditure grows beyond lender’s capacities, the only way to cover the needs is by print. No system is immune to that.
I want to stress, if you are key policy maker, you shouldn’t worry about hyperinflation now. If such is the price for tackling the crisis, so be it. The alternatives are far worse.
If you are policy receiver, it is unwise to rule out the hyperinflation in your considerations. If it does occur, you better be positioned to withstand it.
Whoever you are, it is a big mistake to think you can simply apply theories you’ve learned from economic books to this situation. Most of them have not been written with this kind of crisis in mind.
At a minimum, we should be very cautious about our claims. It’s the future we’re talking about.
Read also: Hyperinflation did not come in 2020
Views expressed are those of the author and do not necessarily reflect official positions of any institution he is associated with.
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