Saturday, February 22, 2020
Will Covid-19 be inflationary or deflationary?
Looking at the Covid-19 response from small-town, Michigan, I am forced to speculate on the effects Covid-19 will have on inflation.
The glib answer "It will be both inflationary and deflationary" is probably the right answer because there will be three different "states".
Before the wave hits, Covid-19 will be highly inflationary. Want face masks? Put in a bid. Want them badly enough and have enough money in your checking account and you will win the bid.
In the middle of the wave, Covid-19 will be highly deflationary. People will be in quarantine and unable to spend money. Factories will be shut down and won't need coal, or people to sweep the floors. Prices will be in free-fall as the market is unable to discover prices due to lack of bidders.
This is a classic case of deflation: Money is sucked out of an economy by banks, bond-holders and property owners expecting the contractually defined rents while those properties are no longer able to create value by combining resources like labor, parts and intellectual property. No longer able to create value, the economy is unable to suck money in to service debts and rents.
After the wave Covid-19 is likely to be mostly inflationary. Goverment responses will have been to print money. For example, they will inject money into industries that were unable to pay their rent through the crisis so they could stay afloat. Due to hits to key personnel, some/many enterprises will fail and will stop producing goods and services. More dollars chasing fewer goods is the classic recipe for inflation.
Some types of goods are likely to get cheaper. You will find fabulous deals on condos in Sun City and on Florida properties next to golf courses.
In other cases, it may become impossible to find certain kinds of goods although it is far too soon to predict what those goods might be.